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Economics > Theme 4 > Flashcards

Theme 4 Flashcards

1
Q

3 sections of the BoP

A

Current Account, Capital Account, Financial Account

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2
Q

Areas of the current Account

A

Balance of trade in goods, balance of trade in services, net primary income, net secondary income

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3
Q

Areas of the capital account

A

Transfer of ownership of fixed assets, sale/transfer of patents

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4
Q

Areas of the Financial Account

A

Net balance of FDI, balance of banking flows, changes to value of gold reserves

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5
Q

What must the BoP always be?

A

Final value of 0

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6
Q

Reasons for surplus and deficit is

A

Uneven distribution of natural resources, differential competitiveness, inflation, domestic and government spending

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7
Q

Reasons for a current account deficit

A

Poor price and non-price competitiveness, strong exchange rates effecting demand for imports and exports, recession in one or more trade partner countries, volatile global prices

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8
Q

Structural causes of a current account deficit (long-term)

A

Under-investment, relatively low productivity, persistently high relative inflation, inadequate r and d, emergence of lower cost competition

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9
Q

Cyclical causes of a current account deficit

A

Over-valued exchange rate, boom in domestic demand, recession in key export markets, slump in global prices of exports, increased demand for imported technology

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10
Q

Recession

A

2 consecutive quarters of negative growth

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11
Q

Significance of a current account deficit

A

Outflow of AD on circular flow of income, drag in GDP growth, loss of jobs in export sectors, fall in foreign exchange reserves, weakened exchange rate

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12
Q

Difference between Fiscal and Trade deficit

A

Fiscal - government debt, Trade - Current Account deficit

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13
Q

Consequences of a current account deficit

A

Lowers AD, debt burdens, worsens exchange rate

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14
Q

How is Lower AD a consequence of a current account deficit?

A

Lowers demand, which lowers growth and increases unemployment

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15
Q

How are debt burdens a consequence of a current account deficit?

A

To balance deficit, countries must have a financial account surplus. To gain a surplus, countries sell bonds and use hot money, which causes issues as doesn’t help the current account deficit and as debut increases, other countries lose confidence as don’t receive money back

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16
Q

How is a worsening exchange rate a consequence of a current account deficit?

A

Large amount of imports mean more countries gain the pound, so the supply increases which worsens the exchange rate

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17
Q

Expenditure switching policies

A

Exchange rate, protectionism, deflationary, supply-side, government investment in industry

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18
Q

Deflationary Policy

A

Tight Fiscal and Tight Monetary Policy - leads to a drop in import demand

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19
Q

Benefits of Supply-Side Policies

A

Drop in prices, exports more competitive

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20
Q

Methods to increase supply

A

Training, subsidies, education, machinery

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21
Q

3 areas of supply-side policy

A

Increase size of labour force, increase productivity, increase efficiency of business

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22
Q

Issues of tight monetary and tight fiscal policy

A

Conflict of objectives, high consumer and business confidence, output gap ( full employment), inelastic imports

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23
Q

Protectionism

A

Taxes on imports (tariffs), banning imports (embargo’s), only import a certain amount (quota), increase Uk production(domestic subsidies)

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24
Q

Problems of protectionism

A

Other countries will retaliate, non-price factors, inflationary issues, WTO rules, loss of efficiency

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25
Q

Exchange rate policies

A

Loose monetary ( weakening interest rates), selling £ or buying foreign currency, increase money supply ( Quantitative Easing )

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26
Q

Problems of exchange rate policies

A

Liquidity Trap, non-price competition, currency wars

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27
Q

Marshall Learner Condition

A

Devaluation of a currency will only improve BoP if sum of the prices elasticities of its imports and exports are greater than one

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28
Q

J-curve reasonings

A

Long-time change ( buying on a national scale), imports get more expensive before exports get cheaper

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29
Q

Reasons why a current account deficit doesn’t matter

A

Capital flows (improve financial account), partial auto correction ( pound weaken anyway if importing more than exporting) , Internal correction ( investment and supply-side policies)

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30
Q

Reasons why a current account deficit matters

A

Reliance on trade, unbalanced economy, issued financing debt, loss of output and employment, downward exchange rate pressure

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31
Q

Reasons for a Current Account Surplus

A

Export orientated growth, FDI, under-valued exchange rate, productive efficiency, closed economy, new resource discoveries

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32
Q

Consequences of a current account surplus

A

Inflation, financial account deficit, appreciate the exchange rate, reliance on exports, harm international relations

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33
Q

Spot Exchange Rate

A

Rate for a currency at today’s market prices

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34
Q

Forward Exchange Rate

A

Fixing a rate for a currency up until a certain period of time (more businesses)

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35
Q

Bi-Lateral Exchange Rate

A

Rate at which one currency can be traded against another

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36
Q

Floating Exchange Rate

A

Value is determined by demand and supply for the currency

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37
Q

Advantages of a floating exchange rate

A

Stability in Bop, unrestricted foreign exchange, enhance market efficiency, import inflation protected, freedom for domestic monetary policy

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38
Q

Limitations of a floating exchange rate

A

Exposed to volatility, restricted economic growth, loss of exchange rate as policy tool

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39
Q

Fixed Exchange Rate

A

Value of the currency is fixed

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40
Q

Advantages of a fixed exchange rate

A

Doesn’t suffer from volatility, unrestricted export growth, maintain low inflation levels, reinforces gains in comparative advantage, higher confidence for importers/exporters

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41
Q

Limitations of a fixed exchange rate

A

Lack of flexibility to external economic shocks, BoP issues, dependence on reserves, currency could be overvalued

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42
Q

Managed-Floating Exchange Rate

A

When a Central Bank may choose to intervene in the foreign exchange market to affect the value of a currency to meet specific macroeconomic objectives

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43
Q

Advantages of a managed-floating exchange rate

A

Economic stability,monetary autonomy, trade competitiveness, risk diversification, improve export competitiveness, control demand-pull inflation, reduce import prices

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44
Q

Intervention for a depreciation of a currency

A

Expand QE to stimulate money supply and lower bond yields. Government buy assets from overseas, return on FDI falls so countries take money out

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45
Q

Intervention for appreciation of currency

A

Reduce taxes on income from assets to attract overseas investors to buy a currency

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46
Q

Limitations of a managed-floating exchange rate

A

Requires large-scale foreign exchange reserves, bank have no power against global economies, conflict of objectives

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47
Q

Reasons for government spending

A

Efficiency and market failure, equity and equality, macroeconomic management

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48
Q

Current spending

A

General government financial consumption I.e NHS wages, road’s maintenance

49
Q

Transfer Payments

A

Any benefits/pension - transferring payments to reduce inequality

50
Q

Current government expenditure

A

Central government final consumption + debt

51
Q

Crowding out definition

A

Increase in government spending, government sells bonds which private sector buy, to buy back the bonds which come from private investment - money shifts from private to public

52
Q

Crowding in definition

A

Increased government spending, increased confidence, increased private investment

53
Q

Progressive Tax

A

Marginal rate of tax increase as income rises (I.e Income Tax)

54
Q

Proportional Tax

A

Marginal rate of tax is constant leading to a constant average rate of tax ( NICs )

55
Q

Regressive Tax

A

Rate of tax paid falls as income rises ( I.e alcohol duty )

56
Q

Direct Tax

A

Taxes on individuals and companies

57
Q

Indirect Tax

A

Taxes on goods and services

58
Q

Laffer Curve

A

Shows how if taxes is increased too high tax revenue falls as it encourages tax evasion

59
Q

Cyclical Fiscal Balance

A

The size of the fiscal deficit is influenced by the state of the economy ( in a recession, tax revenue falls and transfer payment spending increases ) and vice-versa

60
Q

Structural social deficit

A

Size of the deficit isn’t influenced by the state of the economy ( pension payments increasing due to an ageing population )

61
Q

Uk budget Deficit ( Application )

A

Long-term ( 26% borrowed for 15 years + )
28% of debt linked to inflation
Government never failed to repay a debt
Average return on Uk debt is 17 years ( 10 year more than G7 countries )

62
Q

How is the Uk deficit sustainable?

A

Yield in bonds gone down, government can borrow for 10 years between 0.5 - 1 %

63
Q

Public sector debt

A

Debt owed by central/local government and public corporations

64
Q

Private Sector Debt

A

Debt owed by private businesses and households

65
Q

Problems with high government debt

A

Interest on debt, higher taxes, low confidence, less FDI, worsens exchange rate

66
Q

Solutions to high government debt

A

Raise taxes, spending cuts, privatisation, supply-side policies

67
Q

Reasons a debt isn’t an issue

A

Required to fund critical infrastructure, inevitable when an economy experiences a sever external shock ( Brexit/Covid ), rational to borrow when yields are low, foreign investment on bonds, borrow to stimulate economy

68
Q

Transfer Pricing

A

A method of pricing goods and services transferred within a multinational or trans-national company in order to avoid tax burdens and maximise profits

69
Q

Arms Length Principle

A

Stating that each business in each country should be individual and the profits they state should match the conditions of the country

70
Q

Globalisation

A

The interdependence of world economies for trade

71
Q

Footloose definition

A

When big MNCs move to nations for cheap labour and tax reasons

72
Q

Impact of globalisation on UK

A

Increased employment,increased migration, increased wages, increased choice/availability, increased specialisation, less sustainable

73
Q

Absolute Advantage

A

Being able to produce more of something than another country

74
Q

Comparative Advantage

A

Being able to produce something at a much lower opportunity cost than another country

75
Q

Terms of trade

A

How many exports we have to sell to pay for our imports

76
Q

Terms of Trade equation

A

Index of export prices/Index of import prices x 100

77
Q

Factors influencing cost of imports and exports

A

Exchange rate, inflation, productivity, elasticity

78
Q

Free Trade Area

A

Free trade between members, can have different trade barriers with outside country

79
Q

Customs Union

A

Free trade between members, must have same trade barriers with outside country

80
Q

Common Market

A

Customs union with even more freedom between member countries

81
Q

Full Economic Integration

A

Governed by one body (UK)

82
Q

Monetary Union

A

Share currency, central bank and monetary policies

83
Q

Benefits of a Trading Bloc

A

Economies of scale, all provide different benefits, forces firms to compete, increased FDI

84
Q

ASEAN

A

Economic Union of 10 south-east Asian countries aimed at promoting economic growth and regional stability amongst its members

85
Q

Disadvantages of a trading Bloc

A

Competition for weaker members, interdependence, loss of sovereignty

86
Q

World Trade Organisation

A

Seeks to reduce trade barriers, create world trade rules, resolve disputes

87
Q

Positives of the WTO

A

Promotes free trade, provides trade stability, promotes economic development, allows developing nations to benefit from economies of scale, promotes fair competition

88
Q

Protectionism

A

Protecting your domestic markets from foreign goods or services

89
Q

Tariff

A

An excise tax on specific imported goods

90
Q

Gina-Coefficient

A

Area under A divided by Area under A+B ( larger find-coefficient, more inequality )

91
Q

Harold Domar Model

A

Increased investment - Higher capital stock - Higher economic growth - Increased savings

92
Q

Capital-Output Ratio

A

A lower capital-output ratio means investment is more efficient and the growth rate will be higher

93
Q

Criticisms of the Harold- Domar Model

A

Difficult to increase savings, assumes the existence of a reliable finance and transport system, increase in inequality

94
Q

International Aid

A

Any form of needed assistance by one country, or multinational institution, to another

95
Q

Reasons for Aid

A

Reduces inequality, moral responsibility, future trade opportunitws

96
Q

Debt Relief

A

Cancelling the debt of developing countries

97
Q

HIPC

A

Heavily indebted poor countries initiative ( aid when countries debt to government revenue exceeds 280%)

98
Q

Problems of debt relief

A

Encourages countries to borrow and not pay back, no legal obligation on private creditors to cancel debt

99
Q

The Lewis model

A

Movement of surplus unproductive labour from rural areas to cities - movement to a services related economy

100
Q

Micro finance

A

Provision of small scale loans to promote enterprise ( often given to women )

101
Q

Benefits of micro finance

A

Entrepreneurship, tax revenue, reduces inequality, improved rural economy, job opportunities

102
Q

Problems with micro finance

A

High interest rates, money wasted if lack business skills, opportunity cost, banks lose money, small loans

103
Q

FDI

A

When a global firm sets up a factory or makes an ownership investment in another country

104
Q

Problems of FDI

A

Use up resources, reduces competition ( monopoly power ), over dependence on FDI, exploitation of workers

105
Q

The World Bank

A

An international financial institution that provides loans to countries of the world for capital programs

106
Q

IDA

A

International Development Association - works with poorest countries ( average GDP under 888 dollars a year )

107
Q

How the World Bank helped Africa

A

Addressing climate crisis, infrastructure investment, food aid, regional integration, education aid

108
Q

Criticisms of the World Bank

A

Not-elected, corruption, long-term strategy, over dependence on loans

109
Q

Measures the IMF take

A

Cut pensions, raise income tax, raise retirement age, decrease minimum wage

110
Q

Criticisms of the IMF

A

Conditions of loans, exchange rate reforms, privatisation reforms, lack of free market, moral hazard

111
Q

Red Cross

A

Respond to international emergencies, provide short-term relief, humanitarian aid

112
Q

Benefits of red aid

A

Experienced and responsive, no political agenda

113
Q

Criticisms of red aid

A

Small amount compared to UN, patronising, unelectedm

114
Q

Financial market

A

Any place or system that provides buyers and sellers their means to trade ( Bank of England )

115
Q

Role of Financial Markets

A

Facilitate savings, lend to businesses and individuals, facilitate the exchange of goods/services, provide forward market in currencies, provide a market for equities

116
Q

Market failure in a financial market

A

Asymmetric information, moral hazard ( banks get bailed out ), adverse selection ( selling to unworthy buyers), market rigging, externalities, speculation

117
Q

Financial Conduct Authority ( FCA )

A

Regulators in financial market, micro-credential ( protects consumers ), bans collusion, promotes competition in banking, bans misleading products/adverts

118
Q

Prudential Regulation Authority

A

Micro-credential regulators, maintain stability of banks, monitor management of bank-taking risk,specify requirements banks to meet

119
Q

Financial Policy Committee (FPC)

A

Manages entire financial sector, advises government of upcoming risks, carries out stress tests

Economics (7 decks)

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