Theme 4 Flashcards
What is economic growth?
Increase in the economy’s capacity to produce goods and services.
- Narrow Measure
- AD/AS and change in GDP
What is economic development?
With HDI factors?
Measures the changes in living standards and level of welfare within an economy
> Broad Measure
> Human development index (HDI):
- Life expectancy
- School - average length of time in school
- GNI per capita
What does development require?
Stages…
Requires economic growth:
1. Increases GDP, creates more jobs and higher spending across the economy
2. Higher spending on important infrastructure such as health care and education
3. Productive capacity of economy expands
> Leading to development
What should sustainable and unsustainable growth to a diagram? While AD1 pushes outwards to AD2…
> Sustainable - push LRAS outwards (Econ. development)
> Unsustainable - LRAS stays in same place (No Econ. development)
What are the 7 indicators of economic development for developing countries?
- Low living standards
- Low labour productivity
- High population growth
- Primary sector production
- High unemployment rates
- High degree of market failure
- Lack of power in international markets
What low labour productivity means?
The cycle…
Low productivity -> Low incomes -> Low savings -> Low Investment -> Low productivity…
Why measuring economic development in useful?
- Compare across countries
- Question policy choices
- Debate policy priorities
- Target Aid
What are the limitations of diversity of developing countries?
- Resource endowment
- Historical background
- Economy structure
- Demographic composition
- political structure
- per capita income rates
What’s a composite index?
Indices composed of several variables to measure changes in phenomena that cannot be directly measured.
What HDI shows?
Health, education and living standards
Shows us which countries enjoy relatively high standards of living, and which are, by comparison, are under-developed.
Market-Orientated Strategies - Trade Liberalisation?
- Open up domestic markets to foreign competition
- Remove some barriers… tariffs, quotas, regulations
- Reciprocal exchange of goods and services
Liberialisation - export led growth?
Steps….
Increases a country’s openness and leads to increased international trade
- Increase in AD
- Increase incomes
- Growth in domestic competition
- Growth in domestic and export markets
- Concentrate on producing goods and services with a comparative advantage
Benefits of trade liberalisation?
- Increases specialisation
- Increased competition
- Reduces global prices
- Economies of scale
Costs of trade liberalisation?
- Structural unemployment
- Environmental damage
- Infant industries suffer
- Uneven benefits
Market orientated strategies - FDI?
Greenfield investment?
M&As?
Long-term investment by private multinational corporations (MNCs)
> build new or established facilities in foreign countries
> Merge or acquire existing firms in foreign countries
The statistic of FDI net flows to developing countries increasing from 2000 to 2015?
2000 - $230billion
2015 - $780billion
Why do MNCs invest in developing countries?
- Abundance of natural resources
- Market and sales potential
- Low Labour costs
- Less regulation = tax incentives
Advantages of FDI (market orientated strategies)
6…
3 factors drawn…
- Reduces savings gap (S-I)
- Higher employment
- Higher tax revenue
- Greater injection of capital
- Brings R&D + innovation
- Multiplier effect = growth
> Could improve product choice
Could improve economic efficiency
Big influence in Asian economies development
Disadvantages of FDI (market orientated strategies)
- MNCs hold too much power
- Externalities produced
- Exploitation of cheap labour
- Resource depletion
- Repatriate profits - send to home country
> Restrict the development rate of countries
What does deregulation do?
Do to SRAS
Reduction in the quantity and severity of business regulation
- will shift SRAS outwards while excessive regulation would shift SRAS inwards.
What does privatisation do?
- Sale of state-owned firms to the private sector
- Privately owned firms argued to be more efficient and productive
- Due to profit-maximising incentive
- Only works in competitive markets
What the core belief of interventionist strategies are?
Governments role maximised - supply and demand minimised
Whats import substitution?
leakages and injections…
stages…
Trade policy encouraging domestic production of imported goods imports = leakage domestic consumption = injection 1. Trade policy to deter imports 2. Increases domestic consumption 3. Increases domestic production 4. Increase in economic capacity and growth 5. Increase in competitiveness
What happens to lows of demand when a tax is imposed on imported goods? (trade protection)
Laws of demand…
Tariff raises price
Quantity of imports to fall
Marginal propensity to import falls
What happens when quotas are put in place?
Restricts imports
Pushes prices up
Encourages domestic production
Supply expands
What happens when subsides are in place?
Encourages domestic production
Subsidy payments help reduce price
Helps create economic growth
What are the benefits of import substitution?
Protects jobs
Protects infant industries
Protects against MNCs
Maintains domestic culture
What are the drawbacks of import substitution?
Only creates SR benefits
Lack of competition
Increases in prices
Retaliation
What is globalisation?
The ever increasing integration of the world’s local, regional and national economies into a single international market.
What can economic integration be broken down into to (4 areas)?
- Free trade across national boundaries of goods and services
- Free movement of labour between countries
- Free movement of capital between countries
- Free interchange of technology and intellectual capital across national boundaries
What are the 7 causes of globalisation?
- Trade in goods - growth and revenues
- Trade in services - growth and revenues
- Trade liberalisation - lower barriers for global trade
- Multinational companies - EOS, monopoly power, influence government decisions and technological knowledge
- International financial flows - becoming far greater - fast economic growth
- Foreign ownership of firms increasing
- Communications and IT - reducing time needed for economic agents to communicate
Whats the impact of globalisation on consumers?
- Consumer choice - increased
- Prices - changes some fallen and some rised
- Incomes - rised
Whats the impact of globalisation on workers?
- Employment and unemployment - pros and cons
- Migration, experience better living standards, increased productivity
- Wages - pros and cons - has depressed some wages - competition - demand pushing up
- Multinationals - create more jobs, however usually lower income jobs
Whats the impact of globalisation on producers?
- Specialisation and economic dependency
- Costs and markets - achieve lower costs
- Footloose capitalism - destroy jobs and prosperity in the wake as they globalise
- Tax avoidance - can avoid tax
Whats the impact of globalisation on governments?
- Can create prosperity but bring economic problems
- aware of tax avoidance - decrease their tax rates
- bribery and corruption
whats the impact of globalisation on the environment?
- leads to destruction of nature
- increase global warming
What are the benefits of globalisation?
- Lower prices and greater choice
- Economies of scale - lower prices
- Increased global investment
- Free movement of labout
- May reduce global inequality
What are the drawbacks of globalisation?
- Structural unemployment
- environmental costs
- tax competition and avoidance
- movement of highly skilled people moving abroad for higher wages (brain drain problem)
- Less cultural diversity
Who are the winners of globalisation?
- Firms with comparative advantage, e,g high-tech software firms
- High - income earners
- Wealthy who can invest abroad and take advantage of lower tax rates
- Workers who gain employment in export industry
- Consumers who benefit from cheaper prices
Who are the losers of globalisation?
- Unskilled manual labour who have seen a decline in employment opportunities with the structural change to the economy
- Average taxpayers who lose out from tax avoidance schemes
- The environment…
Global export value in 1970 to 2018?
318.02 billion (1970)
19,468.14 billion (2018)
What is global branding?
the strategy companies use to translate their values and identity into a limitless language
What is global sourcing?
Buying strategy in which a business buys goods and services from international markets across geopolitical boundaries to save money by using cheap raw materials or skilled labour from low-cost countries
Whats a transnational corporations (TNCs)
Companies that operate in more than one country. They often have factories in countries that are not as economically developed to take advantage of cheaper labour.
What is international trade?
Benefit…
Is the exchange of products - takes place between economic agents
If countries specialise in the production of certain goods and services and then trade with other countries there will be an increase in economic welfare.
Whats the difference between static and dynamic gains?
Static - improvements in allocative and productive efficiency
Dynamic - the gains in welfare from improved product quality, increased choice and faster and more innovative behaviour
What is free trade?
Free from artificial barriers such as import tariffs, quotas, and other trade barriers
Whats a comparative advantage?
Focuses on when a country has lower relative opportunity cost when it decides to specialise in a particular product
Opportunity cost is the sacrifice of alternative products made when you specialise in another.
The four reasons why countries trade?
> Difference in factor endowments - conditions/resources from your land
Price - can produce goods for cheaper
Product differentiation - many traded goods are similar but not identical
Political reasons
What are the four main factors which affect the world trade pattern?
> comparative advantage
impact of emerging economies
growth of trading blocs and bilaterial trading agreements
changes in relative exchange rates
What is absolute advantage?
Occurs when country can produce a product using fewer resources than another nation
If a country is using the same factors of production and can produce more of a product, then it has an absolute advantage
What does the law of comparative advantage state?
If countries specialise in producing goods where they have a lower opportunity cost - then there will be an increase in economic welfare
- Even if a country is more efficient in the production of all goods (absolute advantage) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies
What is trade creation?
Gain of…
Occurs when countries switch from high-cost producer to low-cost producer
Lower tariffs increase consumer surplus and net economic welfare of 2+4.
Trade creation - reduction in tariff barriers, leading to lower prices
advantages of free trade?
- lower prices
- specialisation and EOS
- increased competitive pressure
- growth of export industries
disadvantages of free trade?
- some industries lose out - possible structural unemployment
- developing economies may struggle to diversify their economy
whats trade diversion?
When production shifts from low-cost producers to high-cost producers
- increase in producer surplus
- net loss = gain in producer surplus - decline in consumer surplus
What is the terms of trade and the equation?
What an increase will do?
ratio between average export prices and average import prices
(Index of export prices / Index of import prices) x 100
- Country can buy more imports from exporting the same quantity of goods
- Living standards rise - improvement in a country’s ToT
Factors influencing the terms of trade?
Short run…
Long run…
Short run…
- Change in the exchange rate will change import and export prices. e.g. rise in exchange rate is likely to lead to a fall in the price of imported goods. ToT will improve.
- Inflation - rise in inflation relative to other countries is also likely to improve the ToT
Long run…
- A rise in productivity, compared to a country’s main trading partners should reduce the relative price of exports as higher productivity leads to lower costs of production.
- Changing incomes will affect patterns of demand. As world incomes rise. e.g. there has been an increase in dmeand for tourism. If this leads to a rise in prices in the tourist industry in, say, turkey, then all other things being equal, there will be an improvement in Turkey’s ToT
What are some countries heavily dependent on with reference to ToT?
The world price of commodities
What are the factors of common markets?
> Tariffs on trade between countries in the agreement - Eliminated
Common Tariffs on imports from outside the agreement area - Yes
Free factor mobility within the area - Yes
Harmonisation of economic policies - Desirable
What are the factors of customs union?
> Tariffs on trade between countries in the agreement - Eliminated
Common Tariffs on imports from outside the agreement area - Yes
Free factor mobility within the area - No
Harmonisation of economic policies - Possible
What are the factors of free trade agreements?
> Tariffs on trade between countries in the agreement - Eliminated
Common Tariffs on imports from outside the agreement area - No
Free factor mobility within the area - No
Harmonisation of economic policies - No
What are the factors of preferential trade agreements?
> Tariffs on trade between countries in the agreement - Reduced
Common Tariffs on imports from outside the agreement area - No
Free factor mobility within the area - No
Harmonisation of economic policies - No
What are the factors of Economic union?
> Tariffs on trade between countries in the agreement - Eliminated
Common Tariffs on imports from outside the agreement area - Yes
Free factor mobility within the area - Yes
Harmonisation of economic policies - Yes
common currency
Whats a monetary union?
Occurs when at least two countries share the same currency.
Also have countries which use the currency of another country rather than issuing their own currency (Ecuador)
Advantages of monetary union for eurozone countries?
> Fixed prices - no losses from exchange rates
Greater price transparency - easier to compare (better information)
More trade and greater EOS - less costs
Inward investment - given a comp advantage
Price stability
Disadvantages of monetary union for eurozone countries?
> Transition costs - vending machines changed
Loss of policy independence
inability to change the value of a currency
Structural problems
Break up of monetary union
What are the conditions necessary for the success of a monetary union?
> Optimum currency area (theory)
- Should be free movement of labour
- Should be capital mobility associated with wage and price flexibility
- Should be automatic fiscal transfers when individual countries are performing poorly
- Countries should share the same trade cycle
What are the factors influencing trade?
- Comparative advantage
- Relative economic performance
- Trade blocs and agreements
- Exchange rates
Benefits of trade?
- Growth
- Efficiency
- Choice
- Innovation
Costs of trade?
- Risks
- Unemployment
- Debt
- Cultural dilution
- Environmental
What happens do domestic business and the terms of trade from a DEVALUATION?
- Devaluation puts cost pressures on domestic businesses because the relative prices of imported raw materials increase.
- Businesses need to pay more in their domestic currency to buy the same quantity of foreign goods as before.
- Even though the prices of exported goods fall in foreign currency terms, in the domestic country it has the same prices charged.
- The ToT therefore deteriorates
What does free trade allow?
The comparative advantage to maximise output between trading nations.
What is protectionism?
Is the use of economic policies deliberately to regulate trade between countries, mainly to reduce imports.
To reduce imports and increase exports.
Whats import dumping?
Dumping happens when firms sell products abroad at below costs or significantly below prices in the home market.
- implies predatory pricing
- implies price discrimination
Motivations for protectionism?
- protect infant industries
- protect key / politically strategic industries
- raise tax revenues for government
- employment protection
- response to a chronical trade gap
- response to export dumping
- response to a recession or low aggregate demand
Whats the consequence of an import tariff? Domestic output Domestic demand Imports Government tax revenues Domestic producer revenue Foreign producer revenue Consumer surplus Overall economic welfare
Domestic output - expansion Domestic demand - contraction Imports - fall in volume Government tax revenues - increase Domestic producer revenue - increase Foreign producer revenue - falls Consumer surplus - falls Overall economic welfare falls
Whats a domestic subsidy?
Any form of financial help given to domestic producers in order to lower their costs and help them compete in international markets.
- outward shift in supply
What are the benefits of being in the EU?
Leads to being more c…
- Trade creation i.e. exploiting comparative advantage
- Exploit economies of scale
- Enhance competition
What are the reasons against the EU?
- membership cost
- loss of national economic sovereignty
- austerity pressures
- migration
- inefficient policies
Whats a quota?
affect on market price..?
Why is it used?
A quota places a quantity limit on the volume of imports of a product that can come into a country.
- indirect effect - creating artificial scarcity
> the effect of a quota is to create excess demand for imports for a given level of domestic demand.
> pushes up market price
> higher market price incentivises domestic producers to increase their supply / enter the market.
> Domestic supply increases (push supply outwards)
Arguments against trade barriers/protectionism?
- risk of retaliation - game theory at work
- market distortions
- higher prices for consumers
- regressive effect on income inequality
- by-passing import controls
- higher costs for exporters
- potential for corruption
- barriers to entry - reduces market contestability
What is the current account made up of?
- Balance of trade in goods
- Balance of trade in services
- Net primary income (interest,profit,dividends)
- Net secondary income (transfers Aid,EU contributions)
What is the capital account made of?
- sale/transfer of patents,franchises leases…
- debt forgiveness/cancellation
- capital transfers of ownership of fixed assets
What is the financial account made of?
Includes transactions that result in a change of ownership of financial assets and liabilities between UK and non-UK residents.
- Net balance of FDII
- Net balance of portfolio investment flows
- Balance of banking flows
- Changes to the value of reserves of gold and foreign currency
What is FDI?
investment from one country into another that invooves establishing operations or acquiring tangible assets, including stakes in other businesses.
What are the difference between inward and outward flows of FDI?
Inward investment - is positive for UK accounts
- a foreign retail firm invests to open new stores in the UK
Outward investment - is a negative for the UK financial account of the BoP
- investment made overseas by UK businesses.
What are the deficit solutions?
Become more competitive in…
> Expenditure reducing
> Productivity enhancing
> Encouraging exporting
> Protectionism
> Reduce exchange rate
How to expenditure reduce…
Reduce government spending
Increase taxation
Increase base rate
Reduce money supply
How to increase productivity?
Incentivise investment
Provide education and training
Tax incentivises for R&D
Incentivise FDI
How to encourage exporting?
- preferential loans to buyers
- insurance against non-payment
- management training for exporters
- subsided prospecting
How to do protectionism?
- Tariffs, quotas, embargos and subsidies
Whats the Marshall Lerner condition?
A devaluation will shift a deficit toward a surplus if imports + exports > 1.
A devaluation will widen a deficit if imports + exports < 1,
What is the balance of payments?
An account made up of the current account, capital account and financial account.
What are the supply side consequences of a current account deficit?
- Low investment
- Low productivity
- Relatively higher inflation
- High labour costs
- Poor quality and low reliability of exports
Demand side consequences of a current account deficit?
- Strong domestic growth // - higher incomes - higher living standards - demand for imports increase - more sterling used to buy foreign currency - worsening of the current account.
- Recession overseas // - slower growth in main trading partners - income growth fall in MTP - lower MTP demand for imports - lower export revenue for the domestic economy - worsening of C/A
- Strong currency - imports are relatively cheaper and exports more expensive - increases expenditure on imports and reduces exports revenues (relatively less competitive) - worsening of C/A
Advantages of Specialisation and Trade?
5…
- Lower prices: Country having comparative advantage (produce lower). Therefore, goods will have lower prices
- More Consumer Choice:
By trading, consumers have access to more goods from other countries. - Larger Markets: Firms benefit because their audience is expanded to a bigger (global) market.
- Economies of Scale: Because firms have a greater audience, there is greater demand for their goods. This means they have the opportunity to expand and gain from economies of scale.
- Increased living standards: benefit from cheaper prices as other countries specialise from comparative and sell cheaper products.
Disadvantages of Specialisation and Trade? 5... Trade... Excess goods... External shocks... Global... Emerging economies...
- Trade Deficit: If a country is uncompetitive, then they could end up with a trade deficit.
- Dumping: Countries with excess goods can sell them in foreign markets at a price far below the market price in order to get rid of them. The economy of the country that the goods are being ‘dumped’ into will be damaged as the increase in supply and fallen price can put some domestic producers out of business as it shocks the market.
- Contagion(increased exposure to external shock): As has been seen by the recent global financial crash, economic shocks can be spread across economies. This is due to the interdependence of economies; as one economy begins to crash, the countries that were dependent on their trade will find they are also hit by their downturn and so economic shocks will be spread across economies.
- Global Monopolies: International trade can allow the rise of global monopolies with global influence and power for market manipulation.
- Problems Facing Emerging and Developing Economies: Emerging economies and developing countries are generally susceptible to exploitation from global monopsonies and from more developed countries that have access to the necessary finance, capital and knowledge.
Whats an exchange rate?
the value of one currency when traded for another currency
A floating exchange rate system?
a country allows the value of its currency to fluctuate according to the free market forces of demand for its currency and the (somewhat controlled) supply of its currency. Decreases and increases in a country’s currency are described as depreciations and appreciations in currency when under a floating exchange rate regime.
Why would you impose restrictions on free trade?
8… protectionism
Infant industries Employment Self-sufficiency Balance the balance-of-payments Retaliation Prevent dumping Reduces competition Protect strategic/important industries
Whats a fixed exchange rate?
A fixed exchange rate is when a country’s governing body or central bank keeps the value of the currency, in terms of another, at the same level. Revaluation and devaluation used when to change the value compared to another.
Whats a managed exchange rate?
A managed exchange rate is when the monetary authorities of a country influence the demand and supply of the country’s currency via buying and selling the currency itself or by changing the interest rate. By influencing the foreign exchange markets, authorities, such as the Bank of England, are able to ‘manage’ the value of the country’s currency in terms of another.
Factor that influence a floating exchange rate? Interest rates Inflation Current account Speculation QE
Relative Interest Rates
The UK interest rate affects the rate of return on UK investments, such as saving accounts in UK banks.
•Relative Inflation Rates (purchasing power parity)
If the UK has lower inflation rates compared to other countries then it means that UK prices are rising at a lower rate than others. This means in comparisons, UK goods will be more competitive. More people will demand pounds in order to purchase UK exports. Rising demand for pounds will cause the pound to appreciate. High rates of inflation would have the opposite effect; UK prices would be rising more than other countries, thus appearing less competitive.
•The Level of Imports and Exports (Current Account)
In order to purchase UK exports, foreign consumers need UK currency. This means if the demand for exports increases, the demand for pounds also increases. Buying imports will increase the supply of pounds in the market because UK consumers will need to swap their UK currency for the currency of the imported good.
•Speculation
Speculation is the act of trading on the anticipated price movements of financial assets. It is risky and similar to gambling. As investors speculate, the demand and supply for pounds and the stock market varies the demand and supply of currency in great volumes every second. Generally investors act on anticipation of expectations, which is a self-fulfilling prophesy. If investors believe pound to appreciate - demand rises, bought, pound appreciates…
•Quantitative Easing
Quantitative easing is a monetary tool the Bank of England uses to stimulate the economy. The Bank of England increases the supply of money to restore a liquidity shortage, but by increasing the supply of money the value of the pound will depreciate.
Government Intervention and Managing the Exchange Rate…?
2 factors
•Changing Interest Rate
Changing the interest rate can change the demand for money because high interest rates will attract foreign investors to domestic investments. Foreign investors will need to change their currency into the domestic currency before investing and thus will demand the domestic currency and push up the price of the currency.
•Influencing Foreign Exchange Market
If the central bank buys its own currency then this would reduce the supply of the currency on the foreign exchange market. The value of currency will also rise. Equally, by buying the currency they will increase the demand for the currency and this would equally increase the value of the currency.
What the J curve shows from a change in the exchange rate?
Time lag in general
The J Curve effect a depreciation in the exchange rate can cause a deterioration of the current account in the short-term (because demand is inelastic). However, in the long-term, demand becomes more price elastic and therefore, the current account begins to improve
The impacts of changes in the exchange rate?
6..
- Current Account of the Balance of Payment
- Marshall Lerner Condition
The Marshall Lerner condition states that there will be an improvement in a country’s current account deficit, following intervention, only if the total sum of all the elasticities of all the imported and exported goods and services is equal to or greater than - J-Curve
- Economic Growth and Unemployment
- Rate of Inflation
- FDI Flows
If the exchange rate falls, then it will be cheaper for foreign companies to invest in the country. Vice versa
What is income?
Represents the flow of money that an individual or household recieves within a given period. As grows, better position to buy assets.
Salary
welfare benefits
company dividends
What is wealth?
The stock value of all assets that an individual or household owns at a point in time. Assets can be used to top up income (stock)
Property
Shares and bonds
Pension
Difference between equality and equity of outcomes?
Equality is how evenly distributed the income and wealth of a country is across society
Equity is how fairly.
Whats the Lorenz Curve? Indicates... Axis... Shows... Helps to vis... Goal
A graph which indicates income inequality by plotting the cumulative %of total national income against the cumulative% of the corresponding population (ranked in increasing size of share)
( X-axis population, Y-axis total income)
Graphical representation of inequality
Helps visualise the state of inequality in an economic system relative to a system of complete equality.
Want to be closest to the line and can split up into different segments (population)
What is the gini coefficient?
Indicates
Shows
Areas and formula
A statistical measure of the level of income inequality in an economy calculated by analysing the size of any inflexion in the Lorenz curve.
Statistical representation of inequality
Provides a simple index figure that can be compared across time and countries
A = area between Lorenz Curve and Line of equality
B = complete Area under line of equality
Area A / Area B = Calculation
Factors Influencing Growth and Development?
- Primary product dependency - (main bulk of exported goods are primary products (raw materials)
- Volatility of Commodity Prices - (economic instability
- Savings Gap - (The higher the savings ratio the easier it is for banks to lend money and then firms can borrow to invest and grow.
- Inadequate foreign currency - (pay for imports…
- Removal of capital
- Demographic factors
- Infrastructure
- Debt
- Education and skills
- Non-economic factors
The 2 main strategies Influencing Growth and Development?
- Market-Orientated Strategies are strategies where the government attempts to use the market forces to promote growth and development, rather than the government directly changing the conditions.
- Interventionist Strategies are strategies where the government takes a more direct role. Instead of manipulating the market, the government will simply change the market conditions.
Market-Orientated Strategies..?
When Influencing Growth and Development?
- Trade liberalisation
- Promotion of FDI
- Removal of government subsidies
- Floating exchange rates
- Privatisation
Interventionist Strategies?
When Influencing Growth and Development?
- Human capital
- Protectionism
- Managed exchange rates
- Infrastructure Development
- Buffer stock schemes - buying excess corn - selling later
Market failure in the financial sector?
- Asymmetric information
- Externalities
- Moral hazard
- Speculation
- Market rigging
Taxation…
.
Macro policies in global policies…
.
