Theme 4 Flashcards
Explain the components of the balance of payments
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
Explain an export
Goods and services sold to foreign countries and are positive in the balance of payments
Explain an import
Goods and services bought from foreign countries and are negative on the balance of payments
Explain the current account
Includes all economic transactions between countries such as the trade in goods and services, income and current transfers.
Explain the financial account
It involves investment such as direct investment, portfolio investment and reserve assets
Explain globalisation
The interdependence of world economies for trade
State why globalisation has come about
Better transport systems
More free trade agreements
The internet
The pursuit of profit
Impact of globalisation on employment
Makes it easier for migrants to enter and work in the Uk
Less unemployment as theirs more migrants to fill jobs
Impacts of globalisation on worker wages
Allows trade liberalisation so it allows business owners to earn more
Impact of globalisation on consumer choice, price and availability
Increased choice of consumer goods
Increased competition and lower prices
Impact of globalisation on producer specialisation
Can benefit from being able to produce at a comparative advantage
Impact of globalisation on producer footloose locations
Where big companies move to other nations for less tax and cheaper labour
Impact of globalisation on environmental and social concerns
Ships and aircraft’s used to transport goods cerastes a lot of pollution
Terms of trade calculation
Export price index
—————————. X100
Imports price index
Factors influencing costs of imports and exports
Exchange rate
Inflation
The added value
Inelastic or elastic goods
Explain terms of trade
How many exports the country has to sell to pay for its imports
Explain trading blocs
Where two or ore countries come together to create trading opportunities with one another
Explain free trade area
A group of countries that have agreed to mutually lower or eliminate trade barriers for trade
Explain customs unions (trade)
A group of countries that apply one common system of procedures, tules and tariffs for imports and exports
Explain common market
An agreement between two or more countries, to remove all trade barriers between themselves
Explain economic Union
An agreement between two or more nations to allow good, services, money and workers to move over borders freely
Explain advantages of trading blocs
Forces firms to compete with each other
Economies of scale
Increased foreign direct investment
Trade effect.
Explain disadvantages of trading blocs
Competition for weaker members
Interdependence
Loss of sovereignty
Insular (trade creation and trade diversion)
Explain causes of deficits and surpluses on the current account
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
State the expenditure switching policies
Exchange rate policies
Protectionism
Deflationary policy
Supply side policies
Explain why some countries may have a surplus
Export orientated growth
FDI - foreign direct investment
Under valued exchange rate
High domestic savings
Closed economy
Strong income from overseas investment
Explain demand side causes of current account surpluses
High income abroad
Low income at home limits imports
Weak exchange rate
Explain supply side causes of a current account surplus
Low relative inflation
Low unit labour costs
Strong investment
Gains in comparative advantage
New resource discoveries
Explain consequences of current account surpluses
Economic growth creating inflationary pressure
Appreciation of the exchange rate
Financial account deficit
Can harm international relations
Signs of an unbalanced economy
Explain a spot exchange rate
The rate for a currency at todays market prices
Explain a forward exchange rate
The delivery of currency at a specified time in the currency at a specified time in the future at an agreed rate (hedging)
Explain a bit-lateral exchange rate
The rate at which one currency can be traded against another
Explain a floating exchange rate
The value is determined by demand and supply
Explain advantages of a floating exchange rate
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
Explain drawbacks of a floating exchange rate
Exchange rate volatility
Currency risk
Inflation pass-through
Loss of exchange as a policy tool
Explain a fixed exchange rate
One that is fixed by the central bank
Explain advantages of a fixed exchange rate
Price stability - some flexibility permitted
Trade confidence
Reduced exchange rate risk
Foreign investment is easier and less risky
Explain drawbacks of a fixed exchange rate
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
Explain a managed floating exchange rate
When the central bank may choose to intervene in the foreign exchange markets to affect the value
Explain advantages of a managed floating exchange rate
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
Explain disadvantages of a managed floating exchange rate
Can lead to manipulation of the exchange rate
Can be unpredictable
Managing the exchange rate can be costly, it may contrast other macroeconomic objectives
Explain how to intervene a managed floating exchange rate (QE)
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
the central bank may bring about deprecation to
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
The central bank may bring about appreciation of the currency to
Curb demand-pull inflationary pressure
Reduce the price of imported capital and technology
State reasons for government spending
Efficiency and market failure
Equity and equality
Macroeconomic management
Current government expenditure equation
Debt + general government final consumption
Explain crowding out
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
State how to improve living standards for low income households
Increase personal allowance
Transfer payments
Increase minimum wage
Tax thresholds
Explain a progressive tax
The marginal rate of tax rises as income rises
Explain a proportional tax
The marginal rate of tax is constant, leading to a constant average rate of tax
Explain a regressive tax
The rate of tax paid falls as income rises
Explain a direct tax
Levied on individuals and companies
Explain an indirect tax
Levied on goods and services
Explain the laffer curve
Once the tax rate exceeds a certain amount it could lead to a reduction in tax revenues
Reason is why tax revenues fall if the rate increases
Tax avoidance
Tax evasion
Brain drain
Disincentive effects in the labour market
Explain an economics boom ( high inflation and confidence)
Lower government spending
Increase taxes
Lowers the deficit
Explain an economic recovery (low confidence and inflation)
Reduction in taxes
Increased government spending
Increases the deficit
Explain discretionary fiscal policy
The government manipulate the tax and spending to influence the economy
explain the cyclical fiscal balance
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
Actual deficit equation
Cyclical deficit + structural deficit
Explain structural fiscal balance
A structural factor might be long-term effects of an ageing population or perhaps the corporation tax avoidance
Not related to the economy
Explain benefits of being a member of the EU
Economies of scale
Enables free moving of goods, services, money and people
Greater consumer protection
Easier to source cheaper raw materials
Explain drawbacks of being a member of the EU
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
Explain the world trade organisation
An organisation that seeks to reduce trade barriers, create world trade rules and solve disputes
Explain benefits of the world trade organisation
Helps promote peace
Trade stimulates economic growth
Encourages good government
Provides more choice of products and quality
Disputes are handled constructively
Removes discrimination
Transparency
Explain drawbacks of the world trade organisation
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
Explain protectionism
Protecting your domestic markets from foreign goods and services, usually done through tariffs, quotas, embargo’s, subsidies, quality standards and bureaucracy
Explain quotas
Allowing in a certain amount of imports
Explain benefits of quotas
Boosts domestic production by restricting foreign competition
Benefits low income families
Greater competition so better quality
Improves balance of payments
Explain drawbacks of quotas
Foreign countries could retaliate
A lot of bureaucracy
Higher prices for consumers
Explain an embargo
A ban on goods coming in from other countries
Explain the Harod Domar Model
Increased saving
Increased investment
Higher capital stock
Higher economic growth
Explain the warranted growth rate
This is the growth rate at which all saving is absorbed into investment
Explain debt relief
Cancelling debt of countries because they can’t pay. It
Explain the Lewis model
Moving surplus unproductive labour from rural areas into the city
Explain advantages of the Lewis model
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
Explain disadvantages of the Lewis model
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
Explain public sector debt
Owed by central and local government and by public corporations
Explain private sector debt
Owed by private businesses and households
State problems with high government debt
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
State how to solve high government debt
Spending cuts
Tax rises
Reduced tax avoidance / evasion
Expansionary monetary policy
Efficiency policies in the public sector
Privatisation
Depreciation policies
Evaluation of high government debt
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
