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Economics > Some macro content, including development > Flashcards

Some macro content, including development Flashcards

1
Q

What are the three injections into the circular flow of income?

A

i) Investment
ii) Government spending
iii) Exports

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2
Q

What are the three leakages out of the circular flow of income?

A

i) Savings
ii) Taxation
iii) Imports

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3
Q

What is Gross National Income (GNI)?

A

GDP + net factor incomes

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4
Q

What are causes of an increase in Aggregate Demand?

A

i) Lower interest rates
ii) Lower income/ corporation tax
iii) Higher consumer/ business confidence
iv) Higher government spending
v) Weaker exchange rate

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5
Q

What are causes of a shift in LRAS?

A

i) Increase in quality of factors of production
ii) Increase in quantity of factors of production
iii) Increase in productive efficiency

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6
Q

What are benefits of economic growth?

A

i) Higher disposable income
ii) Higher employment
iii) Higher profits for firms
iv) Fiscal dividend for government

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7
Q

What are costs of economic growth?

A

i) Inflation
ii) Income inequality
iii) Environmental costs
iv) Current account deficit

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8
Q

What are two different ways to measure unemployment?

A

i) Labour Force Survey
ii) Claimant Count

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9
Q

What are five types of unemployment?

A

i) Cyclical
ii) Structural
iii) Frictional
iv) Seasonal
v) Real-wage unemployment

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10
Q

What are costs of high inflation?

A

i) Lower purchasing power
ii) Erosion of savings
iii) Lower export competitiveness
iv) Wage/ consumer price competitiveness
v) Fiscal drag
vi) Inflationary noise

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11
Q

What are the benefits of low and stable inflation?

A

i) Workers gain higher wages
ii) Consumption is natural
iii) Firms encouraged to increase output
iv) Can keep unemployment low in a recession
v) Reduces real value of debt
vi) Improvement of government finances

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12
Q

Why is malignant deflation dangerous?

A

i) Delayed spending
ii) Positive real interest rates
iii) Increases real value of debt

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13
Q

What is on the current account?

A

i) Trade in goods
ii) Trade in services
iii) Income
iv) Transfers

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14
Q

What are demand-side reasons for a current account deficit?

A

i) Strong domestic growth
ii) Recession overseas
iii) Strong exchange rate

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15
Q

What are supply-side reasons for a current account deficit?

A

i) Low investment
ii) Low productivity
iii) High relative inflation
iv) High unit labour costs
v) Poor quality/ reliability
vi) Depletion of resources

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16
Q

What are reasons for an exchange rate appreciation?

A

i) Increase in real interest rates
ii) Speculators anticipate an increase in value
iii) Increase in FDI
iv) Rise in incomes abroad
v) Increase in competitiveness

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17
Q

What are reasons for a depreciation of the exchange rate?

A

i) Fall in interest rates
ii) Speculators anticipate a fall in the currency
iii) Firms moving away from the domestic country
iv) Increase in incomes domestically

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18
Q

What is the definition of Aggregate Demand?

A

Aggregate Demand is the total demand for a country’s goods and services at a given price level in a given time period.

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19
Q

Why does AD slope downwards?

A

i) Wealth effect
ii) Trade effect
iii) Interest effect

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20
Q

What are the determinants of consumption?

A

i) Level of real disposable income
ii) Interest rates/ availability of credit
iii) Consumer confidence
iv) Asset prices
v) Household indebtedness

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21
Q

What are the determinants of investment?

A

i) Interest rates- MPI
ii) Business confidence- expected profit and expected demand
iii) Corporation tax- retained profit
iv) Spare capacity
v) Level of competition
vi) Price of capital

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22
Q

What can government spending be categorised into?

A

i) Current spending
ii) Capital spending
iii) Welfare spending
iv) Debt interest payments

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23
Q

What are the determinants of net exports?

A

i) Real disposable income earned at home
ii) Real disposable income earned abroad
iii) Strength of the exchange rate
iv) Protectionism at home or abroad
v) Relative inflation levels at home

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24
Q

What are the automatic stabilisers?

A

i) Progressive income tax system
ii) Welfare benefits

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25
Q

What are 3 examples of interventionist supply side policies?

A

i) Government spending on education/ training
ii) Government spending on infrastructure
iii) Subsidies to firms to promote investment

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26
Q

What are categories of market-based supply side policies?

A

i) Tax reform
ii) Labour market reform
iii) Competition policy

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27
Q

What are some policies to rectify a current account deficit?

A

i) Contractionary monetary/ fiscal policy
ii) Protectionist measures
iii) Allow currency to depreciate
iv) Supply side policies

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28
Q

What is the accelerator effect?

A

Changes in investment can be directly linked to the rate of GDP growth.

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29
Q

What is on the financial account?

A

i) Portfolio investment
- bonds
- shares
- derivatives
ii) Foreign direct investment
iii) Reserves
- currency
- gold

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30
Q

What is on the capital account?

A

i) Debt forgiveness
ii) Inheritance taxes
iii) Death duties
iv) Sales of tangible assets
v) Sales of intangible assets
vi) Transfers of financial assets by migrants

31
Q

What is the law of comparative advantage?

A

It states that a country should specialise in producing the goods and services that it can produce at the lowest opportunity cost, and then trade with another country.

32
Q

What are benefits of free trade?

A

i) Improved efficiency and improved allocation of the world’s resources
ii) Access to goods that wouldn’t be produced domestically
iii) Lower prices
- competition
- economies of scale
- technological transfers
iv) Greater consumer choice
v) Economic growth

33
Q

What are the arguments for protectionism?

A

i) Infant industry argument
- short term protectionism
- economies of scale
ii) Protect against ‘dumping’ (sale of a good below its costs of production)
iii) Protect against unfair low cost labour abroad (Asia)
iv) Protect domestic employment
v) Protect product standards
vi) Raise government revenue (tariff)
vii) Improve a current account deficit
viii) Avoid the risk of over-specialisation

34
Q

What are three functions/ roles of the WTO?

A

i) Set and enforce rules on international trade
ii) Resolve trade disputes
iii) Provide a forum for negotiating trade liberalisation
iv) To monitor further trade liberalisation
v) To increase transparency of the decision making process
vi) To help developing countries fully benefit from global trade
vii) Cooperate with other major economic institutions

35
Q

What are types of international competitiveness?

A

i) Price competitiveness
ii) Non-price competitiveness
iii) Ability to attract factors of production (FDI)

36
Q

What are measures of international competitiveness?

A

i) Unit Labour Costs
ii) Global Competitiveness Index
iii) Terms of Trade

37
Q

What are factors that determine international competitiveness?

A

i) Unit labour costs
ii) Labour flexibility
iii) Labour skills
iv) Tax regimes
v) Innovation
vi) Infrastructure
vii) Regulation
viii) Economic stability

38
Q

What are the main causes of globalisation?

A

i) Trade liberalisation
ii) Trading blocs
iii) Growth of TNCs
iv) Technological advancement
v) Mobility of labour and capital

39
Q

What must be happen if a country has a fixed exchange rate?

A

The central bank must hold a large quantity of domestic and foreign currency reserves.

40
Q

What is the Marshall Lerner condition?

A

A currency depreciation will only correct a current account deficit if:
PEDx + PEDm > 1

41
Q

What does it mean if an exchange rate reflects purchasing power parity?

A

If the currency is exchanged, it can buy exactly the same basket of goods and services.

42
Q

What are advantages of a floating exchange rate?

A

i) Less need for domestic currency reserves
ii) Freedom for domestic monetary policy
iii) Useful instrument for macroeconomic adjustment
iv) Partial automatic correction of a current account deficit
v) Reduced risk of currency speculation

43
Q

What are benefits of a fixed exchange rate?

A

i) Less exchange rate uncertainty
ii) Some flexibility can be permitted
iii) Reductions in the cost of trade (reduced hedging)
iv) Discipline on domestic producers

44
Q

What is the exchange rate policy adopted by most governments?

A

Most countries have floating exchange rates, with some intervention from central banks. (Managed exchange rate).

45
Q

Give three costs of high unemployment.

A

i) Lost output
ii) Deterioration of government finances
iii) Hysteresis
iv) Social costs
v) Reduced trade for other countries
vi) Loss of income and self-worth for an individual

46
Q

What is the equation for yield to maturity?

A

100*(Coupon - capital losses/gains)/market value

47
Q

Why do long term government bonds usually carry a higher interest rate?

A

Investors are putting away their money for longer. They also want to guard against inflation.

48
Q

What is the chain of reasoning for quantitative easing?

A

1) Central bank creates money electronically
2) That money is used to buy financial assets (gov. bonds) from financial institutions
3) Price of gov. bonds rises and yields fall
4) Financial institutions either loan this money out or invest in riskier corporate bonds
5) Price of corporate bonds rises and yield falls, reducing the cost of borrowing
6) Access to credit improves, general interest rates fall and the willingness to lend should rise at lower interest rates
7) Stimulates borrowing, spending and investment
8) Aggregate demand rises and so does real GDP

49
Q

What are the arguments supporting the Laffer Curve?

A

i) Disincentives to work harder/ be entrepreneurial
ii) Emigration
iii) Tax evasion/ avoidance

50
Q

What are policies to redistribute income/ wealth?

A

i) Taxation
ii) Benefits
iii) Minimum/ maximum wages
iv) Legislation
v) Government spending on education/ training
vi) Government spending on healthcare

51
Q

What are the different stages of economic integration?

A

i) Preferential Trading Area
ii) Free Trade Area
iii) Customs Union
iv) Common Market
v) Economic and Monetary Union
vi) Full economic integration

52
Q

What is trade creation?

A

Trade creation is a theory that derives from a country’s membership of a custom’s union. It is a movement from a high cost domestic producer to a low cost producer inside the customs union.

53
Q

What is trade diversion?

A

Trade diversion is a theory that derives from a country’s entry into a customs union. It is a movement from a low cost foreign producer to a high cost producer within the customs union.

54
Q

What are advantages of a monetary union?

A

i) Non-fluctuating exchange rate
ii) Lower costs from currency conversion
iii) Increased business confidence
iv) Currency more stable against speculation
v) Prices between countries easier to compare

55
Q

What are disadvantages of a monetary union?

A

i) Loss of monetary policy autonomy
ii) No potential for countries to alter their exchange rates
iii) Cost of currency conversion very high
iv) Lack of a fiscal union

56
Q

What is the Terms of Trade?

A

The Terms of Trade reveals the quantity level of exports that need to be sold to purchase a given level of imports.
ToT = export prices*100/ import prices

57
Q

How does Amartya Sen define development?

A

The process of improving people’s well-being and quality of life, involving improvements in standard of living, reduction in poverty, improved health and education along with increased freedom and economic choice.

58
Q

How does Michael Todaro define development?

A

1) Availability and distribution of life-sustaining goods
- food, shelter, health
2) Increase in standard of living
3) Expansion of economic and social choice

59
Q

What are single indicator measures of development?

A

i) GNI per capita (PPP)
ii) Health measures
- life expectancy
- infant mortality
iii) Education measures
- adult literacy
- enrolment in primary education
iv) Gini coefficient

60
Q

What are the components of the Human Development Index (HDI)?

A

i) Longevity (life expectancy at birth)
ii) Knowledge (mean years of schooling)
iii) Standard of living (GNI per capita (PPP)- logarithmic scale)

61
Q

What are limitations of HDI as a measure?

A

i) Distribution of income
ii) Arbitrary weighting
iii) Freedom and choice?
iv) Other factors- crime, corruption, poverty, negative externalities

62
Q

What are institutional development factors?

A

i) Education
ii) Healthcare
iii) Infrastructure
iv) Taxation
v) Appropriate use of technology
vi) The empowerment of women
vii) Income distribution

63
Q

What are benefits of microfinance?

A

i) Fills savings gap
ii) Can relieve poverty
iii) Source of finance without huge interest
iv) Can empower women

64
Q

What are limitations of microfinance?

A

i) Entrepreneurial ventures are not always successful
ii) Lenders can still apply exorbitant interest rates and bully borrowers
iii) Loans are not big enough to alleviate poverty
iv) Most money was actually used for consumption

65
Q

What is the Prebisch-Singer hypothesis?

A

There will be a long term decline in the Terms of Trade for countries that depend on natural resource exports.

66
Q

What are trade policies that could promote development?

A

i) Import Substitution Industrialisation
ii) Export promotion
iii) Trade liberalisation, the role of markets
iv) Bilateral trade agreements and regional PTAs
v) Diversification

67
Q

What are benefits of foreign direct investment?

A

i) Injection into the circular flow of income
ii) Fills savings gap
iii) Positive balance of payments effects
iv) MNCs lead to infrastructure development
v) Improved domestic productivity
vi) Technological transfer
vii) Raised tax revenue

68
Q

What are limitations of FDI for development?

A

i) Employment may be short term or less than expected
ii) MNCs have too much power
iii) MNCs may invest in labour saving technology
iv) MNCs may ship resources and leave
v) Environmental costs
vi) Tax revenue collection may be lower than expected

69
Q

What are two forms of aid?

A

i) Official Development Assistance
ii) Unofficial Aid (NGOs)

70
Q

What are two types of aid?

A

i) Humanitarian Aid
ii) Development Aid

71
Q

How can aid be classified?

A

i) Bilateral Aid
ii) Multilateral Aid

72
Q

How does foreign aid improve development?

A

Fills the savings gap

73
Q

What are three concerns about aid promoting development?

A

i) Corruption
ii) Dependency on aid can provide little incentive to innovate
iii) Loan repayments can create indebtedness

74
Q

What is the Natural Rate of Unemployment?

A

Unemployment when the labour market is in equilibrium. It consists of structural, frictional and seasonal unemployment.

Economics (6 decks)

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