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Economics > Theme 4 > Flashcards

Theme 4 Flashcards

1
Q

Explain the components of the balance of payments

A

A record of all financial transactions made between consumers, firms and the government from one country with other countries. States how much is spent on imports and exports

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2
Q

Explain an export

A

Goods and services sold to foreign countries and are positive in the balance of payments

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3
Q

Explain an import

A

Goods and services bought from foreign countries and are negative on the balance of payments

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4
Q

Explain the current account

A

Includes all economic transactions between countries such as the trade in goods and services, income and current transfers.

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5
Q

Explain the financial account

A

It involves investment such as direct investment, portfolio investment and reserve assets

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6
Q

Explain globalisation

A

The interdependence of world economies for trade

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7
Q

State why globalisation has come about

A

Better transport systems
More free trade agreements
The internet
The pursuit of profit

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8
Q

Impact of globalisation on employment

A

Makes it easier for migrants to enter and work in the Uk
Less unemployment as theirs more migrants to fill jobs

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9
Q

Impacts of globalisation on worker wages

A

Allows trade liberalisation so it allows business owners to earn more

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10
Q

Impact of globalisation on consumer choice, price and availability

A

Increased choice of consumer goods
Increased competition and lower prices

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11
Q

Impact of globalisation on producer specialisation

A

Can benefit from being able to produce at a comparative advantage

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12
Q

Impact of globalisation on producer footloose locations

A

Where big companies move to other nations for less tax and cheaper labour

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13
Q

Impact of globalisation on environmental and social concerns

A

Ships and aircraft’s used to transport goods cerastes a lot of pollution

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14
Q

Terms of trade calculation

A

Export price index
—————————. X100
Imports price index

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15
Q

Factors influencing costs of imports and exports

A

Exchange rate
Inflation
The added value
Inelastic or elastic goods

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16
Q

Explain terms of trade

A

How many exports the country has to sell to pay for its imports

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17
Q

Explain trading blocs

A

Where two or ore countries come together to create trading opportunities with one another

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18
Q

Explain free trade area

A

A group of countries that have agreed to mutually lower or eliminate trade barriers for trade

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19
Q

Explain customs unions (trade)

A

A group of countries that apply one common system of procedures, tules and tariffs for imports and exports

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20
Q

Explain common market

A

An agreement between two or more countries, to remove all trade barriers between themselves

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21
Q

Explain economic Union

A

An agreement between two or more nations to allow good, services, money and workers to move over borders freely

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22
Q

Explain advantages of trading blocs

A

Forces firms to compete with each other
Economies of scale
Increased foreign direct investment
Trade effect.

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23
Q

Explain disadvantages of trading blocs

A

Competition for weaker members
Interdependence
Loss of sovereignty
Insular (trade creation and trade diversion)

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24
Q

Explain causes of deficits and surpluses on the current account

A

Appreciation of the currency - a stronger currency means imports are cheaper and exports are more expensive
Economic growth - when income increases, demand increases so import demand increases consequently
More competitive- if a country is more internationally competitive with lower inflation exports will increase
Deindustralisation - manufacturing sector has been declining since 1970
Membership of trade union - Uk has negative current transfers since fees are paid for membership of the EU

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25
Q

State the expenditure switching policies

A

Exchange rate policies
Protectionism
Deflationary policy
Supply side policies

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26
Q

Explain why some countries may have a surplus

A

Export orientated growth
FDI - foreign direct investment
Under valued exchange rate
High domestic savings
Closed economy
Strong income from overseas investment

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27
Q

Explain demand side causes of current account surpluses

A

High income abroad
Low income at home limits imports
Weak exchange rate

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28
Q

Explain supply side causes of a current account surplus

A

Low relative inflation
Low unit labour costs
Strong investment
Gains in comparative advantage
New resource discoveries

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29
Q

Explain consequences of current account surpluses

A

Economic growth creating inflationary pressure
Appreciation of the exchange rate
Financial account deficit
Can harm international relations
Signs of an unbalanced economy

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30
Q

Explain a spot exchange rate

A

The rate for a currency at todays market prices

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31
Q

Explain a forward exchange rate

A

The delivery of currency at a specified time in the currency at a specified time in the future at an agreed rate (hedging)

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32
Q

Explain a bit-lateral exchange rate

A

The rate at which one currency can be traded against another

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33
Q

Explain a floating exchange rate

A

The value is determined by demand and supply

34
Q

Explain advantages of a floating exchange rate

A

Stability in the balance of payments
Foreign exchange is unrestricted
Market efficiency enhances
Act as a shock absorber if theirs an economic crisis
Reduced need for currency reserves
Partial automatic correction for a trade deficit
Less opportunity for currency speculation

35
Q

Explain drawbacks of a floating exchange rate

A

Exchange rate volatility
Currency risk
Inflation pass-through
Loss of exchange as a policy tool

36
Q

Explain a fixed exchange rate

A

One that is fixed by the central bank

37
Q

Explain advantages of a fixed exchange rate

A

Price stability - some flexibility permitted
Trade confidence
Reduced exchange rate risk
Foreign investment is easier and less risky

38
Q

Explain drawbacks of a fixed exchange rate

A

Lack of flexibility
Loss of monetary policy autonomy
Balance of payments issues - must be maintained through fiscal policy or controls on capital flows
Speculative attacks - if the currencies overvalued
Dependence on reserves - need to have sufficient foreign exchange reserves

39
Q

Explain a managed floating exchange rate

A

When the central bank may choose to intervene in the foreign exchange markets to affect the value

40
Q

Explain advantages of a managed floating exchange rate

A

Provides a balance between the extremes of a fixed and a floating exchange rate
Allows for some flexibility in monetary policy
Act as a buffer against speculative attacks against the currency

41
Q

Explain disadvantages of a managed floating exchange rate

A

Can lead to manipulation of the exchange rate
Can be unpredictable
Managing the exchange rate can be costly, it may contrast other macroeconomic objectives

42
Q

Explain how to intervene a managed floating exchange rate (QE)

A

Government buys bonds back to stimulate the money supply
Lowers the bond yield because the bond price rises
Foreign investors take money out (hot money)
Increase supply of pound
Depreciation of the exchange rate

43
Q

the central bank may bring about deprecation to

A

Improve the balance of payments
Reduce the risk of a deflationary recession
Rebalance the economy away from domestic consumption towards exports and investments
Selling foreign currencies overseas

44
Q

The central bank may bring about appreciation of the currency to

A

Curb demand-pull inflationary pressure
Reduce the price of imported capital and technology

45
Q

State reasons for government spending

A

Efficiency and market failure
Equity and equality
Macroeconomic management

46
Q

Current government expenditure equation

A

Debt + general government final consumption

47
Q

Explain crowding out

A

In a recession
Government spending increases
Sell bonds
Private sectors buys bonds
Shifts investment from public sector to private sector
Government has to pay interest on yield so it raises taxes

48
Q

State how to improve living standards for low income households

A

Increase personal allowance
Transfer payments
Increase minimum wage
Tax thresholds

49
Q

Explain a progressive tax

A

The marginal rate of tax rises as income rises

50
Q

Explain a proportional tax

A

The marginal rate of tax is constant, leading to a constant average rate of tax

51
Q

Explain a regressive tax

A

The rate of tax paid falls as income rises

52
Q

Explain a direct tax

A

Levied on individuals and companies

53
Q

Explain an indirect tax

A

Levied on goods and services

54
Q

Explain the laffer curve

A

Once the tax rate exceeds a certain amount it could lead to a reduction in tax revenues

55
Q

Reason is why tax revenues fall if the rate increases

A

Tax avoidance
Tax evasion
Brain drain
Disincentive effects in the labour market

56
Q

Explain an economics boom ( high inflation and confidence)

A

Lower government spending
Increase taxes
Lowers the deficit

57
Q

Explain an economic recovery (low confidence and inflation)

A

Reduction in taxes
Increased government spending
Increases the deficit

58
Q

Explain discretionary fiscal policy

A

The government manipulate the tax and spending to influence the economy

59
Q

explain the cyclical fiscal balance

A

The size of the fiscal deficit is influenced by the state of the economy
In a boom, tax receipts are relatively high and spending on unemployment benefit is low

60
Q

Actual deficit equation

A

Cyclical deficit + structural deficit

61
Q

Explain structural fiscal balance

A

A structural factor might be long-term effects of an ageing population or perhaps the corporation tax avoidance
Not related to the economy

62
Q

Explain benefits of being a member of the EU

A

Economies of scale
Enables free moving of goods, services, money and people
Greater consumer protection
Easier to source cheaper raw materials

63
Q

Explain drawbacks of being a member of the EU

A

Potential for brexit like scenarios
Loss of sovereignty as you have to adhere to EU laws and regulations
People leave as they see better opportunity elsewhere

64
Q

Explain the world trade organisation

A

An organisation that seeks to reduce trade barriers, create world trade rules and solve disputes

65
Q

Explain benefits of the world trade organisation

A

Helps promote peace
Trade stimulates economic growth
Encourages good government
Provides more choice of products and quality
Disputes are handled constructively
Removes discrimination
Transparency

66
Q

Explain drawbacks of the world trade organisation

A

Criticised for trade rules that are unfavourable to developing countries
May prevent developing economies developing their infant industries
Being overshadowed by new TIPP trade rules

67
Q

Explain protectionism

A

Protecting your domestic markets from foreign goods and services, usually done through tariffs, quotas, embargo’s, subsidies, quality standards and bureaucracy

68
Q

Explain quotas

A

Allowing in a certain amount of imports

69
Q

Explain benefits of quotas

A

Boosts domestic production by restricting foreign competition
Benefits low income families
Greater competition so better quality
Improves balance of payments

70
Q

Explain drawbacks of quotas

A

Foreign countries could retaliate
A lot of bureaucracy
Higher prices for consumers

71
Q

Explain an embargo

A

A ban on goods coming in from other countries

72
Q

Explain the Harod Domar Model

A

Increased saving
Increased investment
Higher capital stock
Higher economic growth

73
Q

Explain the warranted growth rate

A

This is the growth rate at which all saving is absorbed into investment

74
Q

Explain debt relief

A

Cancelling debt of countries because they can’t pay. It

75
Q

Explain the Lewis model

A

Moving surplus unproductive labour from rural areas into the city

76
Q

Explain advantages of the Lewis model

A

Incentive to invest into education
Better use of labour
More government revenue through taxes
Enhances productivity so more economic growth
Demonstrates the path from agriculture to industry which means more money for the country
Organic growth
Long-term solution
Attracts FDI

77
Q

Explain disadvantages of the Lewis model

A

May not have the infrastructure to facilitate the amount of people
So,em people may not want to move
Less food if less people in rural areas
Neglects international trade
You still need rural workers
High cost involved
Over populated cities
Workers are finite
Time lag

78
Q

Explain public sector debt

A

Owed by central and local government and by public corporations

79
Q

Explain private sector debt

A

Owed by private businesses and households

80
Q

State problems with high government debt

A

High interest payments
Higher taxes / lower spending in the future
Crowding out
Worse structural deficit
Rising interest rates
Negative impact on exchange rates
Government have to borrow more from the private sector
People will invest abroad instead
Reduced confidence in the economy
Not sustainable
Who will pay for the burden

81
Q

State how to solve high government debt

A

Spending cuts
Tax rises
Reduced tax avoidance / evasion
Expansionary monetary policy
Efficiency policies in the public sector
Privatisation
Depreciation policies

82
Q

Evaluation of high government debt

A

Borrowing is required to fund critical infrastructure
Severe external shocks
It is rational to borrow to invest when market bond yields are low
Risk of crowding out is low if bonds remain attractive to overseas investors
Modern monetary theory
Can stimulate economy by self financing via higher tax revenues
Depends on value judgements on public services

Economics (4 decks)

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