Theme 4 Flashcards
Surplus and Deficit specific to the UK (all structural)
Elasticity of demand
Decline of manufacturing
Growth of emerging markets
Net importer of food and fuel
Lack of competitiveness
Cyclical and structural, long term short term
Cyclical is short term
Structural is long term
Partial auto correction
Exchange rate, pound weakens
Wiced - weak pound imports cheap exports deer
What’s an unbalanced economy reliant on
Imports
Evaluative points for the surplus and deficit
Partial auto correction
Investment and supply side
Capital flows
Financial account
What may the deficit lead to
Structural weakness
Unbalanced economy
Loss of output and employment
Money flowing out
Problems financing debt
Exchange rate pressure
Exchange rate policies
Widec
Interest rates decrease
Buying more foreign currency (weakens the pound)
Why might exchange rate policies not be effective
Liquidity trap
Short and long term - 18 months to be effective
Not a priority compared to inflation
How it impacts other macroeconomic objectives
J curve
Sum of elasticities need to be more than 1
Deficit gets worse before it becomes a surplus
Protectionism and where it can be seen
Import duty - raise price
Embargo - ban on import
Quota - limits on imports
Can be seen in supply side
Retaliation for evaluation of protectionism
Government use subsidies
World trade organisation promote free trade
Reasons for surpluses and deficits
Uneven distribution of natural resources
Differential competitiveness
Exchange rates
Inflation
Investment and long term economic growth
Domestic and government spending
Causes of Current Account Deficit
Poor price - non price competitiveness
Higher inflation than trading partners
Weakness in design
What does a strong exchange rate mean
High currency value
Imports are cheaper
Cyclical values
Over valued exchange rate
Boom in domestic demand
Recession in key export markets
Slump in global prices of exports
Increased demand for imported technology
Structural values
Under investment
Low productivity
High inflation
Inadequate research and development
Innovation
Lower cost competition
Default meaning
We don’t pay it back
UK’s main exports
Machinery
Cars
Transport equipment
Chemicals
Oil
UK’s main imports
Mineral fuels,
Mechanical appliances
Metal
Cars
Pharmaceutical products
Balance of payments meaning
An account showing all of the inflows and outflows of money in a country
Foreign currency positive and negative
Inflow of foreign currency - positive
Outflow of foreign currency - negative
Net primary income
Incomes from interests
Dividends generated from foreign investment
Profits
Balance of trade in good and services
Goods is negative
Services is slightly positive
How to make the balance of payments more balanced
Increase interest rates
Sell bonds to foreign countries
Export more than you import
Protectionism - tariffs, subsidies, tight fiscal, monetary
Absolute advantage
When a country can produce a good more cheaply in absolute terms than another country
Absolute poverty
When people are unable to afford sufficient necessities to maintain life; those on les than $1.90 a day
Aid
When a country voluntarily transfers resources to another or gives loans on a concessionaire basis
Appreciation
An increase in the value of the currency using floating exchange rates
Asymmetric information
When one partly has more knowledge than another, this causes market failure in the financial sector
Automatic stabilisers
Mechanisms which reduce the impact of changes in the economy on national income.
Balance of payments
A record of all financial dealings over a period of time between economic agents of one country and another
Buffer stock systems
When a maximum and minimum price are imposed together in order to bring about price stability
Capital account
A part of the balance of payments, records debt forgiveness, inheritance taxes, transfers of financial assets and sales of assets
Capital expenditure
Government spending on investment goods such as new roads, schools and hospitals, which will be consumed in over a year
Capital flight
When large amounts of money are taken out of the country, rather than being left there for people to borrow and invest
Common market
Members trade freely in all economic resources and impose a common external tariff
Comparative advantage
When a country is able to produce a good more cheaply relative to other goods produced, it has a lower opportunity cost
Currant account
A part of the balance of payments, records payments for the purchase and sale of goods and services as well as incomes and transfers.
Customs union
The removal of all tariff barriers between members and the introduction of a common external tariff
Currant expenditure
General government final consumption plus transfer payments plus interest payments
Cyclical deficit
The part of the deficit that occurs because government spending fluctuates around the trade cycle
Depreciation
A fall in the value of the currency using floating exchange rates
Devaluation
When the currency is decreased against another under a fixed system
Developed country
Countries with a high GDP per capita and a high standard of living
Developing country
Countries with a low GDP per capita and a low standard of living
Discretionary fiscal policy
Deliberate manipulation of government expenditure and taxes to influence the economy, expansionary and deflationary fiscal policy
Economic development
Improvements in living standards
Emerging economies
A country that is growing quickly and has some characteristics of a developed country but is not fully there yet
Exchange rate
The purchasing power of a currency in terms of what it can buy of other currencies
Financial account
A part of the balance of payments, records FDI, portfolio investment and transfer of gold and currency reserves
Financial markets
When buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature
Fiscal deficit
When the government spends more than it receives
Fixed exchange rate
The value of the currency is set against the value of another and that exchange rate does not change
Foreign currency gap
When a country does not export enough to finance the purchase of goods from overseas
Foreign direct investment
When a country does not export enough to finance the purchase of goods from overseas
Free trade
Trade with no barriers or restrictions
Free floating exchange rate
Value of the currency is determined purely by market demand and supply of the currency
Gino coefficient
A measure of income inequality, the ratio of the area between the 45 degree line and the Lorenz curve and the whole area under the 45 degree line
Globalisation
The Godwin got interdependence of countries and the rapid rate of change it brings about
Harrod-domar model
Savings that provide funds that are used for investment, and growth rates depend on the level of saving and the productivity of investment
Human capital
The economic value of an individuals skills, experience, training etc
Human development index
Measures the economy’s development based on income, health and education
J curve
A current account will worsen before it improves following a depreciation of the currency
