Theme 4 Flashcards
Define globalisation
Definition - The ever-increasing integration of the world’s economies (national/regional/local) into a single international market
What are the key characteristics of globalisation?
More trade in G+S Free movement of capital Labour - migration and specialisation interchange of intellectual capital larger trading agreements
Causes of globalisation?
Containerisation Less protectionism The death of distance/IT economies of scale business demands international financial flows legislation
Key benefits of globalisation
tech innovation
FDI
Economies of scale
Key disadvantages of globalisation
ineqeuitable distribution
threat to sovereignty and cultural identity
interdependence
types of tax avoidance
transfer pricing
moving production to low tax country
low tax head office
benefits of FDI
can trigger multiplier increases R&D New jobs Productivity Increase in export capacity
Disadvantages of FDI
profits may not go to host country land grabs low ehtical standard volatile low quality jobs
Why are their MNCs?
barriers to entry economies of scale icnreased innovation global branding patenting gain politcal influence
define footloose capitalism
Fickle companies - may leave quickly if things change (however, this can be difficult for manufacturing)
Summary of inequality and globalisation
Decreases inequality between countries
Increases inequality within countries
What is comparative advantage
One countru has a lower indirect/opportunity cost of producting than another
What happens to PPF when two countries are trading at a favourable exchange rate
PPFs pivot out and become parallel
What theory opposes Adam Smith’s specialisation?
Theory of comparative advantage
Name 3 assumptions of theory of comparative advantage
no transport costs production costs/tech costs constant 2 economies 2 goods mobile factors of production homogenous goods no barriers to trade perfect knowledge
What are the primary determinates of a comparative advantage
quantity and quality of production
What 4 factors influence the pattern of trade?
comparative advantage
Emerging economies
Trading blocs/agreements
exchange rates
What can be used to measure trade openess
ratio of trade to GDP = (X-M)/GDP
How has production changed? 3
Fragmentation of production
digitilisation
rise in automation
2 benefits of trade
Reduced costs - comparative advantage specialisation
More choice
Risks of trade 2
overdependence
loss of culture and sovereignty
formula for terms of trade
index of X prices/index of M prices *100
SR determinates of Terms of trade
change in ER
inflation
change in demand
LR factors effecting terms of trade
productivity
change in income
What does a rise in Terms of trade mean
prices of exports rise and prices of imports fall
- buy more imports per export
- may worsen balance of payments (depends on elasticity)
To see how elasticity affects balance of trade what can we look at?
Export market
What is a trading bloc
general term for a group of countries entering a trade agreement to reduce barriers to trade
In order of increasing integration what are the types of trading blocs
Preferential trade area (PTA) Free trade area (FTA) Customs union Common market Economic union Full integration
what is a customs union
free trade and a common external tarriff barrier
what is a free trade area
free trade within bloc but individual trade barriers
what is a common market
free movement of factors of production
What is trade creation
consumers switch from high to low-cost producer
what is trade diversion
consumer switch from low to high cost producers
2 advantages of trading blocs
encourages FDI due to trade potential
encourages competitiveness and effeciency
2 disadvantages of trading blocs
can be ineffective and lead to trade diversion
can reduce national sovereignty and control
What is the condition for consumers to benefit from a trading bloc
trade diversion < trade creation
difference between static and dynamic gains from trade
static are made straight away upon entry and dynamic are over time
Name a key example of a monetary union
eurozone and the european central bank
What are the rules for eurozone members
fiscal debt cannot be greater than 3% GDP
national debt cannot be higher than 60% GDP
3 advantages of a monetary union like the Eurozone
improved price transparancy and stability
inward investment
less volatile exchange rate as more countries behind it
2 disadvantages of monetary union
transition costs (menu costs, shoe leather etc) Loss of policy independence
What are the convergence criteria for joining a single currency? 5
low inflation low fiscal deficit low national debt (as a % GDP) stable ER similar IR
what is the WTO
world trade organisation
what did the wto replace
GATT - general agreements on tariffs and trade
objectives of the WTO
trade liberalisation
follow trade agreements
difference between plurilateral bilateral and multilateral
bi - 2
pluri - multiple
multi - everyone
most recent WTO round
Doha round (QATAR) 160 countries
3 negatives if WTO
rich countries exploit poorer ones
bad for environment
Pushes down prices/revenue for developing countries
Define protectionism
the use of economic policies to manipulate imports and exports
Types of protectionism
Tariffs Quotas subsidies Admininstrative barriers exchange rate manipulation
3 Pros of free trade
encourages competition and effeciency
theory of comparative advantage
rise in living standards
3 cons of protectionism
retaliation
dead weight loss
can be regressive
3 pros of protectionism
Protects infant industries (sunrise and sunset)
can improve diversity
combat dumping from other countries
What is the balance of payements split into
current account
financial account
capital account
What is in the current account
net trade (visibles and invisibles)
Whats in the capital account
government and foreign transfers
whats in the financial account
investment income
FDI
What is the sum of the balance of payments
=0
What do countries have underlying current account surpluses or deficits?
natural resources underlying competitiveness exchange rates inflation spending by consumers/government
Positives of a current account deficit
financial liberation (more FDI) Partial auto-correction (may be corrected buy business cycle) Investment and supply side (tooling up) Capital inflows (low IR can finance)
Problems of a current account deficit
structural weakness unbalanced economy loss of output (withdrawal) Problems with financing (FDI unreliable) downward pressure on exchange rate
3 types of method for tackling the balance of payments?
demand management
Currency adjustment
supply side
Types of demand management
expenditure switching
monetary policy
What is it called when someone refuses/cannot pay debts
default
Key issue of defaulting on debts
makes investment and future borrowing hard and expensive
If money is entering the country…
it is being supplied
If money is leaving the country…
it is being demanded
what is a floating exchange rate
free market determines ER
What is hot money
Rise in IR causes speculative money flows so a rise in ER
What is the difference between devaluation and depreciation
devaluation is a fixed ER, depreciation is a floating ER
what is the marshall-lerner condition
devaluation only leads to an improvement in teh current account if the sum of elsasticities (for X and M) is of a magnitude more than 1
What condition talks about elasticities of exports and imports
marshall lerner condition
What does the J-curve show
Devaluing the currency in the SR can increase deficit due to fixed contracts and slow reactions
- there is a TIME LAG
What can an ER do to inflation
Rise in ER can make imports cheaper, lowering AD, moderating inflation
ER and economic growth
lower rate increases investment as more export opportunities
comptitiveness can have a big effect on…
employment
measures of international competiveness
unit labour costs global competitiveness league table realtive export prices terms of trade growth rates
Real exchange rate formula
nominal * domestic price level/foreign price level
Name 3 factors that influence competitiveness
exchange rates
Quality/R&D
PED
Why are there dynamic gains from trade
widens market so more investment and efficiency
Why is the UK competitive?
Can attract FDI because skilled flexible labour, gateway to europe, stable, low tax rates
3 advantages of competitiveness
Current account surplus
wage growth and jobs
attracts FDI
how can competitiveness be lost 2
rise of middle class (erodes wage advantage)
current account surplus can appreciate exchange rate, reducing competitiveness
evaluating a policy to increase competitiveness
Trade deficit Incentives ST/LT impact Impact of future decisions Could something have achieved them with fewer resources Why did it fail?
what is equity
the quality of being fair or equal
3 causes of inequality
earned income (race, age, gender etc)
government policy
competition
4 types of wealth
physical (antiques etc)
property
private pension wealth
financial
key cause in inequality for wealth
inheritance
formula for gini coeffecient
a/(a+b) *100
value for absolute poverty
less than $1.90
relative income figure
less than 60% median income
3 causes of poverty
lack of human capital
dependency
infrastructure
what is the poverty cycle
concept that poverty causes poverty
what is horizontal equity
equal treatment of people in the same situation (regardless of age race gender etc)
What is vertical equity
different treatment of indivuduals to promote equity (e.g. progressive taxes)
3 types of taxation
progressive
regressive
propotional
6 policies to reduce inequality
Minimum/maximum wages Forced benefits to workers Equal pay legislation Trade unions Price controls on necessities Goods provided on an income basis
key disadvantage of taxation
lowers incentive to work
Trickle down effect
high wealth in individuals creates jobs
6 development classifications
income developed, developing, less developed worlds model NICs BRICs Tiger economies
what are the tiger economices
South Korea, Singapore, Taiwan
Why doesn’t growth correlate with development?
other factors can influence,
inequlity, corruption, lack of social mobility
three variables of HDI
GNI pc at PPP
education - mean years
life expectancy at birth
What is a hard commodity?
Something that is mined or extracted
What is a soft commodity
something that is grown or raised
why are commodity prices so volatile
very inelastic demand and supply, which mean small changes cause big changes in price
What is the prebisch singer hypothesis
Over the long term, as commodities don’t rise in value as much as technology and other processed materials, the terms of trade of countries with primary product dependency deteriorates
What is the IHDI
Inequality-adjusted HDI
uses atkinson index
How many indicators does the genuine progress indicator have and what are the three categories of these
26
Social, economic, environmental
What is the MPI
Multidimensional poverty index
10 indicators
What is the resource curse
Countries have an abundance of natural resources but do not develop
Why do primary product dependent countries struggle with prices
very volatile
makes planning and investment difficult
what is dutch disease
Country becomes a significant exporter of a resource in short space of time, which appreciates exchange rate, eroding competitiveness
What is the harrod-domar model
change in Y/Y=s/k
s is savings ratio
k is capital output ratio
What is the savings cycle
low savings
low investment
low capital accumulation
low incomes
What is the savings gap
the difference between actual savings and the savings needed to finance investment for higher growth
What is a foreign exchange gap
difference between exports and the exports needed to finance higher growth
What is capital flight
Money is sent abroad to be saved
What is the Malthusian trap
Population grows before agricultural growth, results in inadequate food
–> can be extended to energy
What is microfinance
very small loans given to poor groups to allow them to invest
What is often a missing market in developing countries
absence of a financial sector
what does the kuznets curve show
Level of envronmental degradation and the industrialisation of a nation
What can lead to underemployment
Over-education can lead to underemployment
what is a brain drain
better educated memebers of the workforce leave to countries with better opportunities
What is rent seeking
behaviour which attempts to increase share of existing pot of wealth rather than creating higher income/wealth
What is dead capital
Poorer people not being able to use their assets (like land) as collateral for loans
Name 4 non-economic factors that influence growth and development
war
poor governance
disease
Geographical location
What is allocative efficiency
Price (AR) = MR
When the state of the market best represents consumer preferences
What is a surrogate competitor
When a regulator acts as competition to increase efficiency in a monopoly
3 types of strategies to improve development
Market-based
interventionist
Other
Market-based strategies to improve development
Privatisation trade liberisation promotion of FDI Removal of subsidies Floating exchange rate Microfinance
Interventionist strategies to improve development
Development of human capital Protectionism Managed exchange rates developing infrastructure joint venturing buffer stocks
What is import substitution
when protectionism is used to move consumption from imports to domestic products
Other strategies to improve development
fairtrade developing primary industries debt relief aid tourism industrialisation
Why might a government decide to build infrastructure
Potential for a social profit - positive externalities
Pros of FDI 3
Risk of investment taken by MNC not government
transfer of knowledge and skills
Multiplier
Cons of FDI 3
Loses sovereignty
Repatriation of profits
Can be exploitative
What is a joint venture
Foreign investor must set up in partnership with a local
What do buffer stocks tackle
Volatile prices
Advantages of buffer stocks
Encourages I
Prevents fall in revs that cause poverty
Consumers see more stability
disadvantages of buffer stocks
Prices may go one way (don't work) - unsustainable Large cost to taxpayer to set up Difficult to do with perishables Free riders (other countries)
What is the Lewis Model
Traditional and modern sector
Industrialisation through the transfer of workers to urban sector, therefore should a key objective
Negatives of lewis model
Profits may not be passed onto workers
Urban poverty
Government can waste resources on investment
Slums caused by influx
Advantages of Aid
fulls savings, trade gaps
can be targetted
positives of debt relief
Reduces burden on small countries
Allows growth
Interest was larger than original loan
Previous government may have been corrupt
Negatives of debt relief
moral hazard
eases pressure on govt to adopt good policies
Name 3 key development NGOS
IMF
World Bank
WTO
What does the imf do
Provides tempory relief in crisis
tied aid
What does world bank do
Promotes devlopment through different sub branches
What is a financial market
A set of arrangements where buyers and sellers can buy or trade a range of goods/services/assets for financial gain
6 roles of financial markets
Facilitate saving Lending Facilitate exchange Provide forward markets Provide equity markets Provide insurance
5 types of financial institutions
Retail banks Commercial banks Investment bank Saving vehicles Insurance companies
6 key financial markets
Money Capital FX commodity Derivatives Insurance
Types of financial market failure
Asymmetric info Moral hazards Specualtion/bubbles Market rigging Externalities
What is a market bubble
when speculation causes a price to be excessively high, which may then collapse
What is herding
investors watch what other investors do rather than at the underlying value of an asset
What is the relationship between bonds and IR
proportional as substitutes
What is a central bank
Instution responsible for acting as the governments bankers
4 key roles of central bank
Implements monetary policy
Banker to government
Banker to banks (lender of last resort)
Regulator
Classic financial markets moral hazard
bailing out banks
What is the capital/leverage ratio
Ratio of liabilities/capital/reserves to assets
3 reasons for public expenditure
Efficiency
Equity
Macro management
What is capital expenditure
Spendign on investment goods (longer than a year)
What is current expenditure
genereal government spending (G+S in year, transfer payments, debt interest
Ev government efficiency
Free market increases competition, firms maximise profits and lower costs and innovation gives an advantage so is desired
If inefficiency > benefits from the public good, then G should be minimised
What is resource crowding out
extra G leads to reduced private sector spending
What is crowding in
Increase in G leads to higher public sector spendingPF
PPF and crowding in/out
in- shift out (new PPF or better use)
out - shift along
What is a direct tax
Tax levied on economic agents
What is an indirect tax
tax levied on a G/S
Why tax
Fund G
Correct market failure
Manage the economy
Redistribute economy
Equity taxes type
proportional
progressive
regressive
What are the canons of taxation
Cost to collect is low % of yield
Timing and amount is clear
Payment/timing is conveniant
equitable
What is a hypothecated tax
tax linked to a specific area of G
What does the laffer curve show
Tax revenure and tax rate
What is tax competition
low corporation tax to attract investment
Name some main UK taxes
income National insurance contributions Inheritance excise VAT Council Business
2 types of G
Automatic stabilisers
discretionary fiscal policy
Link equation between deficit types
Structural deficit = actual deficit - cyclical deficit
What is the structural deficit
difference between deficit at peak of cycle and fiscal balance
Primary deficit?
Taxes - G
What does primary deficit not include
DEbt interest repayments
4 factors that influence fiscal balance
Strutural
Cyclical
Unforseen disasters
Debt interest
What is the name for the amount of money required to pay debts
debt servicing
What is inter-generation equity’s link to national debt
burden on future
How does borrowing effect future borrowing
Credit ratings - if not paid back it gets more expensive
5 objectives of fiscal policy
Private sector market gaps Desirable distribution of wealth Correct market failure improve macro performance ensure sustainability
Types of demand management
expansionary
deflationary/contractionary
automatic stabilisers
2 ways to reduce a deficit
fiscal austerity
Automatic stabilisers
5 ways to reduce debt
fiscal surplus balancing budget inflation QE Default
What are direct controls
Measure imposed on a single product or factor of production
Key problems that face policy makers
Inaccurate information
Risk and uncertainty
External shocks
