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A-level Economics AQA > The international economy (macro) > Flashcards

The international economy (macro) Flashcards

1
Q

What is globalisation defined as?

A

the free movement of goods and service, factors of production (capital, labour), financial flows (FDI, hot money) and economies becoming increasingly dependent.

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2
Q

What are the causes of globalisation?

A
  • Technological advancements
  • Growth in WTO membership
  • containerisation
  • Growth of BRICS

-Deregulation

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3
Q

What technological advancements have caused globalisation?

A
  • Mobile phones and the internet have promoted globalisation.

-travel between countries is also now easier thanks to technological advancements.

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4
Q

How has technological advancements in mobile phones and the internet promoted globalisation?

A
  • It has allowed firms in a country to access a much larger market - leading to economies of scale advantages, price falls and consumer surplus rises.

-It has also allowed consumers to have more choice. Now, consumers can buy from more firms in more countries. So there is more competition and prices have fallen.

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5
Q

What is the role of the World Trade Organisation (WTO)

A

to liberalise free trade, to provide a forum to resolve trade disputes, and to lower tariff barriers.

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6
Q

How has containerisation caused globalisation?

A
  • Containerisation and huge tanker ships have seen firms exploit economies of scale.
  • This has promoted the international trade of goods by making shipping cheaper.
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7
Q

What countries are the ‘BRICs’ economies

A

Brazil, Russia, India, China and South Africa.

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8
Q

How have growth in BRICS caused globalisation

A

These emerging economies have, for the most part, become increasingly integrated into the world economy.

China, in particular, has opened up to trade.

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9
Q

When were the financial markets dergulated?

A

Financial markets de-regulated in the 1980s/90s.

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10
Q

When did former communist economies liberalise?

A

late 1980s/90s

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11
Q

How does deregulation cause globalisation?

A

Deregulation allows huge flows of hot money and foreign direct investment (FDI) internationally.

Growth of cross-border FDI

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12
Q

What are free trade blocs.

A

Free trade blocs are typically groups of countries that do not have any trade restrictions (e.g. tariffs, quotas) between them.

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13
Q

What does LEDCs stand for?

A

Less Economically Developed Countries

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14
Q

What are the positives of globalisation for LDCs

A
  • Foreign direct invesment (FDI)
  • More export markets
  • Access to finance
  • Technology transfers
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15
Q

Globalisation leads to higher FDI flows into LDCs - what does this increase?

A

This increase AD and this leads to higher real GDP

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16
Q

What can FDI flows and MNC operations lead to a transfer in?

A

Skills and technology, shifting the LRAS curve and PPF for that country outwards.

  • More efficient obtaining cheap technology from other countries than using scarce resources domestically.
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17
Q

Give an example of foreign direct investment?

A

In 2017, China became the largest FDI in Africa.

  • China has purchased mineral mines in Congo
  • Ethiopia has recieved investment in its dams and roads.
  • In 2017, Kenya launched its own $3.8 billion China-funded train line linking Nairobi to Mombasa.
  • The Chinese built a dam in Zambia.

This has boosted infrastructure, and geographical mobility

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18
Q

How has globalisation affected small domestic markets?

A

This has allowed them to export their products abroad and so benefit from foreign demand.

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19
Q

How has globalisation effected export markets overall?

A
  • Dumping
  • Brain drain
  • poor conditions for workers
  • Environmental concerns
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20
Q

What is dumping?

A

This is where developed countries sell products at below cost onto LDC markets.

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21
Q

Where are over half of the anti-dumping cases brought to the World Trade Organisation from?

A

From LDCs complaining about more-developed countries (MDCs)

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22
Q

What does brain-drain describe?

A

Describes the phenomenon of skilled workers moving abroad in search of higher wages - it is a particular problem for LDCs.

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23
Q

How could a brain drain effect LDCs short term and long term?

A

In the short-term this could be costly to LDCs who may be losing their key workers in healthcare or education

Could lead to disastrous consequences for future long term economic growth; although, remittances could add to GDP.

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24
Q

How can globalisation of LDCs cause poor conditions for workers.

A

To attract big MNCs, who will create jobs in their economy, governments may compete.

Having lower health and safety standards for workers, lower corporate tax rates, easier labour laws can bring jobs into a country, but increase hazards for workers in the place.

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25
Q

Give an example where globalisation has effected workers poorly?

A

Primark had to pay over $10m to victims of a factory collapse in Bangladesh; over 100 people died.

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26
Q

Positives of globalisation for More Developed Economies (MDCs)

A
  • Increased competition and choice
  • Better supply of labour
  • Export led growt
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27
Q

What does increased competition and choice for MDCs create?

A

More contestability (lowering barriers to entry and exit) such as deregulation

  • more access to foreign goods and services
  • More competition
  • Lowering price further
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28
Q

What does a better supply of labour mean for MDCs?

A
  • Free flows of labour mean that labour shortages can be filled and wage inflation can be suppressed by creating a greater pool of labour for firms to choose from.
  • MDCs are usually beneficiaries of ‘brain drain’ from LDCs
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29
Q

What are the potential consequences of globalisation for More Developed Countries

A
  • Structural/regional unemployment
  • Exchange rate volatility
  • Vulnerability to shocks
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30
Q

How can globalisation cause exchange rate volatility in MDCs?

A
  • Volatile speculative flows of hot money are a feature of globalisation. Changes in interest can cause investors to take their money out of a currency in seconds
  • Frequent changes in exchange rates are hard to manage as an importer and an exporter.

-Exchange rate volatility can make it difficult for MNCs to plan.

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31
Q

Give an example where globalisation has caused structural/regional unemployment in a MDC?

A

The ‘rust belt’ in the USA suffered from losing its main industry of car manufacturing.

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32
Q

How can globalisation affect structural/regional unemployment in MDC?

A
  • Domestic firms could out-competed by competitors in LDCs with lower costs and close down. Because labour is a derived demand, this could lead to regional unemployment.
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33
Q

How can globalisation cause MDCs to be vulnerable to shocks?

A
  • By becoming more interdependent, the risk of contagion (an external event in the world coming back to affect you) rises.
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34
Q

Give an example of contagion that has made a MDC more vunerable to economic problems else where?

A

economic problems spreading through the Eurozone countries after the events of the financial crash in 2008.

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35
Q

What is an opportunity cost of production?

A
  • If a country produces sugar, it has an opportunity cost of production.
  • The labour and capital used to make sugar cannot be used to make wheat at the same time
  • This can be shown using production possibility frontiers PPFs
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36
Q

Use Brazil and the US as an example to explain opportunity cost of production?

A
  • If Brazil can produce a lot of sugar cane per acre but not much wheat, and the US can produce a lot of wheat but not sugar cane, then the US has a lower opportunity cost of producing wheat than Brazil.
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37
Q

Further explain the US and Brazil’s comparative advantage

A

The US has a comparative advantage in producing wheat.

Brazil has a comparative advantage in producing sugar cane.

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38
Q

What would happen if both the US and Brazil specialised in producing goods they had a comparative advantage in?

A

The total world output of goods will rise.

Brazil and the US can trade wheat for sugar cane, and they both benefit.

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39
Q

When does a country have absolute advantage?

A

A country has an absolute advantage in producing a good over another country if it uses fewer resources to produce that good.

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40
Q

Give an example of absolute advantage?

A

If Saudi Arabia can produce corn and oil more efficiently than the US, but can only produce 100 barrels of oil or 25 bushels of corn, the opportunity cost for Saudi of producing one barrel of oil is the loss of 0.25 bushels of corn.

  • If the US lost a bushel of corn by producing one barrel of oil, then the US has a comparative, but not absolute advantage in corn.
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41
Q

what are the costs of international trade?

A
  • Negative externalities such as pollution from freight.
  • Risk of structural/regional unemployment because employers relocate.
  • Can be bad for unskilled workers - structural unemployment.
  • Low-skilled workers in developed countries compete against extremely low wage workers worldwide, which is unsustainable.
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42
Q

What are the benefits of international trade?

A
  • improved allocative efficiency
  • Higher global output
  • Greater competition and choice
  • economies of scale
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43
Q

How can free trade improve allocative efficiency?

A
  • Because countries produce in sectors they are better suited to, rather than all goods and services.
  • Leads to higher productivity and increasing total domestic output of goods and services.
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44
Q

How can free trade lead to higher global output?

A
  • Due to comparative advantage - specialisation could have the possibility of achieving an allocation of resources outside their initial PPF.
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45
Q

How does free trade cause greater competition and choice?

A
  • Free trade causes increased competition, which will lead to cheaper prices and higher consumer surplus.
  • reduction in prices leads to increased real incomes - increasing purchasing power and improving the standard of living.
  • Brings down cost-push inflationary pressure.
  • Increases choice to consume e.g. banannas
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46
Q

How can free trade lead to better economies of scale.

A

Specialisation allows more focus on few goods and services, leading to lower prices, higher consumer surplus and increased demand for goods.

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47
Q

What is a custom union?

A

It is a group of countries who agree to remove barriers to trade between the union and enforce common trade barriers to those outside the union. e.g. the EU.

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48
Q

What are the features of a custom union?

A
  • Regulation - usually standardised within a customs union and people outside the union have to meet these.
  • Tariffs - usually, there are none of these between members of the union and there is a common one for those outside the union.
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49
Q

What is the European single market?

A

It is a customs union where all internal borders and between country restriction have been removed.

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50
Q

What are the features of the European single market?

A
  • Free movement in goods and services ; in almost every case, goods sold in one country are available to all other countries.
  • Free movement of people - people are able to live and work in different countries in the single market.
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51
Q

What are features of countries in the European single market?

A
  • Free movement of money between member countries.
  • Agreed standards and regulations for all goods and services
  • Members agree not to set rules or laws that favour their own domestic firms, products or workers over other countries in the market.
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52
Q

What are the consequences of EU membership?

A
  • Members agree to rules of customs union including common external tariffs.
  • Members must accept laws and rulings from EU institutions including the European court and parliament.
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53
Q

What were the two key battlegrounds in the lead up to the Brexit vote?

A
  • Free movement of people - increased immigration, higher unemployment and higher costs for the government supporting immigrants through welfare benefits.
  • Autonomy over laws - UK would no longer have to accept laws and rulings of the EU parliament and court.
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54
Q

What is a negative of Brexit?

A

Lots of NHS workers come from EU and lots of goods (like BMW cars) that we purchase are bought tariff-free from EU countries.

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55
Q

What is the WTO?

A

The world trade organisation is where countries meet to try and negotiate a reduction in trade barriers. Lower trade barriers can help to encourage specialisation and increase global output.

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56
Q

When was the WTO formed?

A

1947

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57
Q

How many companies are in the WTO from when it formed to present day?

A

23 countries in 1947 to 163 members present day

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58
Q

What is protectionism?

A

Involves protecting a country’s domestic industries, companies and jobs from foreign competition.

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59
Q

What are the main methods of protectionism?

A
  • Tariffs - promotes domestic products making imported ones less competitive.
  • Import quotas - restrict actual quantity of goods imported. Allow governments to control exact quantity of goods and increase prices of domestic products
  • Non-tariff barriers - import bans, rules of origin e.g. Russia and countries stopping buying oil due to conflict.
  • Subsidies to domestic producers - reduces firms costs making them more competitive internationally.
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60
Q

What is exchange rate manipulation?

A

A government/central bank may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. This will give its exports a price advantage abroad.

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61
Q

What country accused another country of protectionism?

A

The US accused China of manipulating their exchange rates to be more competitive.

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62
Q

What could a current account deficit indicate?

A

Wider problems with the economy.

However, Many developed countries such as the UK and US have significant current account deficits.

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63
Q

What could cause a current account deficit?

A
  • Low productivity
  • Inflation being higher domestically than abroad
  • A strong exchange rate
  • Non-price factors

Supply side constraints.

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64
Q

How could low productivity cause a deficit?

A

Means the final price of goods are likely to be higher.

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65
Q

How could inflation being higher domestically than abroad cause a deficit?

A

It reduces international competitiveness of domestic goods.

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66
Q

How could a strong exchange rate cause a deficit?

A

Reduces the price of imports and increases the price of exports

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67
Q

What non-price factors could cause a deficit?

A

Poor quality of goods and services

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68
Q

How could supply side constraints cause a deficit?

A

Could cause a lot of goods being imported from abroad.

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69
Q

What type of current account deficit is good for future long term productivity?

A
  • If a deficit is because of capital goods imports, this is likely to be good for future long term productivity.
  • FDI repatriated. Means investments were profitable.
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70
Q

What type of current account deficit could be good for short term standard of living?

A

Purchasing of current goods.

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71
Q

When is a current account deficit a concern?

A

When nobody wants to buy a country’s exports, then this may be concerning.

If the deficit is a high % of GDP and is getting worse, this may be worrying.

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72
Q

How will a current account deficit effect a floating currency?

A

The currency will depreciate. This may partially offset the uncompetitiveness of exports.

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73
Q

How can a current account deficit effect foreign investment?

A

A current account deficit needs to be financed by a financial account surplus - so it will become a problem if foreign investors stop wanting to purchase assets in that country.

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74
Q

How will a current account deficit effect the price of imports?

A

This will cause the price of imports to rise though, leading to higher prices for consumers and potentially cost-push inflation.

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75
Q

What are current account imbalances a result of?

A

Trade between different countries. They can work against different macroeconomic objectives.

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76
Q

What is the equation for GDP?

A

GDP= C+I+G+(X-M) (C= consumer spending, I= investment spending, G= government purchase of goods and services, X= sales to foreigners, M= spending on imports)

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77
Q

How can the current account be related to economic growth?

A

If exports are larger than imports, GDP may be rising

If imports rise, M rises and GDP may fall. So a current account deficit may signal weak economic growth.

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78
Q

How can the current account effect the employment?

A

If there is a current account deficit, then economic growth may be slowing and unemployment may be rising.

However, developed countries like the UK who import a lot of raw materials may not be affected in the same way.

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79
Q

How could the current account be reflected in the strucutre of an economy?

A

It could reflect a change in structure of the labour force and economy from less developed to more developed countries. Focusing in productive economic areas like intellectual property.

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80
Q

If the price of goods in China were a lot lower than the prices of goods made in the UK, how would this effect inflation in a current account deficit?

A

A current account deficit would reduce inflationary pressure.

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81
Q

What conditions does the USA government need to have a capital account surplus?

A
  • Sell government debt to foreign governments and international private investors.
  • If government debt isn’t bought then the USA would have to balance its current account.
  • International trade allows current account surpluses and deficits to develop.
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82
Q

What is the balance of payments?

A

This shows a record of all the transactions that a country does with the rest of the world.

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83
Q

What 3 accounts is the balance of payments made up of?

A
  • The current account
  • The capital account
  • The financial account
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84
Q

What is the current account comprised of?

A
  • Trade in goods and services (X-M)
  • Net primary income - net factor income from abroad (e.g. remittances, profits, interest on dividends).
  • Net secondary income - net unilateral transfers (e.g. foreign aid).
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85
Q

What is the capital account comprised of?

A
  • Sale/transfer of patents, copyrights, franchises, lease and other transferable contracts, and good will
  • Transfers of ownership of fixed assets
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86
Q

What is the financial account comprised of?

A
  • Net foreign ownership of domestic assets.
  • Hot money flows.
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87
Q

What should the balance of payments add up to?

A

It has to add up to 0.

In reality there are errors and omissions in calculating so we add ‘balancing item’ to make it balance.

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88
Q

What are the components of the current account?

A
  • services trade balance
  • Merchandise trade balance
  • Income receipts and payments
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89
Q

What is the calculation for the current account?

A

Value of exports - Value of imports

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90
Q

What are unilateral transfers?

A

Unilateral transfers are payments by governments or individuals in which money is sent abroad without any direct good or service being received.

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91
Q

Give an example of unilateral transfers.

A

The UK sending humanitarian aid to African countries, India or North Korea would count as a unilateral transfer.

  • Money given to countries to help them recover from environmental disasters
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92
Q

What is the services trade balance?

A

This is made up of the exports and imports of services.

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93
Q

Give an example of services trade balance

A

Barclays selling financial services (e.g. investment bank consultancy fees) to a company based in Saudi Arabia would count as the export of services.

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94
Q

What is the merchandise trade balance?

A

The merchandise trade balance is made up of the export and imports of goods.

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95
Q

Give an example of merchandise trade balance.

A

The sale of Aston Martins made in the UK would count as an export of goods in this section of the balance of payments.

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96
Q

What are income receipts and payments?

A

Includes money received from foreign investments.

Investment income can come from abroad.

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97
Q

Give an example of income receipts and payments.

A

When someone invests in the US and makes a return, this is then transferred to the person in the UK who owns the asset.

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98
Q

What are the two types of solving a current account deficit policies.

A
  • Expenditure-switching
  • Expenditure reducing
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99
Q

What do expenditure polices aim to influence?

A

The relative prices of exports and imports - to switch expenditure away from imports and towards domestic consumption/exports.

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100
Q

What could expenditure switching policies include?

A
  • Tariffs
  • Supply side policies
  • Exchange rate manipulation
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101
Q

How could supply side policies move expenditure away from imports to exports?

A

It could boost international competitiveness of exports and so improve the current account deficit.

  • By increasing the improving the quality or the price of exports.
102
Q

What do expenditure reducing policies aim to control?

A

They aim to control aggregate demand (AD) and limit spending on imports.

103
Q

What are expenditure-reducing policies?

A

Contractionary monetary and fiscal policies, which would serve to reduce AD, and so real GDP and incomes.

104
Q

How will contractionary monetary and fiscal policies effect imports?

A

Marginal propensity for imports and current account deficit will fall.

105
Q

What are the consequences for the wider economy of expenditure-reducing policies?

A

The consequences are that the economy’s real GDP will fall.

Fiscal policy, like increasing taxes, would reduce disposable income and cause unemployment.

106
Q

What are the benefits of FDI?

A
  • Shifting the LRAS of an economy outwards.
  • Creates employment
  • Rise in the stock of capital
  • Contributes to aggregate demand (AD) and so real GDP.
  • Regional economic impact, especially in areas of lower employment.
  • Positive effects on productivity
  • Funds to contribute to growth (especially if domestic credit is lacking)
  • competition for domestic businesses
  • Inward investment by foreign manufacturing firms can cause a rise in exports.
107
Q

What are the dangers of FDI?

A
  • R & D (high-value added) activities remaining in the ‘home’ country.
  • Long term repatriation of profits.

-Strategic assets owned by foreign companies.

  • The economy becoming increasingly dependent on external firms.
  • Race to the bottom by governments to attract FDI (e.g. tax and regulations compromised).
108
Q

What is a floating exchange rate?

A

When the external value of a currency can change continiously because of market forces (due to supply and demand for that currency).

109
Q

What is a floating currency affected by?

A

The supply and demand of the currency in public markets.

110
Q

What does expansionary monetary policies do to interest rates?

A

They usually lower interest rates to increase demand in the economy. This affects foreign exchange markets.

111
Q

Why do expansionary monetary polices affect foreign exchange rates.

A

The lower interest rates will reduce demand for the currency because returns in that country are lower, leading to a depreciation in the domestic currency.

112
Q

How can a central bank influence FX markets directly?

A

It can increase the supply of its own currency (£) and buy other foreign currencies , again depreciating the domestic currency.

113
Q

What do supporters of floating exchange rates argue?

A

They argue that if government policies were more predictable and stable, then inflation rates and interest rates would be more predictable and stable.

But floating exchange rates have been more volatile than economists expected them to be in the 1970s.

114
Q

What is the acronym to remember the impact of an exchange rate movement?

A

SPICEE

Strong

Pound

Imports

Cheaper

Exports

Expensive

115
Q

What are the advantages of floating exchange rates?

A
  • Freedom to use monetary policy for other aims.
  • Stabilise balance of trade
  • Less need to hold reserves
116
Q

How does floating exchange rates lead to freedom to use monetary policy for other aims?

A

Sacrificing control over exchange rates allows capital (funds) to flow freely into a country, allowing them to better manage inflation.

117
Q

How can a floating exchange rate stabilise the balance of trade?

A

It allows for an automatic adjustment mechanism.

118
Q

Give an example where a free floating currency allows for an automatic adjustment mechanism?

A

If there is a current account deficit, this will lead to an outflow of currency, causing a depreciation of the currency.

This depreciation will lead to greater competitiveness of exports.

This will help improve the current account and partially correct the problem.

119
Q

What will happen to demand when exports rise in a free floating exchange rate.

A

The value of the currency will increase making exports more expensive and when demand for exports falls, the value of the currency will fall making exports cheaper.

120
Q

How does a floating exchange rate affect central banks?

A

There is no obvious need for a central bank to hold foreign reserves.

This is because a key reason to hold them is to intervene in the currency market.

121
Q

What are the disadvantages to having a floating exchange rate?

A
  • Cost-push inflation from depreciation
  • Potential speculation
  • Increased uncertainty
122
Q

How can increased uncertainty be a negative in an economy.

A
  • Could mean that long term international investment is discouraged because of potential investors will be unsure of future prices.
  • Hampers business confidence deterring investment and could give rise to a negative multiplier.
123
Q

How can potential speculation arise at a free floating exchange rate?

A
  • Freely traded currency can still be vulnerable to speculation as investors try to make investment returns by trading FX.
  • Higher levels of speculation could in turn increase volatility.
124
Q

How can floating exchange rates lead to cost-push inflation?

A

If a currency depreciates, the price of imports rises. This could lead to imported raw material costs rising, leading to cost-push inflation.

125
Q

What are the steps of cost-push inflation from depreciation?

A
  • Currency depreciates
  • Import price of goods and services increases
  • Firms who import materials and components face increased costs
  • cost of production increase
  • SRAS is decreased (shifts left)
  • Price level rises
126
Q

What happens to an exchange rate if there is a decrease in interest rates (expansionary monetary policy)?

A
  • Outflow of ‘hot money’ seeking larger returns on investment.
  • Decrease in demand for the currency.
  • Depreciation of exchange rate
  • New exchange rate set
127
Q

What happens to an exchange rate if there is a increase in interest rates (expansionary monetary policy)?

A
  • Inflow of ‘hot money’ seeking larger returns on investment
  • Increase in demand for the currency
  • Appreciation of exchange rate
  • New exchange rate is set.
128
Q

What is a fixed exchange system?

A

When the government or central bank chooses a value that it wants the currency to be stable at.

129
Q

What are the two ways to implement a fixed exchange rate system?

A

Soft peg

Hard peg

130
Q

What do central banks do in a hard peg policy fixed exchange rate?

A

The central bank will have to buy and sell currency using its currency reserves to keep the value at the value of the hard peg.

131
Q

Give an example of a hard peg fixed exchange rate country.

A

Hong Kong uses a currency board to keep a hard peg to the US dollar.

The Hong Kong Monetary Authority fixes its exchange rate to the USD at HKD7.8.

132
Q

What is a soft peg fixed exchange rate?

A

Where the government usually allows the exchange rate to be set by the market, but in some cases, the central bank will intervene with the market.

133
Q

Give examples of two countries that are softly pegged.

A

The Chinese Yuan is softly pegged to the US dollar.

The Swiss franc was softly pegged to the Euro until 2015, when it abandoned the peg.

134
Q

What do central banks do when there is upwards pressure on a fixed exchange rate?

A
  • Central bank sells stores of currency
  • Currency returns to exchange rate peg.
135
Q

What do central banks do when there is downwards pressure on a fixed exchange rate?

A

Central banks buy up spare currency

currency returns to exchange rate peg

136
Q

What are the advantages of a fixed exchange rate?

A
  • Encourage government responsibility
  • Stability for firms and households.
137
Q

Why are governments forced to act more responsible in fixed exchange rates?

A

There is no correction of current account deficits.

Governments will be forced to use supply-side and fiscal policy to control the factors that lead to pressure on the exchange rate.

This may be positive or negative if controlling inflation leads to high unemployment.

138
Q

Why is stability for firms and households an advantage of fixed exchange rates?

A
  • encourages firms to invest and households to spend because of confidence/certainty it builds

Transactions that involve world trade will rise in particular.

139
Q

What are disadvantages of fixed exchange rates?

A
  • Lose power over monetary policy
  • Speculative pressure
  • Unstable current account.
140
Q

Why do central banks lose power over monetary policy in fixed exchange rates?

A

They use monetary policy to alter the exchange rate so they cannot use monetary policy to address issues of inflation or recession at the same time.

141
Q

Give an example of when a country has lost power over monetary policy due to fixed exchange rates?

A

A government may want to depreciate the currency to make exports more competitive by reducing the interest rate.

This would have the side-effect of potentially increasing inflation through increased consumer spending (C) and investment (I), as well as higher import prices.

142
Q

How can speculative pressure be a disadvantage in fixed exchange rates?

A
  • Speculators may force hard peg countries to leave its peg if they sense an incorrect value
143
Q

Give an example where speculation has effected a fixed exchange rate.

A

black Wednesday 1992 when the UK was forced to abandon its peg to the currency of Germany.

This cost the UK government billions of pounds in the process of artificially boosting the Pound by spending foreign reserves.

144
Q

Why can a fixed exchange rate lead to an unstable current account?

A
  • Balance isn’t corrected by natural mechanism like floating exchange rate.
  • If there are lots of imports or exports the ‘price’ of the currency does not change. Fixed exchange rates fail to adjust for changes in competitiveness.
145
Q

What is a merged currency?

A

A merged currency is a common currency shared with one or more nations

146
Q

What is an advantage of a merged currency?

A
  • Exchange rate certainty
  • There is no foreign exchange risk between the countries in the merged currency and this certainty can help encourage trade.
147
Q

What are the disadvantages of merged currencies?

A
  • Lose monetary policy as a tool
  • Regional differences - for example the euro has representatives from all nations.
  • Political risk - exports are competitive and could cause conflict with trade partners.
148
Q

Give an example of how merged currency countries have lost monetary policy as a tool?

A

France cannot lower interest rates to increase AD and stimulate demand in expansionary monetary policy because the European central bank controls the Euro interest rate.

149
Q

Give an example how the European Central Bank (ECB) will not always line up with what is best for the economy of an individual country within it.

A

Greece may have high inflation and need higher interest rates and France may have low inflation and need lower interest rates, but the ECB cannot do both.

150
Q

What is a currency union?

A

Two or more countries sharing the same currency. E.g. the eurozone.

151
Q

What are the advantages of a currency union?

A
  • Increased investment in other nations
  • Lower transaction costs
  • Encourages fiscal responsibility
  • Trade stability
152
Q

How does a currency union lead to increased investment in other nations?

A

Nations can be more certain about investing in other countries in the currency union because their investments will not be exposed to FX risk.

153
Q

How does a currency union lead to lower transaction costs?

A

Transaction costs can reduce welfare.

In currency unions there are lower transaction costs for imports and exports as there is no need to change currency.

154
Q

How does a currency union encourage fiscal responsibility?

A
  • To join the eurozone currency union, governments must meet criteria with their fiscal policy.
  • Countries like Greece did not maintain discipline and had very large fiscal deficit after adopting the Euro.
155
Q

How does a currency union increase trade stability?

A
  • Member countries in union more stable - prices won’t be affected by changes (or fluctuations) in the exchange rate.
156
Q

What are the disadvantages of a currency union?

A
  • Entry costs
  • Lose monetary policy as tool
  • Different economic make-up
157
Q

What are the entry costs to join a currency union?

A

Initial costs in joining a currency union to prepare firms and households for the change.

May be through tighter monetary or fiscal policy in the build up to joining.

158
Q

Why do currency union loose monetary policy as a tool?

A

Individual countries lose autonomy.

Central bank chooses policies which should benefit the union as a whole but that could reduce a country’s ability to respond to shocks.

159
Q

Show how currency unions can cause disparities in countries due to lack of control in individual countries over monetary policy.

A

If unemployment is 30% in Greece, but 2 % in France and Germany, the European Central bank is unlikely to cut interest rates to reduce unemployment in Greece because this may lead to excess inflation in France and Germany.

160
Q

How can different economic make ups of countries affect currency unions?

A

If countries are too different, then the appropriate value of their currency may be different from that of the union as a whole, this could slow down that country’s growth and harm other objectives.

161
Q

What are the UK’s main exports?

A
  • Financial services
  • Cars
  • Wholesale medicines
  • Gas turbines
  • Petroleum
  • Gold
162
Q

What were UK exports valued at in Feb 2023?

A

£837bn

163
Q

How has the UK’s exports to the EU changed?

A

Since 2000 there has been a decrease, from 55% to 45% taking advantage of the rapid economic growth of the BRIC countries

164
Q

When did London mainly grow as a financial hub?

A

between 2000-2008, however, this has slowed since the 2008 financial crisis.

165
Q

What are the main imports of the UK?

A
  • Cars
  • Vehicle parts
  • Aircraft
  • Gold
  • Petroleum
  • Wholesale medicines
166
Q

What were UK imports valued at Feb 2023?

A

906.5bn

167
Q

What percentage of imports have come from the EU since 2000?

A

50%

168
Q

What has rapid growth in China as a exporter meant?

A

Lots of UK imports now come from China.

169
Q

What has the decline in the UK manufacturing industry meant?

A

That we import lots more manufactured goods, including computers.

170
Q

What are the four key factors affecting the pattern of trade and trade flows?

A
  • Changes in relative exchange rates
  • Comparative advantage
  • Emerging economies
  • The growth of trade blocs
171
Q

Give an example of where changes in relative exchange rates has affected trade and trade flows in Brazil

A

When Brazil had a political crisis in 2015, its nominal and real exchange rate declined by over 30%. Holidays to Brazil became more affordable and popular because the Brazilian Real became so cheap.

172
Q

How have emerging economies affected the pattern of trade.

A

China has lower labour costs than developed markets like the UK.

They started producing lots of manufactured goods.

This caused deindustrialisation in developed countries.

173
Q

Who theorised comparative advantage?

A

David Ricardo

174
Q

How is economic growth measured?

A

Through an increase in real GDP

175
Q

What are the problems with measuring economic success with increase in real GDP?

A

increase in real GDP does not equate economic development, although it may contribute.

176
Q

What is viewed as a huge supporter of economic growth?

A

Supporting R & D is veiwed as a huge supporter of economic growth.

South Korea has grown rapidly since 1992 and its R&D has been up to 3.5% of GDP.

177
Q

What is the definition of economic development?

A

The expansion of people’s freedom to live long, healthy and creative lives; to advance other goals they have reason to value; and engage actively in shaping development equitably and sustainably on a shared planet.

178
Q

What are common characteristic of Less-developed economies?

A
  • Low investment and savings
  • Command economy and corruption
  • Lack of education
  • Loans and borrowing
179
Q

Why is low investment and savings a common characteristic of less developed economies?

A

Physical capital is lower as a country that does not save can not invest.

180
Q

What are command economies?

A

Where the price mechanism (or invisible hand) does not allocate resources.

181
Q

What is corruption and infighting?

A

Where resources and investment are not directed to the place where it is intended.

182
Q

Give an example of where an economy is less developed due to command economy and corruption.

A

The Democratic Republic of Congo.

  • Resource rich but politics seems to have slowed economic development.
183
Q

Why is lack of education a characteristic of LDCs

A

High education levels make the labour force more productive and increase the output of an economy.

Education is sometimes called the accumulation of human capital.

184
Q

Why do LDCs tend to take out loans and borrow more?

A

If households cannot borrow money then they won’t be able invest in houses, capital or inventory.

185
Q

What are indicators of economic development?

A
  • Human development index
  • Standard of freedom e.g. woman cannot or drive a car, her levels of economic development is a lot lower than HDI or other measures would imply.
186
Q

What varibales are used to calculate HDI?

A
  • Life expentancy
  • Mean years of schooling and expected years of schooling
  • Gross national income per capita
187
Q

What are the limitation of HDI?

A

Not a comprehnsive measure of human development

Just focuses on basic dimensions excluding political freedom

does not reflect input efforts in terms of policies, nor can it measure short term human development achievements

Masks inequality in countries

188
Q

Postitive of HDI?

A

Simple with minimum variables

  • acceptable

-understandable

  • predictable.
189
Q

What are barriers to development?

A
  • Conflict
  • Geography
  • Corruption
  • infrastructure
  • foreign exchange gap
  • savings gap
  • Inadequate human capital
  • Lack of health care
  • Lack of property rights
190
Q

How can conflict cause barriers to development?

A
  • Physical and human capital destroyed by war - shifts LRAS left.
  • Conflict discourages domestic investment and foreign domestic investment (FDI) due to huge uncertainty - reducing AD and shift LRAS left.
  • Resources spent on short term military expenditure instead of long term capital harming long term rate of economic growth.
191
Q

How can geographical location be a barrier for development?

A
  • climate and location can restrict country’s ability to develop
  • Landlocked countries may find it more difficult to pursue export-led growth.
192
Q

How can corruption be a barrier to growth?

A
  • can lead to governments collecting less tax revenue, which has knock on effects for growth and anti poverty policies.
  • more likely that domestic businesses will invest overseas rather than at home
  • leads to allocative inefficiency, because resources are allocated for personal gain.
  • discourages FDI
193
Q

What does infrastructure include?

A

Physical capital such as critical energy power and water supplies, sanitation, telecommunications and transport networks, schools and hospitals.

194
Q

How can infrastructure lead to barriers to development?

A
  • Poor energy reliability leads to shortages and blackouts - deters FDI and investment - reducing efficiency and productivity
  • Poor trains and roads - reduces mobility of labour and ability to get goods to export markets
195
Q

How can a foreign exchange gap create barriers to development?

A
  • A lack of foreign currency may prevent businesses from being able to purchase ‘big ticket’ items, such as capital machinery, especially if the exporting country will not accept the currency being offered.
  • Makes investment by domestic firms more difficult and can restrict growth.
196
Q

How can a savings gap create barriers to development?

A
  • Need savings to provide finance for capital investments
  • Higher levels of poverty can make it impossible to generate sufficient savings to provide the funds needed to fund investment projects.
  • Poorly developed financial markets and low savings - more expensive for firms to get funds for investment - high borrowing costs deter capital investment
197
Q

What does poor quality of human capital lead to?

A

Lack of productivity and efficiency

198
Q

What does lack of productivity of human capital lead to?

A

Higher costs of production than in other countries and uncompetitive exports.

199
Q

Give an example of a country with inadequate human capital.

A

In 1972, Iraq nationalised the western Iraq National Oil company.

It was better to nationalise in 1972 than in 1950 because this gave Iraqi population 22 years to build up the skills to run oil wells and oil refineries.

200
Q

What does a lack of adequate health care lead to?

A

causes people to be ill more often and to have a lower life expectancy.

201
Q

Why are families larger when there is poor healthcare?

A

To hedge the risk of children not surviving.

This creates an added burden of high population growth and dependants.

202
Q

What are the four main characteristic of property rights

A
  • 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).
203
Q

What does a lack of property rights discourage?

A

entrepreneurship or FDI.

204
Q

What policies can be used to promote development?

A
  • Infrastructure
  • export driven development
  • education
  • special economic zones
  • attracting foreign direct investment (FDI)
  • Healthcare
205
Q

What does the Harrod-Domar model stress?

A

the importance of the need for saving and investment to fund economic growth.

  • higher level of saving - more money there is available for firms to borrow for investment.

also if the productivity of capital improves - so will LRAS and economic growth.

206
Q

How would better infrastructure promote development?

A
  • Improve productivity and labour can be transported around the country better.
  • connect rural area - improve geographical mobility
207
Q

problems with infrastructure to promote development?

A

There are many other policies to promote development - that are less expensive - many LDCs do not have tax revenue to finance them.

208
Q

What did Joe Studwell argue about export driven development?

A

That Asian nations that tired to build exporting business facing domestic competition performed better than protected national champions

209
Q

Give an example of domestic driven development.

A

In korea, the kia and hyundai car companies competed against other domestic champions. Loan, credit and informal government support were given to nations that exported. Korea produced national champions in cars, technology (LG and Samsung)

210
Q

What are special economic zones (SEZs)?

A

It is an area in which business and trade laws are different from the rest of the country

211
Q

Where are SEZs located?

A

Within a country’s national borders

212
Q

What are the aims of SEZs?

A
  • Increased trade
  • Increased investment
  • job creation
213
Q

What do countrys do to encourage businesses to set up in SEZ

A

inancial policies are introduced

214
Q

What are the financial policies set up in in SEZs

A

They regard

  • investing
  • taxation
  • customs
  • labour regulations
  • may be offered tax ‘holidays’ or breaks.
215
Q

How can FDI be encouraged to promote development.

A

lower taxes, especially low corporation tax.

leads to LRAS shifting out

positive multiplier effecs through employment

216
Q

How can FDI be encouraged to promote development.

A

lower taxes, especially low corporation tax.

leads to LRAS shifting out

positive multiplier effects through employment

217
Q

How can healthcare promote development

A

Policies to improve quality and quantity of health care is important because this will lead to higher productivity.

218
Q

What are the types of aid?

A
  • Bilateral aid - one government to another

-Multilateral aid- provided by many governments instead of just one.

  • Tied/condition aid - donates money or resources to another but with conditions attached.
  • Charitable aid - through organisations
  • Non fianncial aid - donation of items, such as malaria nets
219
Q

What does a lack of skilled workers and capital mean for LDEs

A

This means that LDEs don’t have the resources to focus on a profitable export industry.

220
Q

What are the limitations of aid

A
  • Conflicts of interest

-Market distortions

  • Aid dependency
  • Corruption
221
Q

How is corruption a limitation of aid?

A

Corruption can restrict aid from getting to where it needs to go.

222
Q

How is aid dependency a limitation of aid?

A

African economist Dambisa Moyo argue that dependency culture on aid might be created.

Where no government has an incentive to improve

223
Q

How are market distortions a limitation of aid?

A

Firms will focus on their resources trying to secure aid, rather than putting their resources to the best use

224
Q

How can conflicts of interest be a limitation of aid?

A

Can lead to LDE governments focusing on keeping donors happy rather than their own citizens.

225
Q

What are the positive aspects of aid?

A
  • Benefiting human capital -improve healthcare outcomes
  • Increasing LRAS - build infrastructure to increase capital stock
  • Mutual benefit - Donor countries benefit - recipient countries grown and then demand exports from donor country.
  • Saving gap - LDEs have savings gap and aid can provide a way of filling that gap.
226
Q

What is an examples of successful aid?

A

Large infrastructure projects

These include hydroelectric dams which can generate enough power to light up whole cities. The power can also be used to support industrial development.

227
Q

What are trade blocs?

A

Trade blocs are usually groups of countries in specific regions that manage and promote trade activities.

228
Q

What can trade blocks lead to in terms of trade in them (positives)?

A

They can lead to trade lead to trade liberalisation and trade creation between members, since they are treated favourably in comparison to non-members.

229
Q

What is trade liberisation?

A

The freeing of trade from protectionist measures

230
Q

What can trade blocs lead to in terms of outside trade (negative)?

A

Trade diversion away from non-members is also likely to occur, especially if protectionist measures are imposed against non-members.

231
Q

What organisation does trade diversion contradict the aim of?

A

Contradicts the aims of the WTO and distorts comparative advantage.

232
Q

In recent years there has been a flurry in bi-lateral trade deals between countries and the emergence of regional trading blocs. Give an example of this?

A

The European union now has over 30 separate international trade agreements including those with countries such as Colombia and South Korea. Some of these deals are free trade agreements.

233
Q

what are free trade areas?

A

Members trade freely between one another but can have individual trade barriers with countries outside the free trade area

234
Q

Give examples of free trade areas?

A

SADC - Southern African Development Community

COMESA- Common Market for Eastern and Southern Africa

Makes these countries more competitive when they join together.

235
Q

What is a custom union?

A

These countries are no longer fully sovereign over trade policy. There will be some degree of unification of custom or trade policies.

All members all trade freely between one another and have common external tariff (CET) which is applied to all countries outside the customs union

236
Q

Who will members of custom unions be represented by at trade negotiations with organisations such as the World Trade Organisations?

A

Supra-national organisations e.g. the European Union.

237
Q

What is a common market?

A

Members trade freely, have a common external tariff and also have free movement of factors of production such as labour and capital between the member countries without restriction.

The European union is a common market.

238
Q

What is a current account deficit?

A

Where outflows on the current account are greater than inflows

239
Q

What are the three possible consequences of current account deficits?

A
  • Currency weakness
  • slower economic growth
  • need to attract capital
240
Q

What would happen to the currency in a free floating exchange rate like the UK in a current account deficit?

A

A current account deficit can put pressure on the sterling to depreciate.

241
Q

What happens to imports when there is currency weakness?

A

As the currency weakens, imports become more expensive, which can contribute to inflationary pressures and falling real incomes.

242
Q

How can a current account deficit lead to slower economic growth?

A
  • net outflow of income for UK’s circular flow
  • reduces AD and acts as a drag on short run economic growth
  • made worse by higher cost-push inflation
243
Q

Why can a current account deficit lead to needing to attract capital flows?

A
  • A current account deficit requires net capital/financial inflows to finance its deficit.
  • This might require the central bank to raise interest rates to attract hot money (unlikely) in the UK. or be done by attracting inward FDI.
244
Q

GIve examples of FDI that could be used for the UK current account deficit?

A

New factories

Mergers and acquisitions

245
Q

What is a current account deficit an important signal of?

A

Relative competitiveness

246
Q

What does a large current account deficit imply?

A

Some kind of economic imbalance

247
Q

GIve 3 examples of an economic imbalance?

A

Low productivity

low investment,

Over-consumption

248
Q

What 2 things need correcting to fix these economic imbalances?

A

depreciation in the exchange rate

improved supply-side competitiveness over time

249
Q

What is currently happening to the UK’s current account deficit?

A

It is Large and rising

250
Q

What is the forecast of the 2023 current account deficit?

A

6% of GDP in 2023

251
Q

Why can the UK finance such a large current account deficit?

A

Because it is relatively attractive to financial inflows

252
Q

What may change the UK’s attractiveness for financial inflows?

A

Rise in corporation tax from 19% to 25%

Non-tariff trade barriers with the EU

A-level Economics AQA (17 decks)

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