Revision for Feb Mocks Paper 2 Flashcards

Question

Why is short run AS likely to be elastic?

Answer 1

An increase in output by firms is likely to increase in costs which leads to a rise in prices as they pass these costs onto consumers. However, because the factor prices are constant, the increase in prices will be relatively small.

Answer 2

Changes in costs of raw materials and energy Changes in exchange rates (weaker pound leads to increase in the price of imports, SRAS decreases as production becomes more expensive) Changes in tax rates

Answer 3

Classical believes AS is independent of the price level and is determined by the level of all factors of production and quality of technology. In the short run it's possible for an economy to exceed the maximum potential LRAS by allowing factors of production to work overtime or not allow time for maintenance of machinery. However, it's not possinle in the long run - machines eventually stop and workers will want a break. The AS curve is vertical, based on the view markets tend to correct themselves fairly quickly.

Answer 4

Wages tend to be 'sticky downwards', not falling below a certain level because of unions, motivation and minimum wage. When there is high unemployment, low wages, perfectly elastic LRAS. At low unemployent, it's more inelastic.

Answer 5

Technological advantages Changes in relative productivity Changes in education and skills Changes in govt regulations (changing size of workforce, R&D tax break incentives, entrepreuneral grants) Demographic changes and migration (immigration increase dependent on skills, age of population) Competition policy

Answer 6

Consumer spending | Factors of production

Answer 7

Wages, rents, dividends Goods and services

Answer 8

Exports Govt Spending Investment

Answer 9

Savings Taxation Imports

Answer 10

Govt needs to be added, as they tax and spend, and affect the flow of income. Introduce financial services who can inject with investment, and withdraw when consumers/producers save. Foreign markets need to be added, they inject by buying exports and sell, increasing and decreasing the circular flow of income respectively.

Answer 11

When GDP is higher than predicted; the economy is producing above full output

Answer 12

An increase in an injection will lead to an even greater increase of national income. 1/1-MPC 1/MPW

Answer 13

When an increase in national income (GDP) results in a proportionately larger rise in capital investment spending.

Answer 14

It's the idea that an increase in AD because of an increased injection can lead to a further increase in national income.

Answer 15

The multiplier means that growth can occur quicker, as any injections lead to a bigger increase in national income. Injections can be targeted at those with the biggest MPC in order to increase the size of the multiplier. However, it's impossible for the govt to know the exact effect of their spending as it is difficult to know the size of the multiplier. There will also be a time lag between the increase in income and the full effect of that increase - not everyone will spend straight away. The overally effect depends on the change in AD and the elasticity of the AS curve.

Answer 16

Marginal Propensity to save + Marginal Propensity to tax + Marginal Propensity to import

Answer 17

The multiplier increases AD, but to have the desired effect, there myst be sufficient spare capacity in the economy for extra output to be produced. If the classical LRAS is perfectly inelastic, then the multiplier is just inflationary. The more elastic the SRAS curve is, the smaller the effect on price but the bigger the effect on output. Therefore, the effect of the multiplier depends on the shape of the AS curve and whether it is short run or long run. The size of the increase in AD will depend on both the size of the initial increase in AD and the size of the multiplier.

Answer 18

Actual growth is the percentage change in GDP. Potential growth is the change in the productive potential of the economy over time.

Answer 19

The average sustainable rate of economic growth over a period of time.

Answer 20

Boom Recession Slump Recovery

Answer 21

Demand and supply side shocks. Demand side shocks could be the collapse of a housing bubble, political issues, changes in exchange rates or a recession in the world economy. Supply side shocks could include trade union action, a change in oil prices or a chnage in the exchange rate.

Answer 22

Aimed at increasing AD to bring about growth.

Answer 23

Attempts to decrease AD to control inflation.

Answer 24

Where the central bank or regulatory authority attempts to control the level of AD by altering base interest rates or the amount of money in the economy.

Answer 25

The use of borrowing, govt spending and taxation to manipulate the level of aggregate demand and improve macroeconomic performance.

Answer 26

Monetary policy committee are able to change the official based rate in order to tackle inflation. A rise in interest rates cause a fall in AD through four key mechanisms: Increases the cost of borrowing, more saving, fall in demand for stocks/shares/govt bonds, fall in investment, consumption, AD. Fall in prices for assets, negative wealth effect, fall in consumption. AD falls because of fall in consumption and investment. Interest rates rise = less consumer/business confidence. Loans become more expensive. Increases the incentive for foreigners to hold their money in British banks, higher rate of return. Value of pound rises, decreases net trade, AD.

Answer 27

The exchange rate may be affected so much that exports fall significantly, imports rise, causing trade deficit. Changes in interest rates take up to 2 years to have their fall effect - small changes in interest rates may not affect people's decisions. Sometimes, interest rates are so low that they cannot be decreased any further to stimulate demand. Not every interest rate is affected by the BoE base rate. A lack of confidence in the economy may mean that now matter how low interest rates are, consumers and businesses do not want to borrow or banks do not want to lend to them. High interest rates over a long period of time will discourage investment and decrease LRAS.

Answer 28

The BoE buys assets in exchange for money in order to increase money supply and get money moving around the economy during times of very low demand. The BoE can increase the size of banks' accounts at the BoE (reserves), which encourages them to lend money. The BoE could also buy securities or bonds from private sector institutions such as insurance companies, pension funds and banks. Prevents the liquidity trap, where even low interest rates cannot stimulate AD.

Answer 29

Since the bank is buying assets, there is a rise in demand, and so asset prices rise. Positive wealth effect, more consumption, cost of borrowing decreases (as higher asset prices mean lower yields). Money supply increases, private sector companies receive more money which they can spend on goods and services or other financial assets, which may increase investment or consumption, increase AD. Banks, more reserves, increase lending, AD up. Commercial banks lower their interest rates because of their money from the BoE so can offer very low interest deals to their customers. AD increase.

Answer 30

It's risky - if not controlled properly, could cause high inflation/hyperinflation. Others say it would only increase demand for second hand goods which pushes up prices but not AD. It doesn't lead to more new houses being built, only secondhands becoming more expensive. No guarantee that higher asset prices lead into higher consumption through the wealth effect, especially if confidence remains low. Had a large impact on the housing market-worsening issues of geographical mobility, also leading to rising share prices, increasing inequality, since the rich grow richer whilst the poor see none of the gains.

Answer 31

Interest rates | Quantitative easing

Answer 32

Their main aim is to keep inflation at 2%. They use CPI in order to see whether this target has been met. 5 people from the BoE are in the MPC, with 4 outside experts. They adjust the bank rate.

Answer 33

Tax decrease | Rise in govt spending

Answer 34

Direct: Taxes paid directly to govt by individual taxpayer. Indirect: Where the person charged with paying the money to the govt is able to pass on the cost to someone else.

Answer 35

Govt spending impacts LRAS - could be reducing the quality of education or spending on R&D. Political issues - tax raises are unpopular, can lead them to be voted out of govt. Expansionary fiscal policy is difficult to undertake during a period of austerity. The govt needs to consider the effects of policies on the budget. The impact of fiscal policy depends on the multiplier. Classical economists argue the multiplier is almost zero, Keynesian economists argue that it can be large if targeted correctly.

Answer 36

Classical economists argue that any demand management will have no effect on long-run output so supply side policies should be used. they believe increasing AD during a depression will have no effect other than to increase prices. Keynesian economists believe the impact of changes in AD depend on where the economy is operating.

Answer 37

Monetary policy is useful as the govt is able to increase demand without having to increase their spending, which would result in a larger fiscal deficit. Classicists argue that if demand management is going to be done, only monetary policy should be used. Fiscal policy can impact the supply side of the economy - spending on education can increase LRAS. It's more effective at targeting specific groups and reducing poverty, like through benefits.

Answer 38

Loss of cosumer and business confidence - firms cut back investment, consumers spent less. US banking system - the govt allowed banks to fail after the crash, banks had leant too much. Protectionism - reducing world trade decreased AD and confidence. Firms involved in exports were no longer able to pay back their loans. Gold standard - UK's currency was fixed to the value of gold and other currencies. The pound appreciated rapidly and exports fell as they became more expensive.

Answer 39

Balancing govt budget by cutting public sector wages and unemployment benefits while raising tax. The UK left the gold standard due to continued speculation against it. Depreciation, allowing AD by exports, consumption and investment, while interest rates were cut.

Answer 40

Wanted a balanced govt budget. However... Franklin Roosevelt was elected in 1932 with his New Deal which promised public sector investment, work schemes for the unemployed and fiscal stimulus.

Answer 41

Subprime mortgage lending Fall in confidence (banks stopped lending to each other)

Answer 42

Govts were forced to nationalise banks and building societies and guarantee savers their money in order to save banks from collapsing. Expansionary monetary policies (record low interest rates and quantitative easing)

Answer 43

Market based policies (designed to remove anything that prevents the free market system working efficiently) Interventionist policies (designed to correct market failure, like through govt provision, encouraging investment in private markets)

Answer 44

Increasing incentives (benefits, universal credit, investment incentives by decreasing taxes) Promoting competition (privatisation, competition policy through the CMA) Reform the labour market (retirement age, weakening trade unions, changing employment contracts, higher mobility of labour, benefits, minimum wage) Improving skills of labour force (education and training, regulation on businesses training their staff, increase in high skilled migrants) Improve infrastructure (tax incentives or subsidies on investment, govt spending, new technology)

Answer 45

Many people may argue a small change in any tax will have little impact on people's incentive to work. Reduction of tax on high income earners will lead to more income inequality. Less govt revenue, opportunity costs of other spending. Reducing benefits worsen equality.

Answer 46

Possible poorer quality service. Could cause environmental issues if deregulation is seen in environmental regulations.

Answer 47

Trade unions are already weak in the UK, no point reducing their power further. Reducing benefits will lower AD if people are unable to get job - further fall in employment. Multiplied effect, as the poor have a high MPC, AD falls by a lot. Increased income inequality. Making the labour force more flexible will lead to decreased quality of life as people are less secure in their jobs and may have to work odd hours. Could even decrease pay, lower AD.

Answer 48

Improving education may have no effect if it is in skills not relevant to the workforce. Increasing education will incur an opportunity cost, govt spending. Increasing education will take a while for full effect.

Answer 49

Offering tax breaks/subsidies lowers tax revenue. Some businesses may not invest subsidies and may use it as a method of tax evasion. Investment may not always be successful in improving supply as it may not achieve its aim or it may not be aimed at increasing supply.

Answer 50

FOR: Can increase output and decrease prices, unlike demand-side policies. Long-term policies, long-term economic growth. Can be directed at increasing exports, improving the balance of payments. AGAINST: No impact when LRAS is elastic (on Keynesian LRAS curve) Not all supply side policies work at increasing supply, whilst others cause conflicts. Depends on the policy used. The government has to spend more money, budget deficit. Undesirable impacts on AD - could cause unemployment or higher inflation. Supply side policies take a long time to have any effect on output.

Answer 51

The growing interdependence of countries and the rapid rate of change it brings about; movement towards free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital.

Answer 52

Improvements in transport infrastructure and operations have meant there are quick, reliable and cheap methods to allow production to be separated around the world. Improvements in IT and communication allow companies to operate across the globe Trade liberalisation and reduced protectionism has made it cheaper and more feasible to trade; this has been occurring since 1945. The breakdown of the soviet bloc and the opening of China has shown a whole area of the world for business to expand into. International financial markets have provided the ability to raise money and move money around the world, necessary for international trade. TNCs (large companies operating around the world) have led to globalisation by acting to increase their own profit as they want to take advantage of low labour costs. They sell and produce their goods all around the world and have the power to lobby governments.

Answer 53

More choice of goods Lower prices (with comparative advantage and production in countries with lower costs) Rise in prices (due to incomes rising, higher demand for goods and services)

Answer 54

Large scale unemployment/employment, transferring production from Western countries to countries like China and Poland. Increased migration: may lower wages but can also provide skills and an increase in AD which increases the number of jobs International competition has led to a fall in wages for low skilled workers in developed countries. The wages for high skilled workers appear to be increasing, since there is more demand for their work; this is increasing inequality. TNCs tend to provide training for workers and create new jobs. Those working in sweatshops will see poor conditions and low wages.

Answer 55

Firms can source products from more countries and sell them in more countries. This reduces risk since a collapse of the market in one company will have a smaller impact on the business. They can employ low skilled workers much cheaper in developing countries and can exploit comparative advantage and have larger markets, both of which can increase profits. Firms who are unable to compete internationally will lose out.

Answer 56

The govt may be able to receive higher taxes, since TNCs pay tax and so do the people they employ. However, they could lose out through tax avoidance. TNCs also have the power to bride and lobby govts, which could lead to corruption. If the govt uses the correct policies, they can maximise the gains and minimise the losses.

Answer 57

The increase in world production has led to increased demand for raw materials, which of which is bad for the environment. Increased trade and production has also led to more emissions. However, globalisation means the world can work together to tackle climate change and share ideas and technology.

Answer 58

Increases investment with TNCs investing as an injection (will have larger impact due to multiplier). Encourages countries to make supply-side improvements to get TNCs in their country. TNCs may bring world class management techniques and technology which can have knock on benefits to all industries as these techniques and technologies are available for them too. Trade will increase output since it allows exploitation of comparative advantage. However, the power of TNCs can cause political instability as they may support regimes which are unpopular and undemocratic but that benefit them or could hinder regimes which don’t support them. Comparative cost advantages will change over time and so companies may leave the country when it no longer offers an advantage which will cause structural unemployment and reduce growth.

Answer 59

Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country. The theory of comparative advantage states that countries find specialisation mutually advantageous if the opportunity costs of production are different. Comparative advantage exists when a country is able to produce a good more cheaply relative to other goods produced.

Answer 60

Comparative advantage assumes there are no transport costs, and these could lower or prevent any comparative advantage. It also assumes costs are constants and that there are no economies of scales. Economies of scale help to increase the gains from specialisation. Goods are assumed homogenous, which is unlikely in real life. The fact products aren't homogenous makes it difficult to conclude that a country has a comparative advantage as their products can't be perfectly compared. It also assumed that factors of production are perfectly mobile, there are no tariffs or other trade barriers and there is perfect knowledge. Whether trade takes place will depend on the terms of trade between the countries.

Answer 61

Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing, this will increase global economic growth. Trading and specialising allows countries to benefit from economies of scale , which reduces costs and therefore decrease prices globally. Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to. Trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer welfare. Trade also means there is greater competition, which provides an incentive to innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively. Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to stagnate.

Answer 62

Trade can lead to over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports. It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long periods of time. The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation. Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs, for example in the EU. They may see a loss of culture as trade brings foreign ideas and products to the country.

Answer 63

When consumption shifts from a high cost domestic producer to a low cost partner producer.

Answer 64

Where consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within it.

Answer 65

Infant industry argument Job protection Protection from potential dumping Protection from unfair competition Terms of trade Danger of over specialisation

Answer 66

An infant industry is one that is just being established within a country, and they would need to build a reputation, customer base, and have to cover lots of sunk costs. The industry would be unable to compete in the international market, so the govt protect them until they are able to compete on an equal level.

Answer 67

Firms can grow to be ineffiicient. The government tend to have a poor record of 'picking winners'.

Answer 68

Dumping is when a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries. The govt may need to intervene to protect domestic producers who are unable to compete with firms that are willing to make a loss. In China, tariffs are placed on stainless steel tubes from the EU and Japan to prevent from dumping.

Answer 69

If a country buys a large amount of imports for a certain good, this will increase demand for that good and hence increase the price. This will worsen the terms of trade and so therefore can buy less imports with the amount of exports. Restrictions will reduce supply of the good and lead to a fall in the price received by the importer, so improves the terms of trade.

Answer 70

Tariffs Quotas Subsidies to domestic products Non-tariff barriers

Answer 71

Taxes placed on imported goods in an attempt to prevent people from buying them.

Answer 72

Check physicsandmathstutor detailed notes 4.1 page 18

Answer 73

These are limits placed on the level of imports allowed into a country, meaning people are forced to buy domestic goods if they want that good and the quota is already used up.

Answer 74

Embargos (total ban on imported goods) Import licensing (countries/firms need a license to be able to import; by reducing the number of licenses they give out, the govt can restrict the level of imports) Legal and technical standards (some products cannot be sold in the country, due to copyrights/intellectual property laws for example) Voluntary export restraint agreements (agreement to limit the volume of exports to one another over an agreed period of time to allow domestic producers to grow and establish)

Answer 75

Higher prices for consumers - imports more expensive, intermediate goods also suffer less efficiency. Less choice

Answer 76

Domestic producers benefit - less competition so can sell more goods at a higher price. Intermediate goods from abroad may rise production costs. Foreign producers will lose out. They are limited in where they can sell their goods.

Answer 77

Evidence suggests that there is little difference to employment figures. It can be argued that allowing inefficient firms to close would be better for workers in the long run. The market would reallocate resources and create new jobs with greater security. Following the steel tariffs imposed in America in 2018, it is estimated that 16 jobs will be lost elsewhere for every job gained in the steel industry.

Answer 78

In the short run, governments benefit from protectionist policies as they can gain tariff revenues. However, it could lead to an inefficient economy which stifles growth.

Answer 79

The imposition of import controls results in deadweight welfare loss. Show in diagram, Pg 18 4.1 detailed notes on physicsandmathstutor. It also causes trade wars, since countries may retaliate. US-China trade war included each country imposing more tariffs on the other's goods, causing a reduction in trade and growth.

Answer 80

It has a regressive effect on the distribution of income as the rise in price affect the poorer members of society far more than the well off as they are no longer able to afford the products.

Answer 81

The exchange rate is the purchasing power of a currency in terms of what it can buy of other currencies.

Answer 82

Free floating system Managed floating system Fixed system

Answer 83

Where the currency is determined purely by market demand supply of the currency, with no target set by the govt and no intervention in the currency markets. Both trade flows and capital flows affect the exchange rate under a floating system. Most systems are floating, including the UK.

Answer 84

The central bank doesn't need to try to maintain a particular exchange rate and therefore will not need to use reserves to buy pounds in the market to keep it at the target. Interest rates are reserved for domestic monetary policy to control inflation rather than maintaining the exchange rate. It's able to partly auto-correct a trade deficit as a large trade deficit will cause a fall in the value of the pound, since supply of pounds is high and demand is low. This fall in the pound will make exports cheaper and imports more expensive so may reduce the trade deficit (assuming the Marshall Lerner condition). It also reduces the risk of currency speculation, since speculation is most attractive when the currency is under/over valued, and floating exchange rates reduces this because the price is determined by the market.

Answer 85

Where the value of the currency is determined by demand and supply but the Central Bank will try to prevent large changes in the exchange rate on a day to day basis. This is done by buying and selling currency and by changing interest rates.

Answer 86

Where currencies are fixed against each other but the level at which they are fixed can be changed. Crawling peg systems are a form of this but have a mechanism which allows the value to change.

Answer 87

Where the govt intervenes to improve macroeconomic stability

Answer 88

When a government sets their currency against another and that exchange rate does not change. The country can decide to devalue its currency overnight to imporve international competitiveness of its industry. One example was the gold standard, where each major trading country made its currency convertible into gold at a dixed rate.

Answer 89

It avoids currency flunctuations, which encourages trade and investment as firms/individuals know the true costs of the deal. It reduces the cost associated with trade, as firms have to spend less on currency hedging which is the process of agreeing on forward exchange rates. A stable exchange rate may reduce inflation as there is not a sudden reduction in the value of the currency leading to a rise in imports and therefore inflation.

Answer 90

It can cause a conflict with other objectives. If the currency is falling below the govt's set level, they have to intervene by raising interest rates to increase the desire to move hot money into UK or buying sterling using gold or foreign currency reserves to increase demand. A rise in interest rates could decrease AD and growth. It will be easy for the govt to set the exchange rate at the wrong rate: if it is too high, then goods become uncompetitive but if too low it could cause inflation due to high import prices. There is less flexibility and it is difficult to respond to temporary shocks.

Answer 91

An increase in the value of the currency using floating exchange rates.

Answer 92

A fall in the value of the currency under floating exchange rates.

Answer 93

When the currency is increased against the value of another under a fixed system.

Answer 94

A decrease in the value of one currency against another under a fixed system.

Answer 95

The amount of British goods that foreigners want to buy The number of foreigners wanting to invest in the UK, visit the UK or place their money in British banks The amount of speculation on the pound

Answer 96

The amount of foreign goods people in the UK want to buy The number of British firms that want to invest abroad The amount of British people wanting to go on holiday abroad or place their money in foreign banks The amount of speculation on the pound

Answer 97

Using interest rates (an increase will strengthen the pound as people put their money in English banks). Gold and foreign currency reserves (if the pound is too high, they can increase supply by buying foreign currency or gold with pounds)

Answer 98

Where a country deliberately intervenes in foreign exchange markets to drive down the value of their currency to provide a competitive boost to their exporting industries.

Answer 99

It can cause inflation and this may reduce competitiveness, leading to a fall in the balance of payments. Other countries may follow and reduce their currency as well. It's unlikely if there's a budget deficit but if the country who devalues has a surplus, other countries may retaliate.

Answer 100

The sum of the price elasticities of imports and exports must be more than one if a currency devaluation is to have a positive impact on the trade balance.

Answer 101

It shows how the current account will worsen before it improves. People will not immediately recognise that British exports are cheaper and it will take a while to find a source for them, whilst UK consumers will not see that imports are more expensive and may be unable to switch straigh away. Demand tends to be inelastic in the short run. Therefore, the amount sold of each will stay the same but the price of exports will fall, so the value will fall, and the price of imports will rise, so the value will rise. However in the long term, the current account deficit will fall as demand becomes more elastic.

Answer 102

A weaker exchange rate is likely to increase exports, since they become cheaper, and decrease imports so lead to an increase in AD. This will increase employment and economic growth.

Answer 103

Falls in the exchange rate will increase inflation as imports become more expensive, causing a rise in prices and a fall in SRAS. Also, the net exports section of AD will increase and so inflation will rise further.

Answer 104

A fall in the currency may increase FDI because it becomes cheaper to invest. However, if the currency is continuing to fall then this is an indication that an economy has serious economic difficulties which will discourage investment.

Answer 105

Relative unit labour costs Relative export prices

Answer 106

``` Exchange rates Productivity Regulation Investment Taxation Inflation Economic stability Flexibility Competition and demand at home Factors of production Openness to trade ```

Answer 107

By being competitive, a country will experience current account surpluses. This surplus allows them the opportunity to invest overseas and build up a surplus of assets overseas, on which interest, profit and dividends can be earned. A competitive economy is likely to attract inflows of foreign investment, whether this be by establishing new companies (creating jobs) or buying domestic firms. This will lead to a transfer of knowledge, skills and technology to firms. Employment is likely to increase because more gooda are being produced, since more goods are exported and less are imported. A rise in demand for labour will lead to a rise in wages. There will be economic growth, both by supply side improvements due to efficiency and investment and by demand side improvements relating to X-M.

Answer 108

Developing countries who have benefits due to lower costs of labour and costs of materials etc. could see this eroded when they experience export led growth due to their competitiveness. A current account surplus may lead to a rise in the exchange rate, reducing their competitiveness. Less competitive countries may implement trade barriers to protect themselves. Despite this, international competitiveness is not always lost with development. Countries who are competitive may become more dependent on overseas countries and so this may mean they suffer from larger issues if there is a global recession.

Answer 109

Absolute poverty is when people are unable to afford sufficient necessities to maintain life. The World Bank defines anyone living on less than US $1.90 a day as living in absolute poverty.

Answer 110

Relative poverty is about people's income compared to others in their area. Someone is said to be in relative poverty if their income falls below an average income threshold for the economy; they are at the bottom end of the income scale. In Britain, relative poverty is classed as those with an income of less than 60% of median household income after deducting household costs.

Answer 111

The minimum level of income deemed necessary to achieve an adequate standard of living in a given country.

Answer 112

The poverty trap affects people on low incomes, when the tax and benefits system creates a disincentive to look for work or work for longer hours. By working longer hours, individuals may find they lose income due to income tax and national insurance contributions as well as losing some income-related state benefits.

Answer 113

Unemployment Lack of skills Health problems Income dependency

Answer 114

Those on higher salaries see larger income growth than those on lower salaries Changes in govt spending and taxation

Answer 115

Inequality in wage growth, due to the policy of austerity. De-industrialisation, increasing the number of service sector jobs which tend to be lower paid. There has been a growth in underemployment, zero-hour contracts, part-time jobs and temporary jobs. Decline of trade unions State benefits have fallen in relative value whilst taxes have become more regressive Long term and structual unemployment has risen.

Answer 116

Income is a flow of earnings, while wealth is a stock of an asset.

Answer 117

Assets that make up wealth can be accumulated over time. People who are wealthy now can generate income from those assets and as long as income exceeds expenditure, they are able to build up a stock of assets.

Answer 118

It shows the cumulative percentage of the population plotted against the cumulative percentage of income that those people have. A perfectly equal society would have a straight line.

Answer 119

A/(A+B) - the ration of the area between the 45-degree line and the Lorenz curve divided by the whole triangle under the 45-degree curve. The bigger the coefficient, the more unequal the country.

Answer 120

Wages (also, the higher the level of income, the more people can build up wealth) Wealth levels (someone who already has a high level of wealth is able to build up larger wealth than those on lower levels of wealth, like taking more risks with investment) - Rent is also increase income from wealth. Chance (Those who bought assets in the right area will see a huge increase in the price of their assets and therefore wealth. Same goes for type of job.) Age (adults at peak of career will earn a higher income than those who have just started. Those who are older will have had a chance to build up more assets.) Inheritance Pension rights Changes in taxation Trade union power Economic development

Answer 121

Natural causes Developed countries favouring each other through trade Education/skills Type of employment Globalisation Technological progress Offshoring International wage competition Access to natural resources Economic change

Answer 122

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 govt spending so inequality falls.

Answer 123

Inequality rises as a country develops as the rate of return on capital grows, so the rich get richer and inequality increases.

Answer 124

Health (as measured by life expectancy at birth) Education (as measured by the mean years of schooling of adults aged 25+ and the expected years of schooling of a current 5-year old over their lives) Income (measured by real GNI per capita at PPP)

Answer 125

It measures the percentage of the population that is multidimensional poor. Uses data for health, education, standard of living, but uses a broader range of indicators within these categories. Includes years of schooling, attendance data. Includes availability of electricity, sanitation and safe drinking water in households, etc. It highlights areas of the extreme rich but where most of the population is not. Focuses on poverty.

Answer 126

Calculated from 26 different indicators grouped into three main categories: economic, environmental and social. Aims to look at economic sustainability to ensure development does not limit amount produced and consumed in the future. They tend to show developed countries epxeriencing negative growth over time, due to their impact on the enviornment.

Answer 127

Suggests the long run price of primary goods declines in proportion to manufactured goods, which means those countries dependent on primary exports will see a fall in their terms of trade.

Answer 128

In recent years, there has been a rise in the price of some key commodities, such as food and a fall in prices of some manufactured goods due to the expansion to places like China.

Answer 129

When a country becomes a significant commodity producer in a short amount of time, causing an increase in demand for currency (to enable people to buy the goods) which pushes its value up. This increases export prices and leads to a reduction in competitiveness of the economy, causing a fall in output in other areas.

Answer 130

Suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment. It concludes that economic growth depends on the amount of labour and capital and that developing countries have a vast labour supply, so their problems are caused by capital. In order to improve capital, investment is necessary and investment requires savings.

Answer 131

Economic growth is not the same as economic development. It is difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt. It is possible that investment could be wasted.

Answer 132

``` Primary product dependency Volatility of commodity prices Savings Gap Foreign currency Gap Capital flight Demographic factors (e.g. population) Debt Access to credit and banking Infrastructure Education/skills Absence of property rights ```

Answer 133

Individuals and businesses cannot use the law to protect their assets, leading to reduced investment.

Answer 134

When large amounts of money are taken out of the country, rather than being left there for people to borrow and invest.

Answer 135

When exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth.

Answer 136

Corruption/High levels of bureaucracy Diseases Poor climates/geographical terrain Civil wars

Answer 137

``` Trade liberalisation Promotion of FDI Removal of govt subsidies Floating exchange rate systems Microfinance schemes Privatisation ```

Answer 138

Development of human capital Protectionism Managed exchange rates Infrastructure development Promoting joint ventures with global companies Buffer stock schemes

Answer 139

It assumed that developing countries had dual economies with a traditional agricultural sector, which had low wages, low productivity, underemployment and low savings, and a modern industrial sector, with high levels of investment and urbanisation. It suggested that the modern industrial sector would attract workers from rural areas by offering higher wages. Lewis believed labour productivity was so low in agricultural areas that people leaving the area would have no impact on output and would in fact mean there was a surplus of food, since the same amount was being shared amongst less people. Those who moved to urban areas would have higher incomes and thus more savings for investment, which are key to growth.

Answer 140

During planting and harvesting vast amounts of labour is needed. Not all people on higher wages will save and invest their money. Recently, migration has led to urban poverty replacing rural poverty as the industrial sector is unable to provide jobs for all those who have moved. Improvements in technology will lead to a reduced demand for labour.

Answer 141

FDI is investment by one private sector company in one country into another private sector company in another.

Answer 142

Creation of jobs, leads to the multiplier effect. Can help fill the savings gap. Transfer of knowledge from one country to another.

Answer 143

Usually a repatriation of profits and developing countries may be exploited. The country will lose sovereignty and become dependent on another firm. Local competition may find it hard to compete. Environmental damage and exploitation of natural resources.

Answer 144

Where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature.

Answer 145

To facilitate savings (storing money in savings account or holding stocks/shares) They lend to businesses and individuals, which allows consumption and investment. They facilitate the exchange of goods and services by creating a payment system. They provide forward markets, where firms are able to buy and sell in the future at a set price. They provide a market for equities, company's shares.

Answer 146

Asymmetric info: Financial institutions often have more knowledge compared to their customers. Use subprime mortgages as example of this. Externalities: Banks costed taxpayers when they got bailed out. Moral Hazard. Moral hazard: Workers may take adverse risk to increase their salary. Also they know the central bank is the lender of last resort, they cannot let the bank fail. Speculation and market bubbles Market rigging: Collusion by insider trading, individuals or institutions affecting the price of a commodity/currency/asset to benefit themselves.

Answer 147

Spending on investment goods such as roads, schools and hospitals which will be consumed in over a year.

Answer 148

Spending on goods and services that will be consumed within the next year, such as public-sector salaries.

Answer 149

Govt paymnets for which there is no corresponding output, where money is taken from one group and given to another, for example, benefits and pensions.

Answer 150

General govt final consumption plus transfer payments plus interest payments

Answer 151

FINANCIAL CROWDING OUT - In order to spend money above their tax revenues, the govt has to borrow from individuals and businesses. However, the amount of money in the economy available to borrow does not increase. Therefore, the govt causes an increase in interest rates as it would be competing with the private sector for finance. RESOURCE CROWDING OUT - Every resource used in government spending means that there are less resources available for the private sector. Usually occurs at full employment.

Answer 152

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, like income tax.

Answer 153

Where the proportion of income paid in tax falls as the income of the taxpayer rises. Those on higher incomes pay a smaller percentage of their income on the tax. Most indirect taxes are regressive, for example everyone pays the same rate of VAT and for those on higher wages this represents a small proportion of their earnings compared to those on low wages.

Answer 154

Where the proportion of income paid on tax remains the same whilst the income of the taxpayer changes.

Answer 155

High marginal rates of tax will discourage individuals from working. Supply of labour is relatively elastic, so reduction in marginal taxes on income will lead to a significant increase in work. High taxes on high income earners could encourage them to move abroad and taxes on the poor may lead to a poverty trap. High income tax reduces incentives more than high VAT. A switch may increase incentives. There is no hard evidence for the link between income tax and incentives. It can be argued that higher taxes mean people have to work longer hours in order to maintain their income, so increases incentives.

Answer 156

It shows that a rise in the tax rate does not necessarily increase tax revenue. If people were taxes at 100%, they would not do any work and this means that tax revenue is 0 at 0% and 100%. Tax revenue will initially rise as the tax rate is increase but revenue is maximised at rate T and after there is a fall in motivation, a rise in tax evasion, and tax revenue slowly travels to 0. Revenue from indirect taxes can be uncertain as they depend on consumer spending patterns.

Answer 157

Inheritance taxes | Corporation taxes

Answer 158

Could cause a fall in leftover profits for businesses, and a reduction in investment. Higher indirect taxes and NICs increase costs for firms and this will decrease SRAS. Income taxes could cause a disincentive to work, and therefore reduce LRAS as the most skilled workers go overseas and more people become inactive.

Answer 159

Consumers spend less on imports, as imports in the UL have been found to be highly income elastic. Trade balance will improve in the short run. However, in the long run, lower AD will reduce businesses' need to invest and this could reduce competitiveness meaning that exports decrease.

Answer 160

Low taxes on profit and investment tend to encourage businesses to invest in a country since it will help them to see a higher level of return. However, many countries may continue to lower their taxes in order to make them the lowest to encourage investment; the eventual result is a fall in revenues for all countries.

Answer 161

They are mechanisms which reduce the impact of changes in the economy on national income; govt spending and taxation are automatic stabilisers. Benefits increase in a recession with unemployment. During a boom, taxes rise so AD doesn't get too high and cause high inflation.

Answer 162

They cannot prevent fluctuations, they simply reduce the size of these problems and there can be negative aspect to these stabilisers. Benefits may act as a disincentive to work and lead to higher unemployment whilst high levels of tax can decrease the incentive to work hard.

Answer 163

The deliberate manipulation of govt expenditure and taxes to influence the economy; expansionary and deflationary policies.

Answer 164

It is part of the deficit that occurs because govt spending and tax fluctuates around the trade cycle.

Answer 165

Not related to the trade cycle, occurs when the cyclical deficit is zero; it is long term and not related to the state of the economy.

Answer 166

Structual deficit plus fiscal deficit

Answer 167

``` Trade cycle Unforseen events (disasters or recessions) Interest rates Privatisation Govt aims Number of dependents ```

Answer 168

Fiscal deficits over 3% will lead to growing national debt as a propotion of GDP. Ageing populations (pension fund)

Answer 169

Yes, but not always. The government may borrow from overseas, and during a recession, private sector investment falls which means interest rates may remain unchanged.

Answer 170

When interest rates are extremely low

Answer 171

There may be intergenerational inequality, where citizens now may benefit but comes at the opportunity cost of future generations. However, if the deficit is due to capital expenditure, then future generations may benefit.

Answer 172

If the govt increases their spending and there is no similar fall in private sector spending, AD will rise and this can be inflationary. More dangerously, the govt may print more money if they can't borrow anymore. Could cause hyperinflation.

Answer 173

Rising interest rates Servicing national debt Intergenerational inequality Inflation/Hyperinflation Reduced credit rating for govt Difficulty with foreign currency to make debt repayments

Answer 174

Policy of austerity (decreasing spending) or increasing taxes. Demand stimulus by high spending, causing eocnomic growth, and then bringing higher tax revenue to reduce national debt. Relying on automatic stabilisers Defaulting on loans (last resort)

Answer 175

Progressive tax system Govt expenditure (benefits, transfer payments) Provision of goods and services Reducation in wage differentials (min. wage, max. wage, equal pay legislation, trade union legislation) Improvements in access to education and training opportunities. Price controls to increase spending power of the poor Trickle down (increasing incomes of rich to increasing the poor's)

Answer 176

Excess supply, development of black markets

Answer 177

Increasing the incomes of the rich will lead to an increase in the income of the poor. The rich create jobs by spending their money and employing others and reducing their income would reduce employment and lead to lower living standards. There is also the belief that inequality is necessary to encourage people to work hard and therefore increase their income.

Answer 178

Redistribution increases total utility and therefore is a better allocation of resources. The higher the spending of an individual, the less satisfaction they gained from spending an extra pound. £10 to a poor family would increase satisfaction more than £10 to a rich family.

Answer 179

Supply side measures to improve productivity and flexibility, can involve taxes and deregulation. Exchange rate policies They can join the WTO or sign trade agreements

Answer 180

Commodity price shocks Financial crisis Changes in exchange rates Political instability

Answer 181

Can create jobs, raise tax revenue, bring knowledge and investment. However, can destroy local culture, the environment, withdrawing more in profits than they inject through investment, influencing politicians. Some developing countries don't allow TNCs to set up in their country without first setting up a joint company with a local partner, meaning some profits are retained within the country and knowledge/technology is transferred. Many govts use import contracts with TNCs, meaning some part of the value of the order must be manufactured in the country.

Answer 182

Example of tax avoidance This occurs if a firm produces a good in one country and then transfers it to another to make it into another good which it then sells. If taxes are higher in the first country than the second country, they can set a low price on the product made in the first country. The overall aim is to increase their profit made in the low tax country and decrease it in the high tax country and so overall reduce their tax bill.

Answer 183

It's difficult for individual govts to control TNCs. Small countries may earn less in revenue than a TNC earns in profits. Solutions to taxation are extremely difficult as they require worldwide agreement. Division in countries allows TNCs also to prevent any agreements they don't like through immense lobbying. Solutions are time consuming and costly

Answer 184

Inaccurate information (short-term figures are often inaccurate, who's avoiding tax, past data may not be representative, etc.) Risks and uncertainties (govt cannot predict the future, unintended consequences) External shocks (the govt is unable to control and prepare for these shocks, can only hope to lessen impact, unintended consequences, mention Brexit delaying govt plans to balance the budget)