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Economics A > Theme 4 > Flashcards

Theme 4 Flashcards

1
Q

Define transfer payments

A

Payments made from governments to individuals without an exchange of goods or services i.e. JSA, Universal Credit.

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2
Q

What are the 5 implications of public expenditure?

A
  1. Taxation
  2. Productivity and Growth: Rahn curve
  3. Equality
  4. Living standards
  5. Crowding out
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3
Q

What are the 5 reasons for changing size and composition of public expenditure?

A
  1. Government aims
  2. Incomes
  3. Age
  4. Expectations
  5. 2008 Financial crisis
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4
Q

Define current spending

A

Spending on state-provided goods and services that are provided on a reccurent basis.

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5
Q

Define capital spending

A

Spending on investment projects to be consumed in over a year.

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6
Q

What 7 things does tax affect?

A
  1. Employment and growth
  2. Living standards
  3. Tax revenue
  4. Price level
  5. Trade balance
  6. FDI
  7. Incentives to work
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7
Q

Define progressive tax, proportional tax and regressive tax.

A

A progressive tax is when the proportion of income taxed increases as incomes rise.
A proportional tax is where the same proportion of income is taxed regardless of income.
A regressive tax is when those on lower incomes see a greater proportion of their income taxed.

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8
Q

What is an automatic stabiliser?

A

A countercyclical response to changes in the business cycle helping to stabilise AD.

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9
Q

What is discretionary fiscal policy?

A

When governments deliberately change spending, taxation or borrowing in order to influence the economy.

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10
Q

What is a structural deficit and what is a cyclical deficit?

A

A structural deficit is the budget deficit when the cyclical deficit is zero.
A cyclical deficit is a budget deficit as a result of the business cycle.

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11
Q

What causes national debt? (3)

A
  • unexpected events causing a surge in borrowing which must be repaid with debt.
  • fiscal deficits
  • high interest rates on national debt
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12
Q

What 6 factors may influence the size of a fiscal deficit?

A
  1. Trade cycle
  2. Housing Market
  3. Political priority
  4. Unforeseen events
  5. Interest rates on debt
  6. Privatisation: receiving income from the one-off privatisation of state owned assets
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13
Q

What is the significance of a fiscal deficit and national debt? (4)

A
  • High borrowing causes financial crowding out
  • Higher taxes harming incentives, productivity and migration
  • Intergenerational inequality
  • Reduced credit rating of a country, less able to acquire loans. This may cause people to sell government bonds enhancing supply of the £ weakening exchange rates.
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14
Q

What measures can be used to reduce fiscal deficits?

A
  1. Automatic Stabilisers
  2. Austerity
  3. Demand stimulus
  4. Default on loans - last option
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15
Q

List 5 measures to reduce inequality

A
  1. Maximum and Minimum wage
  2. Progressive tax: link to Kuznet
  3. Maximum prices
  4. Welfare state
  5. Education, healthcare, infrastructure
  6. Equal pay laws
  7. Trade union friendly laws
  8. Trickle down effect
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16
Q

Why is redistribution of income good according to the law of diminishing utility?

A

Redistribution increases total utility. Those on high incomes do not experience marginal increases in happiness for income increases to the same extent those on lower incomes do (Easterlin Paradox).

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17
Q

How do interest rates boost AD?

A
  1. Low int rates = less demand for pound = weak exchange rates = increased exports
  2. Low int rates = reduced marginal propensity to save, more investment into assets which rise in price and therefore a positive wealth effect
  3. Low int rates = inc borrowing from firms and consumers, more injections via investment causing actual and potential growth
  4. Accelerator effect
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18
Q

How can the Bank of England perform quantitative easing?

A
  1. Increasing the bank’s reserves meaning they’re more willing to lend
  2. The bank buys securities and bonds from private sectors, this pushes the value of assets up leading to a positive wealth effect
  3. Banks receive more funds and so may spend on investment projects
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19
Q

What is transfer pricing and how is it regulated?

A

When companies produce goods in country A then move them to country B to be made into new products. If tax rates in A are high, goods are priced lower and higher in B reducing tax receipts.
The UK regulates transfer pricing as if companies don’t allocate sufficient profits, they’re challenged by HMRC.

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20
Q

What limits our ability to control TNCs?

A
  1. The size of TNCs.
  2. Globalisation means that if the UK adopts legislation against tax avoidance, those tax avoiding via Barbados means Barbados loses out on revenue.
  3. TNCs may be a major driver of growth.
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21
Q

How can we control TNCs?

A
  1. Only allow joint ventures to prevent exploitation
  2. Manufacturing companies can negotiate with governments that a certain proportion will be exported to allow for export-led growth.
  3. In the EU and USA, it is illegal for manufacturing countries to use bribery or corrupt practices and they can be fined for doing so.
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22
Q

How may governments respond to commodity shocks?

A
  1. Try to reduce inflationary pressure through monetary and fiscal policy (contractionary)
  2. They may implement maximum prices
  3. They may accept the shock and try to get the economy back to full employment
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23
Q

How to Multinationals tax avoid in the EU?

A

‘Double Irish’ and ‘Dutch Sandwich’ are when firms channel costs, revenues and profits through tax havens like Ireland, the Netherlands and Luxembourg. For every £1 tax revenue raised in Lux. leads to around £1000 losses of other countries.

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24
Q

What are problems facing policy makers?

A
  1. Risk and uncertainty
  2. Inaccurate information
  3. External shocks
25
Q

What are 6 market-led strategies to cause development?

A
  1. Removal of domestic subsidies
  2. Trade liberalisation
  3. Privatisation
  4. Floating exchange rates
  5. FDI promotion
  6. Microfinance schemes
26
Q

What are 6 interventionist strategies to cause development?

A
  1. Protectionism
  2. Buffer stock schemes
  3. Managed exchange rates
  4. Promoting joint ventures
  5. Infrastructure
  6. Education
27
Q

What are 6 alternatives methods to cause development?

A
  1. Fair trade
  2. Tourism
  3. Lewis Model
  4. Foreign aid
  5. Debt relief
  6. Development of primary industries - increase savings ratio
28
Q

What are the economic factors that affect development?

A
  1. Price volatility
  2. Primary Product dependency
  3. Harrod-Domar Model
  4. Lack of finance and stable banks
  5. Lack of property rights
  6. Demographics
  7. Infrastructure
  8. Education
  9. Capital flight
  10. Debt
  11. Foreign currency gap
29
Q

How can governments increase international competitiveness?

A
  1. Reduce inflationary pressures via interest rates
  2. Reduce unit labour costs via regulation
  3. Weaken exchange rates via weak interest rates and buying foreign reserves.
30
Q

What are the 5 reasons for financial sector market failure?

A
  1. Bubbles
  2. Market rigging
  3. Asymmetric information
  4. Moral hazard
  5. Externalities
31
Q

What are the 4 key roles of central banks?

A
  1. Banker to banks
  2. Banker to governments
  3. Monetary policy
  4. Regulating the banking industry
32
Q

How do central banks regulate banking?

A
  1. Maximum interest rates
  2. Ensures banks store reserves
  3. Ensure rigging is illegal
    WHY
  4. Reduce risk of financial crisis
  5. Reduce market failures
  6. Reduce consumer exploitation
  7. Promote a fair market
  8. Prevent system risk (lender of last resort)
33
Q

What does the IMF do?

A

Promote macroeconomic stability and reduce poverty:
- provide economic data to advise on policy and indicate potential shocks
- provide loans to reduce poverty

34
Q

What does the World Bank do?

A

Aims to eradicate world poverty and increase the incomes of the bottom 40%.
- offers loans and aid interest free
- helps build key infrastructure
- provides policy advice

35
Q

How does quantitative easing lead to growth?

A
  1. Wealth effect
  2. Weak exchange rates
  3. Borrowing + increased willingness to lend at lower interest rates
  4. Lower MPS - higher multiplier
36
Q

What are some problems with high interest rates?

A
  1. Strong exchange rates = less exports
  2. Lower AD and consumption and so lower employment
  3. Increased mortgage repayments - lower disposable incomes, lower home ownership
  4. Less investment
  5. Higher cost of servicing national debt
37
Q

Measures to increase employment?

A
  1. Child care
  2. Infrastructure spending - mobility of labour, multiplier
  3. Increased NMW and decreased benefits
  4. Increased education
  5. Lower tax - inc profit, inc reward and motivation so inc productivity and labour demand, inc incomes inc spending
  6. Less union power
38
Q

How has the BoE been successful in monetary policy?

A
  1. Inflation fell from 2008-2010
  2. QE + int rates helped to encourage growth and recovery post-crisis
  3. Openness and transparency, a lack of political interference.
39
Q

2 differences between monetary policy and fiscal policy?

A
  1. Monetary policy reviewed once every 6 weeks, Fiscal yearly
  2. Mon policy controlled by the BoE, fiscal by the government
40
Q

5 evaluations of supply side policies

A
  1. Opportunity cost
  2. Poor during a recession when AD is of concern
  3. Time lag
  4. Losers i.e. lower minimum wages harm workers, lower benefits harm claimants etc
  5. There is a limit to how much government can drive progression: largely dependent on private investment and technological advancement
41
Q

5 Market based supply-side policies?

A
  1. Trade liberalisation
  2. Privatisation
  3. Lower welfare benefits
  4. Deregulation
  5. Tax cuts
42
Q

How has globalisation lead to a decrease in the wages:GDP ratio (wages fall as GDP increases)?

A
  1. Migration
  2. Technology
  3. Multinationals
  4. Deindustrialisation
  5. Increased competition = lower wages
43
Q

Factors impacting the pattern of trade?

A
  1. Comparative advantages
  2. Exchange rates
  3. Trading blocs
  4. Growth of emerging economies
44
Q

Benefits of specialisation in a global context?

A
  1. Economies of scale
  2. Comparative advantages lead to lower prices
  3. Increased output and choice and quality
  4. Increased trade and competition
  5. Helps solve the problem of scarcity
45
Q

4 Assumptions of comparative advantage theory and what are the weaknesses?

A

ASSUMES:
1. Free trade
2. No transport costs
3. Perfect factor mobility
4. Constant returns to scale

CRITICISMS:
- inflation
- exchange rates
- protectionism
- gravity theory (trade with those closest)
- trading blocs
- transport costs
- imperfect knowledge

46
Q

Define terms of trade

A

A ratio between the index of a country’s export prices to its index prices

47
Q

5 pros and cons of a monetary union

A

PROS
1. Price transparency
2. FDI
3. Incentivises countries to keep inflation low
4. Increased trade due to common currency
5. No exchange costs
6. Benefits of a union: trade creation, economies of scale, mobility of labour, export led growth

CONS:
1. Lack of monetary sovereignty
2. Cannot devalue
3. Transition costs
4. Membership costs
5. 1 Interest rate does not fit all - asymmetric shocks have an unequal effect

48
Q

What are 4 criticisms of the WTO?

A
  1. Free trade can lead to cultural erosion
  2. Favours developed economies: economies cannot grow infant industries without protectionism
  3. Has failed to create multilateralism as there are lots of bilateral agreements
  4. Outsourcing means exploitation of developing economies
  5. Environmental issues associated with free trade
49
Q

How may the WTO conflict with regional trade agreements?

A
  1. Trading blocs may negatively impact the rest of the world i.e. dumping
  2. Conflicts between blocs could lead to an increase in tariffs
  3. Problems with WTO
  4. Customs unions mean not all parties are treated equally due to a common external tariff
50
Q

5 Pros and 5 Cons of protectionism?

A

PROS
1. Dumping
2. Infant industry
3. Protect domestic employment and sunset industries
4. Raise government revenue
5. Improve current account position
6. Avoid risk of overspecialisation

CONS:
1. Promote inefficiency: less competition = less incentive to cut costs
2. Higher prices means lower living standards and this may be regressive
3. Retaliation
4. Higher prices leads to less demand and unemployment
5. Reduction in export-led growth for economies trying to develop

51
Q

Characteristics of deglobalisation?

A
  1. Less tourism
  2. Less capital flow
  3. Less trade
  4. Less FDI
52
Q

What is the growth poverty cycle?

A
  1. Low growth
  2. Low incomes
  3. Low saving
  4. Low investment
    low growth
53
Q

What is the development poverty cycle?

A
  1. Low incomes
  2. Low edu + health
  3. Low human capital
  4. Low productivity
    low incomes
54
Q

Why does growth not always mean development?

A
  1. Externalities
  2. Inequality
  3. Growth in one sector
  4. Growth due to weak labour laws and poor working conditions
  5. Investment takes time
55
Q

How does Todaro explain development?

A
  1. Increase in living standards
  2. Increase in economic and social choice
  3. Availability of life-sustaining goods
56
Q

What is microfinance? Pros and Cons?

A

Microfinance is the provision of small loans to individuals and small firms to promote investment.
PROS:
1. Empowers women and reduces gender inequality
2. Improves the saving ratio, increases investment and output and thus increases incomes reducing poverty: inc funds to buy education reducing development poverty trap.
3. Source of finance with low interest rates: progressive

CONS:
1. Exploitative interest rates worsen poverty.
2. Microfinance is not enough to promote development - we need to think about WHY investment is low - low education.
3. Firms are not always successful and this debt follows households leading to demoralisation and less happiness

57
Q

Causes of inequality?

A
  1. Wage differentials
  2. Ownership of assets
  3. Education
  4. Age
  5. Taxation
  6. Poor healthcare and welfare state
  7. Poor infrastructure
  8. House prices
  9. Part time work
58
Q

Why should governments support financial systems during crisis?

A
  1. Prevent system risk - collapse = loss of confidence and savings, risk of depression
  2. Government recovered every penny
  3. Economy depends on the financial sector - the role of the financial sector in lending, storing money etc: consequences of collapse i.e. crime, inequality
    BUT
    - social unrest: why are those who caused the crash supported?
    - moral hazard: how is the support spent? Banks reckless as they expect a bailout
    - huge expenditure increasing debt

Economics A (3 decks)

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