Macroeconomics Theme 4 Flashcards
What is Horizontal equity (4.2.2)
This is the same treatment for everyone regardless of any differences, e.g indirect taxes
What is Vertical equity (4.2.2)
This is different treatment for similar groups of people, e.g income tax
Absolute poverty (4.2.1)
The minimum amount of resources a person needs to survive (food, shelter, clothing, clean water, sanitation, education and information). A positive statement
Relative poverty (4.2.1)
This is measured in comparison with other people in a country and varies between countries. Usually living under a certain income threshold in a particular country. A normative statement
Measures of Absolute poverty (4.2.1)
The World Bank measured the international poverty line to $1.90 a day
Measures of Relative poverty (4.2.1)
A poverty line is set, which is a percentage of average income for the given country.
Causes of poverty (4.2.1)
◦Lack of unemployment
◦Lack of human capital
◦Lack of financial capital
◦Health problems
◦Level of education
◦Inheritance
What is equality (4.2.2)
If people have the same incomes or wealth and concerns what is fair
What is inequality (4.2.2)
It occurs when there is a difference between the highest earners and lowest earners in an economy
What are Income levels (4.2.2)
The higher the level of income the more likely it is that you will be able to save and create wealth
What are Wealth levels (4.2.2)
mr james sheet…….
What is Income inequality (4.2.2)
Its a capitalist system, where people … teams
What is Wealth inequality (4.2.2)
It is the difference in total assets between people. Generally, wealth inequality is greater than income inequality
Measures of Income inequality (4.2.2)
The Lorenz Curve - The curve plots the proportion of total income or wealth that is held by each percentile of the population, from poorest to richest
How do you calculate the Gini Coefficient (4.2.2)
Area A / Area of A + B
Causes to lower inequality (4.2.2)
◦ Higher marginal tax rates on income and wealth
◦ Increases in the legal minimum wage
◦ Rise in the relative level of cash welfare benefits
◦ Measures to increase increase employment rates
◦ Subsidies on energy bills, tuition, childcare
◦ Rent controls to tackle unaffordable housing
◦ Laws to tackle discrimination in labour market
◦ Universal Basic Income (UBI)
Causes of income inequality and wealth within countries (4.2.2)
◦ Differences in education, training and skills
◦ Differences in wage rates in different occupations
◦ Strength of trade unions
◦ Degree of employment protection
◦ The level of welfare benefits
◦ The progressive rate of the tax system
Causes of income inequality and wealth between countries (4.2.2)
◦ Natural resources
◦ Geography
◦ History
◦ Degree of political stability
◦ Macroeconomic policies
◦ The amount of FDI attracted by different countries
◦ The degree of technological change
The Kuznets Inequality curve (4.2.2)
He proposed that as a country gets richer, income inequality will rise at first, but then it falls as income levels continue to rise
What is the Low-income stage (4.2.2)
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What is the High-income stage (4.2.2)
teams
What is the Higher-income stage (4.2.2)
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Significance of capitalism for inequality - Access to opportunities (4.2.2)
Not everyone has equal access to opportunities, education, or resources to start a business or invest in capital
Significance of capitalism for inequality - Economic Mobility (4.2.2)
It allows individuals to improve their economic status through hard work and entrepreneurship. However some may face challenges such as discrimination
What is the Human development index (HW) (4.3.1)
It is a composite measure that is used in the UN development report and consists of three elements; Income, Health and Education
Factors influencing growth and development (HW)
Saving gaps x
Foreign currency gap x
Demographic factors x
Debt x
Access to credit banking x
Infrastructure x
Education/skills x
Absence of property rights x
Non-economic factors, e.g poor governance, civil wars, corruption
Characteristics of developing countries (4.3.1)
◦ Lower per capita incomes
◦ Structure of the economy
◦ Physical capital
◦ Human capital
◦ Unemployment & underemployment
◦ Population growth
◦ Institutional structures
◦ The environment
◦ Health and morality
What are the 3 indicators of development with HDI (4.3.1)
◦ Health - life expectancy at birth
◦ Education - which is measured in terms of mean years of schooling at age 25 and expected years of schooling at age 4
◦ Income - GDP per head, which is measured at PPP
Benefits of HDI (4.3.1)
◦ It’s a broader measure than GDP per capita
◦ It’s used to make comparisons of developing between countries
◦ Places a greater emphasis on the quality of life of a countries people
◦ HDI figures can be used to rank countries
Limitations of HDI (4.3.1)
◦ Gender inequality
◦ Scale & depth of income & wealth inequality
◦ Extent of democratic freedoms
◦ Sustainable development
◦ Quality of education
◦ Years of healthy life expectancy rather than longevity
◦ Perceptions of human insecurity
◦ Well-being/stress
Measures of economic development (4.3.1)
◦ HDI
◦ Energy consumption per person
◦ The proportion of population with internet access
◦ Mobile phones per thousand of population
◦ The proportion of male population employed in agriculture
◦ The proportion of the population with access to clean water
◦ The degree of inequality
◦ The degree of democracy
◦ The proportion of people entitled to civil rights
What is Inequality- adjusted Human development Index (IHDI) (4.3.1)
This is HDI with inequality, with inequality being considered to have a negative impact on economic development
What is Multidimensional Poverty Index (MPI) (4.3.1)
It measures the percentage of the population that is multidimensionally poor. It uses a broader range of indicators
What is Genuine Progress Indicator (4.3.1)
This is calculated from 26 different indicators grouped into 3 categories - economic, environmental and social
what is HDI for someone who doesn’t know what it is…
HDI is a way of measuring developing countries by the UN in 3 elements: Income, health and education so that you can make comparisons between developing countries and rank them. However, it has limitations such as: gender inequality & extent of democratic freedoms
Economic factors in different countries (4.3.2)
◦Primary product dependency
◦Volatility of commodity prices
◦Savings gap
◦Foreign currency gap
◦Demographic factors
◦Debt
◦Access to credit and banking
◦Absence of property rights
◦Infrastructure
◦Education/skills
Impact of non-economic factors (4.3.2)
◦Poor governance, political stability and civil wars
◦Corruption
The Harrod-Domar model (4.3.2) (image)
Low incomes and output –>
Low savings –>
Low investment –>
Low capital accumulation –> back to start
What does the Harrod-Domar do (4.3.2)
It illustrates the problem of how countries with a low GDP per capita will experience low savings ratios
Causes of foreign currency gap (4.3.2)
Dependency on exports of primary products
Dependency on imports of oil and manufactured goods
Capital flight
Interest payments on loans from foreign countries
Conclusion of Foreign currency gap (4.3.2)
Due to the causes, the country may have insufficient foreign currency to purchase imported capital goods, which are needed to increase its productive capacity
Causes of debt (4.3.2)
◦Primary product dependency
◦Interest payments on debt - especially if loans were taken out when interest rates were low
◦Loans for major investment projects or military equipment
◦Depreciation of currency
What is the Absence of poverty rights (4.3.2)
What are Market-orientated strategies (4.3.3)
◦Trade liberalisation
◦Promotion of FDI
◦Removal of government subsidies
◦Floating exchange rate systems
◦Microfinance schemes
◦Privatisation
What is Trade liberalisation (4.3.3)
It is the removal or reduction of barriers to free trade, such as tariffs, between countries
What is the Promotion of FDI (4.3.3)
It is when a company in one country establishes operations in another country or when it acquires assets or a stake in an overseas company
What is the Removal of government subsidies (4.3.3)
It is the removing of a grant given by the government that has the effect of reducing the costs of production
What is the Floating exchange rate systems (4.3.3)
It is the exchange rates that are solely determined by free market forces of supply and demand, with no government intervention
What are Microfinance schemes (4.3.3)
They are small loans and finical services to low-income individuals and businesses
What is Privatisation (4.3.3)
It is the sale of government organisations or assets to the private sector
What are the Interventionist strategies (4.3.3)
◦Development of Human capital
◦Protectionism
◦Managed exchange rates
◦Infrastructure development
◦Promoting joint ventures with global companies
◦Buffer stock schemes
What is the Development of human capital (4.3.3)
It refers to the skills, knowledge and talents of the workforce. If there is an investment in people this will result in an increase in productivity
What is Protectionism (4.3.3)
The policies restrict trade, for example tariffs and quotas on imports and subsidies on domestic products
What is the Managed exchange rates (4.3.3)
It involves policies to fix a number of exchange rates
What is the Infrastructure development (4.3.3)
It refers to capital assets that are designed to help and economy to function efficiently, e.g motorways, internet connection
What is Promoting joint ventures (4.3.3)
It refers to enterprises that are undertaken jointly by two or more firms which retain their distinct identities
What are Buffer stock systems (4.3.3)
They are systems designed to reduce price fluctuations and involves the buying and selling of stocks to maintain price within agreed limits
What are the Other strategies (4.3.3)
◦Industrialisation - The Lewis model
◦Development of tourism
◦Development of primary industries
◦Fairtrade schemes
◦Aid
◦Debt relief
What is Industrialisation (4.3.3)
It is the process of transforming the economy of a nation or region from a focus on agriculture to a reliance on manufacturing
What is the Development of tourism (4.3.3)
It has strong attractions for developing countries but also some potential drawbacks
What is the Development of primary industries (4.3.3)
Primary industries are those firms that operate in extracting raw materials from the ground
What is the Fairtrade schemes (4.3.3)
Fairtrade is defined as being ‘a trading partnership based on dialogue transparency and respect, which seeks greater equity in international trade’ (WTFO)
What is Aid (4.3.3)
It is when a country voluntarily transfers resources to another or gives loans on concessionary terms
What is Debt relief (4.3.3)
Debts are usually owed to all, or some, of the following - the IMF, the World Bank, governments and banks in developed countries
What are the Awareness of the role of international institutions and NGOs (4.3.3)
◦World Bank
◦International Monetary Fund (IMF)
◦NGOs
What is the World bank (4.3.3)
The World Bank was founded at the Bretton Woods Conference after WWII. It aims to bring about long-term development and a reduction in poverty
What is the International monetary fund (4.3.3)
The IMF was also set up in the Bretton Woods Conference. It was set up to ensure that exchange rate systems work well
What are NGOs (4.3.3)
Non-government organisations are organisations that work independently of governments
What are Financial markets (4.4.1)
Financial markets are where buyers and sellers come together to trade financial assets, such as stocks, bond, and currencies
What do Financial markets do? (4.4.1)
Financial markets serve as intermediaries between those who need capital (borrowers) and those who have capital to lend (investors). They help enable companies, governments and individuals to raise funds (financial capital) and invest their savings / profits
Roles of the financial market (4.4.1)
◦Facilitate savings
◦Facilitate the exchange of goods and services
◦Provide forward markets
◦Markets for equities
◦Lend to business and individuals
Facilitate savings (4.4.1)
Financial institutions enable households and businesses to save money providing a range of accounts with varying degrees of risk and rates on interest
Lend to businesses and individuals (4.4.1)
Financial institutions enable the connection between households and businesses which have savings with those that need to borrow
Facilitate the exchange of goods and service (4.4.1)
They facilitate the exchange of goods and services by creating a payment system. Central banks print paper money, institutions process cheque transactions, companies offer credit card services and banks and bureau de changes buy and sell foreign currencies
Provide forward markets (4.4.1)
This is where firms are able to buy and sell in the future at a set price. Markets set the price of an asset (e.g. a commodity such as wheat, or a financial instrument such as foreign currency) for future delivery
Market for equities (4.4.1)
Equity markets involve the trade of shares. It is also called a stock market. Equity markets provide access to capital for firms, and allow investors to own part of a market. Returns on the investment, usually in the form of dividends, are based on future performance. A dividend is a share of the firm’s profits
Examples of market failure (4.4.2)
◦Moral hazard
◦Speculation and market bubbles
◦Market rigging
◦Externalities
◦Asymmetric information
What are Moral hazard (4.4.2)
This is where individuals make decisions in their own best interests knowing there are potential risks. This can happen in 2 main ways
Examples of Moral hazards (4.4.2)
When individual workers take adverse risk in order to increase their salary, any problems they cause will be the problem of the company and not the problem of the individual. Moral hazards also show some external costs
What are Speculation and market bubbles (4.2.2)
Almost all trading in financial market is speculative which leads to creation of market bubbles, where the price of a particular assets rises massively and then falls.
Why does Speculation and market bubbles occur (4.4.2)
They tend to occur because investors see the price of an asset is rising and so decide to purchase this asset as they believe the price will continue to rise and will profit them in the future. This leads to prices becoming excessively high and eventually investors decide that the price will fall, so they sell their assets and panic sets in
What is Market rigging (4.4.2)
Where a group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves at the expense of other participants in the market
Example of Market rigging (4.4.2)
An example is insider trading, where an individual or institution has knowledge about something that will happen in the future that other don’t know and so can buy or sell shares to make a profit. Another example is when individuals or institutions affect the price of a commodity, currency or asset to benefit themselves
What are Externalities (4.4.2)
There are a number of costs placed on firms, individuals and the government that the financial market does not pay
Example of Externalities (4.4.2)
An example of this is the cost to the taxpayer of bailing out the banks after the 2007-08 financial crisis. Even higher than this, was the long-term cost to the economy of the crisis due to its effect on demand and growth
What is Asymmetric information in the financial sector (4.4.2)
Financial institutions often have more knowledge compared to their customers, both consumers and other institutions. This means they can sell them products that they do not need, are cheaper elsewhere or are riskier than the buyer realises.
Example of Asymmetric information in the financial sector (4.4.2)
An example of this was The Global Financial Crisis which was partially caused by banks selling packages of prime and subprime mortgages, but advertising them all as prime mortgages. Those buying the packages suffered from asymmetric information and it is unlikely they would have bought them if they knew the risk involved
Roles of central banks (4.4.3)
◦Implementation of monetary policy
◦Banker to the banks - lender of last resort
◦Banker to the government
◦Role of regulation of banking industry
Implementation of monetary policy (4.4.3)
The central bank controls monetary policy through interest rates and controlling money supply in order to keep inflation low and stable
Banker to the government (4.4.3)
The exact nature of the services offered by the bank differs from country to country. Typically they will: ◦Hold the government’s bank account and lend to them
◦Hold government debt
◦Hold gold and foreign exchange reserves
Banker to the banks- lender of last resort (4.4.3)
Banks deposit their money within the central bank and this is often used to balance the accounts of banks at the end of each day, when banks owe each other money because cheques have been paid in by consumers. Banks tend to lend to each other and so the collapse of one bank will lead to the collapse of others
Role of regulation of banking industry (4.4.3)
It prevents financial institutions from undertaking activities which harm consumers or engage in risky activities which would lead to collapse and to prevent systemic risk, the risk of the whole system collapsing
Examples of Financial regulation (4.4.3)
◦Banning market rigging
◦Prevent the sale of unsuitable products
◦Maximum interest rates to prevent consumer exploitation and prevent excessively risky lending
◦Deposit insurance to protect consumer deposits and increase stability
◦Liquidity ratios, when banks are forced to hold a certain percentage of liquid assets
Key bodies of Financial regulation (4.4.3)
The Financial Policy Committee (FPC)
The Prudential Regulatory Authority (PRA)
The Financial Conduct Authority (FCA)
Base interest (4.4.3)
teams
Factors to consider when setting bank rate (4.4.3)
teams
What is Public expenditure (4.5.1)
Government spending is a critical aspect of fiscal policy. Government spends money to:
control AD
achieve macroeconomic objectives
aim for equity and equality
correct market failure
Types of expenditure (4.5.1)
Capital government expenditure
Current government expenditure
Transfer payments
Capital government expenditure (4.5.1)
It is spending on long-term investments which are expected to provide benefits over multiple years
Transfer payments (4.5.1)
Government payments made to individuals or groups without any expectation of goods or services in return (possible teams examples)
Current expenditure (4.5.1)
Consists of day-to-day government spending on recurring items, such as salaries, maintenance, and operational costs. (teams important stuff)
Composition and size of public expenditure in a global context (4.5.1)
In most mixed and free economies, the lower the average income of the country, the lower is likely to be the percentage of GDP spent by the government. This is due to poorer countries tend to have a lower tax revenue, due to avoidance, inefficiency at collecting and smaller amounts of wealth to tax (teams)
Impacts of government expenditure (4.5.1)
Productivity and growth
Living standards
Crowding out
Level of taxation
Equality
Productivity and growth (4.5.1)
Free market economists argue that government spending is wasteful and causes inefficiency. However, the government is able to enjoy economies of scale when it provides goods, and this improves productivity
What is Tax (4.5.2)
Tax is used to pay for the number of goods and services that the government provides. Tax can also be used to correct market failure at a microeconomic level and to manage the economy and redistribute income at a macroeconomic one.
Types of Tax (4.5.2)
Progressive tax
Regressive tax
proportional tax
Progressive tax (4.5.2)
This is where those who are on higher incomes pay a higher marginal rate of tax, they pay a higher percentage of their income on tax. Direct taxes tend to be progressive, for example income tax
Regressive tax (4.5.2)
This is where the proportion of income paid in tax falls as the income of the taxpayer rises. Those on higher pay a smaller percentage of their income on the tax.
Proportional tax (4.5.2)
This is where the proportion of income paid on tax remains the same whilst the income of the taxpayer changes
Impact of tax changes on (4.5.2)
Incentives to work
Tax revenues
Income distribution
Real output and employment
Price level
Trade balance
FDI flows
Incentives to work (4.5.2)
Higher marginal rates of tax mean people don’t want to work
The Laffer Curve (4.5.2)
Add Laffer Curve
Automatic stabilisers (4.5.3)
They are policies which reduce the impact of changes in the economy on national income, government spending and taxation are automatic stabilisers
Discretionary fiscal policy (4.5.3)
This is a policy which is implemented through one-off policy changes. Discretionary fiscal policy involves deliberate changes in government expenditure and taxes with the intention of influencing AD
Automatic stabilisers and discretionary fiscal policy (4.5.3)
In a recession, benefits increase more since people are unemployed and so the overall fall of AD is reduced. In a boom, tax increases as people have more more jobs and higher incomes, so the tax reduces disposable income, so decreases consumption and AD. These stabilisers reduce the size of the problem
Fiscal deficit and the national debt (4.5.3)
The national debt is the sum of all the government debts built up over many years whilst a fiscal deficit is when the government spends more than it receives that year
What are Cyclical deficits? (4.5.3)
This is a temporary deficit. It might occur during recessions, when the governments increase spending to stimulate the economy
What are Structural deficits? (4.5.3)
This is a deficit, which is due to an imbalance in the revenue and expenditure of the government
Factors influencing the size of fiscal deficits (4.5.3)
The Business cycle
Interest payments
Privatisation
The Business cycle (4.5.3)
Government are likely to spending more during recessions. This is to try and stimulate the economy. Spending might be increased on welfare payments, since more people will be unemployed and on low incomes
Interest payments (4.5.3)
If interest rates increase on government debt, the amount the government pays in interest payments increases, so the deficit might increase
Privatisation (4.5.3)
An industry is privatised when the government sells the industry to the private sector. This provides them with a one-off payment, which could improve the budget deficit
The significance of fiscal deficits and national debts (4.5.3)
The cost of borrowing could increase, which would cause an increase in demand on credit in the economy
If confidence is lost in the government’s ability to repay the debt, governments might have to raise interest rates to encourage investors to buy bonds
A fiscal deficit could be inflationary if it increases AD
Macroeconomic policies (4.5.4)
Measures to reduce fiscal deficits and national debts
Changes in interest rates and the supply of money
Measures to reduce poverty and inequality Measures to increase international competitiveness
