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Economics Theme 4 > Recap sheet 3 > Flashcards

Recap sheet 3 Flashcards

Start with components of current account

1
Q

What are the 5 types of trade bloc, in order or integration

A
  1. Free trade area
  2. Customs union
  3. Common market
  4. Monetary union
  5. Federal superstate
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2
Q

Describe characteristics of a free trade area

A

Goods and services are reduced or if not completely tariff free
Each member country can impose different tariffs on countries outside the bloc

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3
Q

Describe characteristics of a customs union

A

Free movement of goods and services

CET around the block-> can’t negotiate your own tariffs

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4
Q

Describe characteristics of a common market

A

Free movement of goods/ services/ labour/ capital
CET around bloc
Common set of rules and regulation, cannot distort CA
The UK is in a common market

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5
Q

Describe characteristics of a monetary union

A 
Free movement of goods/services/ labour/ capital
CET around bloc
Common set of rules and regulations
Share the same currency 
1 monetary policy, 1 interest rate 
1 bank 
Closest example is the Eurozone
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6
Q

Describe characteristics of a federal superstate

A 
Free movement of goods/services/ labour/ capital
CET around bloc
Common set of rules and regulations
Share the same currency 
1 monetary policy, 1 interest rate 
1 bank 
1 fiscal policy
Closest example is Greece being controlled
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7
Q

Disadvantage to trade with being in a free trade area

A

A business will set up in the country who offers the lowest tariff, and then export their goods to the bloc. Thus the country is gaining a comparative advantage

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8
Q

What is the most favoured nation principle

A

It means that the lowest tariff you offer to one country is the tariff that you should offer to the rest of the countries you trade with

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9
Q

What is the role of the WTO

A

To promote and police free trade agreements

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10
Q

Evaluation points of the WTO

A
  1. Seen as favouring the Western countries
  2. Massive time lag in setting up these tariffs
  3. More evident of regionalisation not globalisation
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11
Q

Advantages of the Uk membership in the EU

3

A
  1. All goods and services have access to common market
    - > no protectionist measures -> reduces c.o.p
    - > Economies of scale from selling to larger market
    - > EU is worlds richest trade bloc
  2. Domestic firms are protected by a CET
    - > see trade creation inside the bloc
    - > trade diversion outside the bloc
  3. Free movement of Labour -> fills the skills gap
    - > enables potential growth
    - > increase in supply of workforce allows firms to reduce wages paid to workers -> decrease c.o.p
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12
Q

Disadvantages of Uk membership in the EU

A
  1. Domestic firms face higher competition
    - > structural unemployment in inefficient industries
  2. Cost of meeting higher regulations
    - > less competitive with firms outside the bloc
  3. Membership fee -> net contribution to EU budget
    - > Opportunity cost to the gov
    - > In the LR it is developing wealthy countries e.g. Poland
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13
Q

Advantages of monetary union

4

A
  1. Remove exchange rate uncertainty -> consumption/ investment
    - > removes the last barrier to trade
  2. Higher levels of FDI
    -> can trade more freely
    However FDI didn’t drop in the UK- other factors are more significant
  3. No transaction costs involved
    - > broker can’t take a fee, trade would be cheaper
  4. Members of financial stability pact
    - > Other countries obliged to bail you out if you are in financial difficulties
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14
Q

Disadvantages of a monetary union

A
  1. Different countries need different exchange rates
    - > example of Greece and Germany
  2. One exchange rate
    Euro is quite strong -> expensive
    Exports expensive ->not bad for Germany as they sell high quality goods
  3. Cost of changing the currency
    - > e.g machines and new notes
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15
Q

What are the four components of the current account

A
  1. Trade in goods
  2. Trade in services
  3. Transfer payments
  4. Investment income from abroad
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16
Q

What does a strong imbalance between trade in goods and trade in services mean

A

the country has a strong sectoral imbalance

17
Q

How is a deficit on the current account balanced

A

A surplus on the capital account

18
Q

What is the capital account made of

A
  1. Borrow
  2. Sale of assets
  3. Run down assets
19
Q

Who’s debt is a deficit on the current account

A

The countries, not the government !!

20
Q

Why is borrowing on the capital account not good

A

It will work in the SR to balance the B.O.P but in the long run it will lead to:

  1. Less interest earned from savings in foreign accounts
  2. Increased interest repayment to the countries borrowed from
  3. Firms profits being repatriated out of your country
21
Q

Whats an expenditure reducing policy

A

Decrease consumption/ investment -> shift AD left

22
Q

What are the two expenditure reducing policies

A
  1. Contractionary fiscal policy
    Increase tax -> Decreases spending -> Leakage from circular flow -> Downward multiplier
  2. Contractionary monetary policy
    Increase interest rates -> increase incentive too save
23
Q

Implications from expenditure reducing policies

A
  1. Contracting the size of the economy
    - > tradeoff between growth and a balanced BOP
  2. Domestic unemployment increases, caused by an decrease in consumer spending
  3. Exports increase -> Push factor, domestic consumers aren’t purchasing so businesses have to go elsewhere
    - > however an increase in the interest rate increased hot money flows -> appreciating the currency-> less competitive
24
Q

What are the three ways of reducing a deficit on the current account

A

Expenditure reducing
Expenditure switching
Supply side policies

25
Q

What is an expenditure switching policy

A

Buying domestic goods rather than importing the good

26
Q

Examples of expenditure switching policies

A

Non competitive purchasing
Inward looking policies -> Trump
Currency manipulation

27
Q

Issues with expenditure switching

A
  1. Distorts comparative advantage -> Decrease world output -> inefficient allocation -> decrease S.O.L
  2. Trade retaliation
  3. Having a sectoral imbalance
    - > cant actually switch as you don’t produce the good
28
Q

How do supply side policies reduce a deficit on the current account

A

Make exports more competitive

-> infrastructure/ education

29
Q

Issues with supply side policies

A

Expensive for the government
Massive time lag
Political implications

30
Q

Issues with a sustained imbalance on the current account

A
  1. Without action the deficit can get worse
  2. Oversupply of the currency
    -> to many imports / no demand for exports
    -> Supply increases
    £ depreciates, increase in imported inflation
    -> demand for price inelastic goods won’t decrease
  3. Shows a lack of competitiveness
    - > quality/ price]
31
Q

What are the ‘it depends on’ points of a sustained imbalance on the current account

A
  1. Depends on the size of the debt realtive to gdp
  2. A deficit shows people are spending, high S.O.L
  3. Depends on what’s being imported
    - > e.g capital goods are good in the LR

Economics Theme 4 (8 decks)

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