Paper 2 Revision Flashcards
Absolute Poverty
When people are unable to afford sufficient necessities to maintain life
(anyone less than $1.90 a day)
Relative Poverty
Peoples income falls below an average income threshold. In Britain it is an income of less than 60% of median household income (27,300 in 2017)
The Poverty Trap
affects people on low incomes, when the tax and benefit system creates a disincentive to look for work or work for longer hours.By working longer hours individuals might lose income
Poverty Causes
Caused by unemployment, a lack of skills,health problems and income dependency
Causes of increased Relative Poverty in the UK
-De-industrialisation has increased the number of service sector jobs which tend to be lower paid.
-Growth in underemployment, zero-hour contracts, part time jobs, all of which mean lower wages for workers
-The decline of trade Unions
-State benefits have fallen in relative value whilst taxes become more regressive
Income
is a flow of earnings
Wealth
is a stock of assets
Gini Coefficient
A/(A+B)- it is measured between 1 and 0 and the bigger the coefficient ,the more unequal the country
Causes of Wealth Inequality within countries
1.Wages
2.Wealth Levels
3.Chance
4.Age
What is the Kuznets Hypothesis
States that as society develops and moves from agriculture to industry,inequality increases as the wages of industrial workers rises faster than farmers. Then wealth is redistributed through taxation and Gov spending and so inequality falls
Quantitative Easing
Central bank creates money electronically by adding money to their own balance sheet
-They use this to buy financial assets from financial institutions, ie pension funds, banks, and gov. bonds, especially in the UK
-The D for gov. bond rises, so P increases, so the yield goes down, reduces the incentive to hold government bonds
- financial institutions now have money, they can either use this to deliver more loans (very good, main obj. of QE), but maybe they will invest this money in riskier corporate bonds with a higher yield or shares (due to low willingness to lend)
- So the P or corporate bonds goes up and the yield goes down, so it’s cheaper and easier to raise finance and access finance, reduces the cost of borrowing money (obj. of QE) (it goes down as FIs can issue bonds at lower i/r = lower borrowing for companies and individuals who then access credit more cheaply
Globalisation
the increasing interdependence of the different economies worldwide through integration.
The financial markets
where buyers and sellers can buy a range of services or assets that are fundamentally monetary in nature
What are the roles of the financial market
1.To facilitate savings (such as storing money in savings account and holding stocks and
shares)
2.They lend to Businesses and individuals
3.facilitate the exchange of goods and services
4.provide forward markets
5.market for equities
Forward Market
This is where firms are able to buy and sell in the future at a set price, for example if a farmer wants to sell the crop they are growing at a guaranteed price in a month’s time. The forward market exists for commodities and in foreign exchange and helps to provide stability.
Market Failure in the financial sector
1.Asymmetric information-financial institutions have more information than customers.
2.Negative externalities- the cost to the taxpayer of bailing out the banks after the 2007-8 financial crisis
3.Moral hazard-where individuals make decisions in their own best interests knowing there are
potential risks.
4.Market Rigging-individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves
Fiscal Policy
increased government spending and lower taxation in an attempt to recover the economy as it is believed that an increase aggregate demand can boost economic output and take the country out of a recession.
Automatic Stabilisers
Automatic stabilisers are fiscal instruments that respond to the upturns and downturns of the economic cycle. These processes are automatic.
How would Automatic Stabilisers work in a Recession
Recessions tend to lead to higher unemployment rates and lower income.This automatic increase in government spending, accompanied by lower taxation, helps curb the drastic decrease in aggregate demand. During a recession, automatic stabilisers help reduce the effects of a fall in economic growth.
Expansionary Fiscal Policy
which aims to increase aggregate demand (AD) by increasing government spending and/or decreasing taxes.
-This policy aims to increase consumption by lowering tax rates, as consumers now have a higher disposable income and a higher MPC
Contractionary Fiscal policy
This aims to decrease aggregate demand in the economy by decreasing government spending and/or increasing taxes. This policy aims to decrease the budget deficit and lower levels of consumption
Economic Growth
the sustained, long-term increase in the total output of goods and services within a country’s economy, typically represented by a rise in GDP
Disposable income
income left after taxes are deducted and benefits are added
Multiplier effect
When an initial injection into the circular flow of income causes a bigger final increase in real national income
protectionism
Protectionism
a policy adopted by a country to shield its domestic industries from foreign competition.
Tariff
a tax imposed on imported goods making them more expensive and less attentive for consumers to buy more domestic goods
subsidy
financial assistance given to local businesses to help them compete against overseas competition
