New macroeconomics key terms Flashcards
Nominal Value
_______V____ of an economic variable based on current prices taking no account of changing prices through time (not adjusted to inflation)
Real Value
_______ V____. Value of an economic variable taking account of changing prices through time
Index Number
A device for comparing the value of a variable in one period or location with a base observation (e.g. measuring the average level of prices relative to a base period)
Consumer Price Index (CPI)
A measure of the general price level in the UK adopted as the UK’s inflation target since December 2003
Inflation
The rate of change of the average price level e.g. the percentage annual rate of change of the CPI.
Retail Price Index (RPI)
A measure of the average level of prices in the UK. Tracks changes in the cost of a fixed basket of goods over time, and is produced by combining about 180,000 price quotes for over 650 representative items
Cost-Push Inflation
Inflation initiated by an increase in the costs faced by firms arising on the supply side of the economy
Demand Pull Inflation
Inflation initiated by an increase in AD
Deflation
a sustained decrease in the general price level
Economically Inactive
Those people of working age who are not looking for work, for a variety of reasons
Discouraged Workers
People who have been unable to find employment and who are no longer looking for work, seen as economically inactive.
Workforce
People who are economically active- either in employment or unemployed
Unemployed
People who are economically active but not in employment
Full Employment
A situation where people who are economically active in the workforce and are willing and able to work (at going wage rates) are able to find employment.
Claimant Count
Number of people claiming job seekers allowance each month
ILO Unemployment Rate
Measure of the percentage of the workforce who are without jobs, but are available for work and looking for work. Based heavily on Labour force survey.
Frictional Unemployment
Unemployment associated with the job search; people between jobs
Structural Unemployment
Unemployment arising because of the changes in the pattern of economic activity within an economy. unemployment due the loss/decline of entire industries e.g. coal mining
Cyclical Unemployment
Unemployment that arises from during the down turn of a economic cycle such as a recession
Demand Deficient Unemployment
Unemployment arising because of a deficiency of aggregate demand in an economy, so that the equilibrium level of output is below full employment
Seasonal Unemployment
Unemployment that arises in seasons of the year when demand of the good/service is relatively low
Voluntary Unemployment
A situation that arises when a individual decides not to accept a job at the going wage rate
Involuntary Unemployment
Situation arising when an individual who would like to accept a job at the going wage rate cannot find employment- rely on social security payments
Unemployment
Costs of ____________. Cannot achieve allocative or productive efficiency. The less workers the less efficient the economy
Human Capital
The stock of skills and expertise that contribute to a workers productivity; can be increased through education and training
Economic Growth
Can stem from a increase in the inputs of factors of production, or from an improvement in their productivity.
GDP
measurement of economic output in an economy over a period of time. Not seen as a good assessment of standard of living in a country.
GDP
measurement of economic output in an economy over a period of time. Not seen as a good assessment of standard of living in a country.
Reduction of trade barriers
Another factor that has contributed to globalisation. Implemented under WTO. Encourages firms to be more active in trade.
Balance of payments
a record of all the monetary transactions between residents of a country and the rest of the world over a given period of time.
The current account
The 3 main items appear here: Balance between imports and exports of goods and services
International transfers
Income
Balance between imports and exports (of goods and services)
If exports exceed imports then the country has a trade surplus and the trade balance is said to be positive. If imports exceed exports, the country or area has a trade deficit and its trade balance is said to be negative.
Income
One of the 3 main parts of the current account. Employment income from abroad→ major item of income is made up of profits, dividends, and interest receipts from overseas UK assets.
International transfers
One of the 3 main parts of the current account. Transfers trough the central government or transfers made or received by private individuals. This item includes transaction and grants from inside the EU
Financial account
The buying and selling of financial assets e.g. Bonds, shares
Capital account
The capital account in the balance of payments for a country includes the effects of debt forgiveness, sale/transfer of patents, copyrights, franchises, leases and other transferable contracts across borders.
Exchange rate
the rate at which one currency can be exchanged for another.
Connection between BOP and Exchange rates
BOP itemises these transactions which entail the supply and demand for pounds
International Competitiveness
Competitiveness depends on both the exchange rate but also the movements in the price of the good over time. To find the overall competitiveness with another country real exchange rate calculated
Inflation targeting
An approach to macroeconomic policy whereby the central bank is charged with meeting a target for inflation
Bank rate
The interest rate that is set by the monetary committee of the bank of England in order to influence inflation
Quantitative Easing
A process by which the central bank purchases assets such as government and corporate bonds in order to release additional money into the financial system
Supply-side policies
measures governments take to increase the availability or affordability of goods and services
Absolute Advantage
A country’s ability to produce a good using less then resources than another country
Comparative advantage
A country’s ability to produce a good relatively more efficiently (i.e. at lower opportunity cost) than another country
Trading possibility curve
Shows the consumption possibilities under conditions of free trade
Law of comparative advantages
A theory arguing that there may be gains from trade arising when countries specialize in the production of goods or services in which they have a comparative advantages.
Terms of trade
The relative prices at which exchange takes place; the ratio of export prices to import prices
Globalization
A process by which the word’s economies are becoming more closely integrated
Multinational Corporation (MNC)
A company whose production activities are called out in more than one country
General Agreement on Tariffs and Trade (GATT)
The precursor of the WTO, which organized a series of ‘rounds’ of tariff reductions
World Trade Organization
A multinationals body now responsible for overseeing the conduct of international trade
Balance of Payments
A set of accounts showing the transactions between the residents of a country and the rest of the world
Current account and the Balance of Payments
Account identifying transitions in financial in (physical) capital between the residents of a country and the rest of the world
Visible trade
Trade in goods
Invisible trade
Trade in services
Exchange Rates
The price of one currency in terms of another
Real Exchange rate
The nominal exchange rate adjusted for differences in relative inflation rates between countries
Effective exchange rate
Exchange rate for a country relative to weighted average of currencies of its trading powers
Foreign exchange reserves
Stocks of foreign currency and gold owned by the central bank of a country to enable it to meet any mismatch between the demand and the supply of the countries currency
Devaluation
Process whereby government reduces the price of its currency relative to an agreed rate of its currency relative to an agreed rate in terms of a foreign currency
Revaluation
Process whereby a government raises the price of domestic currency in terms of foreign currency
Exchange Rate Mechanism
A system that was set up by a group of European countries in 1979 with the objective of keeping member countries currencies relatively stable against each other
Purchasing power parity theory of exchange rates
Theory stating that in the long run exchange rates are determined by relative inflation rates in different countries
Appreciation
A rise in the exchange rate within a floating exchange rate system
Depreciation
A fall in the exchange rate within a floating exchange rate system
Why is exchange rate important?
It influences the prices that domestic consumers must pay for imported goods, services, assets and so the price that foreigners pay for UK goods services etc.
International competitiveness
Dependant on not only the exchange rates but also on movements in the prices of goods over time. This can offset a change in exchange rate.
Real Exchange rate
Needed to calculate the overall competitiveness of goods in a country
Real exchange rate
A calculation for international competitiveness
International transactions (in financial assets)
Something other than the current account that has influence over and is influenced by the exchange rate
how is a stable current account a measurement of macroeconomic performance?
- Although governments do not have explicit targets for the current account –> try to improve their international competitiveness.
- Exports are promoted.
how is a sustainable fiscal deficit & national debt a measurement of macroeconomic performance?
- governments must borrow
- if interest payments on the national debt are high, this has a high opportunity cost
why is low income inequality/poverty a measure of macroeconomic performance?
- High inequality and poverty can lead to social unrest –> impact the standard of living
- Inequality can be measured in different ways (Gini Coeffiient)
why is low unemployment a measure of macroeconomic performance?
- governments aim to have low unemployment
- full employment is not 0% unemployment, because there will always be some people temporarily unemployed.
what is the international labour organisation measure of unemployment?
defines unemployment as someone who has been actively seeking work for the past 4 weeks - but ready and able to start in the next 2 weeks.
- calculated quarterly; internationally agreed and comparable measure.
- based on a survey.
how can short-run economic growth be measured?
by the annual percentage change in real GDP
- shown on an AD/AS diagram, by a rightward shift of AD.
what are the causes of short-run economic growth?
anything that causes AD to rise:
- lower interest rates, lower income/corporation tax, higher consumer/business confidence, higher government spending, weaker exchange rate.
what are the causes of long-run economic growth?
- increase in the quantity of factors of production
- increase in capital for higher investment from firms
- increase in quality of factors of production
- increase in labour productivity
what are the costs of economic growth (environment)?
- can give rise to negative externalities, such as pollution.
- unsustainable - growth at the expense of future generations, by using up natural resources.
what are the costs of economic growth (inequality)?
rapid increases in real national income –> higher level of inequality & social divisions
what are the costs of economic growth (inflation)?
- rapid growth can put pressure on resources, and lead to prices rising too quickly
- esp. those on fixed incomes/low-wage bargaining power
what are the benefits of economic growth?
- improved living standards
- increased employment & disposable incomes
–> meets increased consumption demands
–> reduces income inequality - improved public services
–> raises tax revenues & reduces gvt spending on JSA + improves budget balance
what happens in a recovery?
- as investment increases, real GDP grows
- unemployment falls (jobs are created = workers needed to produce goods/services)
- incomes & consumption rise –> further need for investment & workers
- as profits rise, so do firms’ share prices.
what is a boom?
- workers working over-time, and wages are rising.
- inwards migration may rise
- demand for luxury goods is high
- demand for imports is high
- government gets more tax revenue, spending less on benefits.
what are the causes of a recession?
- global financial crisis
- agricultural harvest
- trading partners
what is the shadow economy?
illegal activities that create GDP, but are not recorded in the formal economy
what is sustainability?
the ability to meet the needs/wants of the current generation, without compromising the ability of future generations to meet their needs and wants.
what are the benefits of PPP?
- remains fairly constant year round; easily compared
- exchange rates often get closer to PPP as time passes
- knowing PPP allows you to track & predict exchange rate relationships
- helps you examine relative living conditions of different countries
what is arbitrage?
if, at a certain exchange rate, it is cheaper to buy goods in one country than another, businesses will buy goods in the cheaper country & sell in the other for a profit.
- forces prices/exchange rates to align over time.
what are the limitations of the CPI?
- the ‘average family’ = personal inflation rates differ
- price fluctuations of certain goods (food, energy)
- housing costs (CPIH)
- basket updates may be too slow
what are the limitations of real GNI per capita?
- scale & depth of income + wealth inequality
- changes in leisure/working hours
- value of non-marketed output, unpaid work
- impact on stock of our natural resources
- defensive expenditures
- the amount of debt
what causes changes in the average price level?
- real incomes : a rise in the average price level –> real value of income drops
- balance of trade : if the average price level of a foreign country fell, domestic consumers would demand more imports = contraction in AD
- interest rates : if the average price level rises, there will be inflation.
what is consumption affected by?
- wealth levels
- income levels
- future expectations of inflation
- animal spirits/confidence
- unemployment levels
- job security
what is investment affected by?
- interest rates
- future growth & demand
- profitability
- government policies
- efficiency of financial system
what is government spending affected by?
- cost of borrowing
- fiscal deficit/debt targets
- levels of national debt
- state of the economy
- confidence in the economy
- political bias
- Global crisis
what is level of exports/imports affected by?
- the exchange rate = determines relative prices of exports & imports
- quality of goods = affects international competitiveness
- relative inflation rates
- relative levels of income
what is the difference between current and capital spending?`
current = on transfer payments (benefits), or on the day to day running of government
capital = on long-term spending that increases the productive capacity of the economy
what are the determinants of savings?
- the interest rate being received on savings
- the level of consumer confidence about the future
- job security
- inflation expectations
- level of income`
what is the difference between the short-run & long-run supply curve?
- in the short-run = at least one of the ‘factors of production’ are fixed
- in the long-run = all factors of production are variable + the economy operates at full employment
what causes shifts in the SRAS curve?
- business costs = labour ~& raw material costs may rise
- exchange rates = the exchange rate may lead to higher prices of imports
- the government can impose taxes = increases cost of producing goods/services.
why is the SRAS curve upward sloping?
shows how suppliers will react to a higher price level for final outputs of goods/services, holding inputs constant
what is underlying economic growth represented by on the LRAS curve?
rightwards shift in the LRAS; represents an increase in the productive capacity of the economy.
what are long-run factors that shift the LRAS?
- productivity growth
- technology
- infrastructure
- enterprise
- cultural attitudes
what are the limitations of HDI?
- not a comprehensive measure of human development
- excludes factors like political freedom
- doesn’t reflect input efforts in terms of policies
- an average measure; masks inequalities within countries
- important to keep it simple with min. variables to make sure its acceptable, understandable, and predictable.
what is the HDI?
calculated using:
- life expectancy at birth
- mean years of schooling & expected years of schooling
- GNI per capita
what are the 4 main characteristics of property rights?
- the right to use the good
- the right to earn income from the good
- the right to transfer the good to others
- the right to enforce property rights ( rights of ownership )
what is hysteresis?
when workers are unemployed for a time period, they become deskilled/demotivated & are less able to get new jobs
what is the impact of unemployment on workers?
- falling incomes
- poverty
- depression/health problems
- poor standards of living
- debt problems
what is the impact of unemployment on the economy?
- crime
- higher fiscal deficit
- hysteresis –> LRAS shifts in
- loss of workers to foreign countries
- may cause rising income inequality
consequences of unemployment - fiscal issues
- government spending on unemployment benefits increases
- receives less income tax & wouldn’t have as much revenue to invest in public services
consequences of unemployment - social issues
- increased rates of crime
- costs the government through expenditure on policing & give rise to negative externalities
consequences of unemployment - reduced output
- if unemployment is not due to workers being replaced with capital = real GDP falls
- reduced confidence & multiplier effects could magnify negative impact
consequences of unemployment -living standards & inequality
- dramatic fall in standard of living
- may increase inequality within an economy
what is the natural rate of unemployment (NRU)?
the rate of unemployment which the economy should tend towards in the long-run.
what are the factors affecting the NRU?
- better job centres, improved flow of information about vacancies
- more generous out-of-work benefits
- occupational mobility
- hysteresis
- changing working practices
how can structural unemployment be reduced?
provide/subsidise/incentivise education & retraining schemes
–> workers learn the skills needed to be useful in the current economy & be in position to gain employment
how can frictional unemployment be reduced?
- harder to solve = time delays are almost inevitable
- improve flow of information about jobs through job centres & internet –> makes it easier for those out of work to find suitable jobs
- make it easier for firms : background checks, registering new workers for tax
what are the causes of cost-push inflation?
- national minimum wage increases
- trade union wage increases
- increases in world commodity prices
- external supply-side shocks
- rise in indirect taxes
- rise in corporation tax
- falling productivity
what are the government causes of demand-pull inflation?
- excessively loose fiscal policy: income taxes could be cut too much / GS could be increased too quickly
- excessively loose monetary policy: interest rates could be cut too much/too quickly & QE could be too high.
what are the causes of demand-pull inflation?
- exchange rate depreciation
- rising animal spirits
- excessive borrowing
consequences of inflation for consumers:
- erodes the real value of money –> real incomes will fall & standard of living falls
- inequality rises (more skilled workers can negotiate nominal wage increases)
- shoe leather, menu costs
- savers lose out + borrowers gain
- indebtedness falls
consequences of inflation for savers and borrowers:
- savers lose out
- borrowers gain
- indebtedness falls, because the real value of debt falls as inflation erodes the real value of repayments
consequences for inflation: wage-price spiral
- as inflation rises, people start to expect higher inflation
- leads to them asking for higher nominal wage rises to keep pace with the rising cost of goods in shops –> higher prices
what do the consequences of inflation depend on?
- is it unexpected or expected?
- is it a temporary or persistent problem?
- the extent to which workers have negotiation power in terms of union/skill level
- what is happening to nominal interest rates?
- what is happening to inflation rates in the rest of the world?
what is the capital account comprised of?
- sale/transfer of payments, copyrights, franchises, leases & other transferable contracts & goodwill
- transfers of ownership of fixed assets
what is the current account comprised of?
- trade in goods/services
- net primary income = net factor income from abroad
- net secondary income = net unilateral transfers
what is the financial account comprised of?
- net foreign ownership of domestic assets
- hot money flows
what are the causes of a Current Account Deficit?
- low productivity - final prices of goods likely to be higher
- higher inflation = reduces international competitiveness of domestic goods
- strong exchange rate
- non-price factors; e.g. poor quality of G/S
- supply-side constraints
is a CAD a concern?
- if because of capital goods imports –> good for future productivity & growth
- if because of current goods –> good for short-term standard of living
- if because of a lot of FDI - profits being repatriated
- if deficit is a high % of GDP & is getting worse = worrying
what are the effects of a CAD?
- needs to be financed by a financial account surplus = problem if foreign investors stop wanting to purchase assets in that country
- currency may depreciate (exports!)
- causes price of imports to rise - leading to higher prices for consumers & cost-push inflation
current account & economic growth:
- can mean that an economy is exporting a lot of goods (if exports>imports = GDP may be rising)
- if imports rise, M rises & GDP may fall - CAD may signal weak economic growth
current account & employment:
- if there is a CAD = economic growth may be slowing & unemployment may be rising
- if a developed economy is importing lots of primary goods –> labour force may be working in more productive economic areas (e.g. intellectual property)
- could reflect a change in the structure of an economy/its labour force
current account & inflation:
- may show a nation is importing lots of G/S; VS if labour & input costs are cheaper overseas = may reduce inflationary pressure
what are the policies to reduce a CAD?
- expenditure-switching policies
- expenditure-reducing policies
- expenditure-reducing cont
- expenditure-switching policies
- expenditure-reducing policies
- expenditure-reducing cont
- aim to influence relative prices of exports/imports –> to switch expenditure away from imports & domestic consumption/exports
- tariffs, supply-side policies, exchange rate manipulation
- could boost international competitiveness of exports & improve CAD
what are expenditure-reducing policies?
- aim to control AD & limit spending on imports
- contractionary monetary/fiscal policies = reduce AD & real GDP / incomes
- marginal propensity to import & CAD will fall
what are the consequences of expenditure-reducing policies?
- consequences for wider economy = real GDP will fall
- fiscal policy –> reduce DI & cause unemployment.
what is the MPC?
- body within BofE in charge of achieving price stability
- normally meet once a month to vote on changes in monetary levels -determined by majority
what are the factors affecting the MPC’s decision?
- inflation expectations
- consumer spending forecasts
- real GDP growth rate
- exchange rate
- trade balance
impact of lower interest rates on : housing market
- mortgages become cheaper –> allows first-time house buyers to take out more mortgages
- positive wealth effect = houses go up in value & larger mortgages –> more time to spend now + more consumer confidence
- lower monthly repayments
impact of lower interest rates : consumption
- loans are cheaper = AD rises
- return on savings falls when IR falls + opportunity cost falls
impact of lower interest rates : government spending
- lower corporate borrowing rates
- government can borrow more cheaply, running a fiscal deficit is less negative
- tax revenues may rise
impact of lower interest rates : trade & exchange rates
- hot money flows out –> increase supply & fall in demand for sterling; causing depreciation
- imports become more expensive in domestic currency terms
- ceteris paribus demand for exports falls & impprts rises –> AD rises
impact of lower interest rates on : business investment
- loans are cheaper = easier to meet hurdle rate of return projects + more projects undertaken
- previously unprofitable projects = profitable
what is the effect of lowering the Bank Rate?
- lower LIBOR = rate at which commercial banks lend/borrow from each other
- pass on to consumers/firms with fall in mortgages rates/loans
what does contractionary fiscal policy do?
decreases level of AD by decreasing consumption/investment/gvt spending
- shifts AD left
what does expansionary fiscal policy do?
- increases AD By increasing GS / cutting taxes
- increases consumption = tax cuts increase DI
- increases investment = cutting business taxes
- increases GS
what are the microeconomic functions of fiscal policy?
- governments levy taxes –> provide merit goods & public goods, reduce negative externalities, and reduce consumption of demerit goods
what are the macroeconomic functions of fiscal policy?
- governments levy taxes –> redistribute income & wealth by giving out transfer payments to reduce inequality
how does fiscal policy impact AS?
- corporation tax cuts = more post-tax profits, investment rises
- boosts human & physical capital –> more productive capacity
- income tax cuts = attracts foreign workers; LRAS shifts right
- more infrastructure spending = shifts AD & LRAS to the right
what are the principles of taxation?
- canon of equality
- canon of certainty
- canon of convenience
- canon of economy
what is the canon of equality?
- taxes should be determined according to the ability to pay, so richer people should pay more
what is the canon of certainty
the timing and amount of tax must be certain to the taxpayer, so there are no shocks/unexpected tax bills
what is the canon of convenience?
it must be convenient to pay - in terms of how it is paid & when it is paid
what is the canon of economy?
the cost of collecting/enforcing a tax should be low, relative to the amount collected
what are the problems with government spending on national debt?
- if markets view a country’s national debt as unsustainable = demand for government debt falls & cost of borrowing will rise
- opportunity cost (money for repayments couldve been sent elsewhere)
- intergenerational fairness = future gens have to face increased taxes
evaluation of national debt payments
- key measure = national debt as % of GDP
- has money borrowed gone to current/capital spending?
- what is the rate of interest on the borrowing?
what are key supply-side objectives?
- increasing labour & capital productivity
- promoting non-inflationary growth
- promoting competition
- increasing investment & research
- improving incentives for people to find work
- increasing mobility
what are supply-side policies?
policies that improve the productive potential/capacity of an economy, shown by an outward shift of the LRAS / PPF.
what are examples of free-market supply-side policies?
include measures like tax cuts, privatisation, deregulation & labour reforms - creating more flexible labour markets by reducing trade union power.
impact of SSP : privatisation
= transfer of state sector assets to private sector
- profit incentive means firms have incentive to be dynamically & productively efficient
- reduction in waste, better allocation of resources, LRAS shifts out
impact of SSP : deregulation
= reducing bureaucracy/admmin costs
- allows firms to supply G/S more easily –> reducing price & promoting competition
- increases LRAS
impact of SSP : corporation tax cuts
- lower corporation tax rates –> higher post-tax profits
- more money for firms to finance investment; investment in R&D –> better quality G/S
impact of SSP : reducing trade union power
- protects workers & helps them negotiate higher wages
- allows firms to hire + fire workers & pay more competitive rates
impact of SSP : income tax cuts
- increases DI that workers can earn & incentivise work
- attracts foreign labour
- increases quantity & quality of labour + long-term growth
impact of SSP : subsidies
- encourages firms to invest in supply-side improvements
- e.g. subsidies for firms if they invest in green energy –> improves efficiency & shifts LRAS out
impact of SSP : education & training
- improves productivity & efficiency –> shifts productive potential + LRAS out
- reduces rate of structural unemployment & natural rate of unemployment
what is the fisher’s equation of exchange?
MV = PQ (money supply x velocity = price level x real GDP)
- if velocity is constant over time; a % rise in money supply = equivalent % rise in nominal GDP
what are the policy implications of the SRPC?
arguing a government can aim for low unemployment/low inflation, but not both
what is the money illusion?
when people mistake changes in nominal prices for changes in real prices
impact of higher interest rates : fall in consumption
- increase in mortgage IRs –> reduction in disposable income for those on variable-rate mortgages
–> fall in house prices & negative wealth effect
–> reduction in consumption
impact of higher interest rates : fall in investment
- loans to finance investment projects = more expensive; fall in real rate of return
- if higher IRs –> fall in consumer demand; causes increase in spare capacity + worsening business confidence
impact of depreciation of currency on trade balance :
- rise in exports –> overseas price falls, causing increase in export volumes & values
–> improved trade balance - fall in imports –> fall in imported demand as buyers switch to domestically-produced output
evaluation of impact of depreciation on trade balance:
- depends on PED for exports/imports; only if Marshall-Lerner condition holds (PED X + PED M > 1) will net trade improve
- in short-term = depreciation –> J-curve effect
why could a fixed exchange rate cause difficulties for a country?
- domestic economy might be experiencing recession
- central bank may want to cut IRs –> stipulate money supply & AD
–> VS this causes an outflow of money + puts pressures on fixed exchange rate & causes a deeper recession
evaluation of appreciation of a nation’s currency on inflation rate:
- depends on country’s dependence on imported raw materials
- PED
- exchange rate isn’t only factor influencing rate of inflation
how could a recession in a major trading partner cause unemployment in an economy?
- recession = associated with falling AD of trading partner –> reduces marginal propensity to import (MPM) & fall in exports
- exports are a component of AD = reduces AD
how can taxation be used to alleviate poverty?
= increasing progressive taxation & reducing regressive taxation
–> e.g. coalition gvt increased tax free allowance –> £12,500
- increases tax revenues; redistributed to lower earners
how can welfare benefits be used to alleviate poverty?
- e.g. Universal Credit; Employment Support Allowance (those under pension age who can’t work due to a disability)
- lets money directly in hands of poor –> increased incomes
how can government spending on education & healthcare be used to alleviate poverty?
- e.g. out of G7 countries = UK healthcare spending in 2017 was second lowest
- better healthcare –> more people able to work
- better education –> more highly-skilled & increased employment
- breaks cycle of poverty
evaluation of policies to correct a CAD
- demand-side policies carry risks
- option of competitive devaluation isn’t available - if free-floating ER system
- supply-side reforms = effective in long-run; helping to correct an external deficit
examples of a CAD leading to austerity:
eurozone countries (2012-2016) had to use austerity measures to reduce a budget deficit to comply with EU rules & resulted in lower AD/growth + U
why might rising debt lead to slower economic growth?
= crowding-out theory
- rising debt -> increased gvt spending & borrowing
–> increased supply of bonds
–> decreases bond prices
–> higher IRs in market of loanable funds
why might there be changes in the level of government expenditure?
- cyclical = welfare spending increases in a recession due to higher U
- new decisions over provision of merit/public goods
- to influence distribution of income
- changing priorities
why might there be changes in the distribution of government expenditure?
- changing economic circumstances (e.g. higher defence spending during wars)
- changing priorities of a new government
- impact of an ageing population (e.g. healthcare costs)
- enviornmental issues
- issues of IR payments on National Debt
causes of globalisation:
- containerisation
- technological advancements
- growth in WTO membership
- deregulation
- growth of free trade blocs
- growth of sovereign wealth funds
- growth of BRICS
how has containerisation caused globalisation?
- seen firms exploit volume EOS
- promoted international trade of goods by making shipping cheaper
how have technological advancements caused globalisation?
- internet has removed physical barriers to trade
- allowed firms in a country to access a much larger market
- more choice –> can buy from more firms in more countries
how has growth in WTO membership caused globalisation?
- role of WTO = liberalised free trade, provided a forum to resolve trade disputes
- GATT = formed in 1948
- Most Favoured Nation Principle (MFN) = any tariff reduction offered to one country must be offered to all
how has deregulation caused globalisation?
- allows huge flows of hot money & FDI internationally
- growth of cross-border FDI
how has growth of sovereign wealth funds caused globalisation?
= state-owned investment fund composed of financial assets (e.g. stocks, bonds, property) which invest huge sums globally.
- typically created when gvts have budgetary surpluses
- driven by commodity-rich countries
what are the positives of globalisation for LDCs? - FDI
- higher FDI flows –> increases AD & leads to higher real GDP (positive multiplier, creates employment)
- FDI flows & MNC operations can lead to transfer of skills/technology –> shifts LRAS curve outwards
what is globalisation?
the free movement of goods/services, factors of production, and economies becoming increasingly interdependent
what are the limitations to the Phillips curve?
- not automatic that inflation will rise
- improved supply-side flexibility of labour market –> fall in NAIRU
- external factors (e.g. lower commodity prices) = off-setting factors
Components of AD
- consumption
- investment
- Government spending
- Net exports
Terms of trade formula?
Export/ Imports
