Theme 4 Flashcards
Globalisation
The ever-increasing integration of countries around the world. Includes:
Trade (visible and invisible), migration, ideas/knowledge, financial markets, FDI, global brands
Arises from growing world markets and increasing international trade and entails increasing interdependence between countries
Why has globalisation increased
Developments in technology (transport and communications) has enabled fast and 24/7 global communication - use of containerisation
Rise of social media somewhat makes national boundaries irrelevant
Rise of electronic payment systems
Increasing capital mobility
Increased and freer trade (WTO and trading blocs)
Emergence of M/TNCs (Increase in FDI)
IMF
Founded by Keynes + White, 1944
Supports economic policies that promote financial stability and monetary cooperation
World Bank
Founded by Keynes + White, 1944
Provides loans and grants to the government of low and middle income countries for the purpose of pursuing capital projects
Impact of globalisation on countries and governments
Rising incomes from new jobs created → rising tax revenue
Economic growth and improved SoL
Better quality jobs due to MNC investment
Potentially improved BoP
Increased migration to where the new jobs are created, skills gaps may be filled
Reduced poverty / inequality
Decline in traditional industries leading to structural unemployment
Impact of globalisation on consumers
Increased choice and quality of jobs
Increased choice and quality of goods and services
Lower prices
Potentially improved infrastructure
May help lift people out of poverty / increase SoL
Income may not be equally distributed across the population
May lead to a reduction in locally produced goods
Impact of globalisation on producers
Lower costs as producers can access materials from a range of countries
Increased competition leads to producers aiming for EoS (may arise from increased sales) and MES
Businesses can benefit from production in low cost countries
Greater competition
Businesses may gain poor reputation due to ethical/environmental concerns
Greater interdependence between countries can make businesses vulnerable to external shocks
Impact of globalisation on workers
Jobs may be more diverse and fulfilling than previous jobs
Potentially better jobs and pay is likely to be higher
Higher economic growth → rising employment → increased wages → improved living standards
Skills and technology transfer
Can cause structural unemployment (mining in UK)
Exploitation by some MNCS - conditions may be poor
Specialisation
Occurs when an economy focusses on a narrower range of products
Economies make the most of their by concentrating on what they do best - free trade enables this
Advantage can be enhanced by EoS
Absolute advantage
A country can produce a good or service at a lower cost than another
Comparative advantage
Helps explain the benefits of specialisation and trade between individuals, firms, or countries
Arises when one country can produce a good at a lower opportunity cost
Introduced by David Riccardo in 1800s
Overall output can be increased if individuals specialise in producing the products they have a comparative advantage
Assumptions of comparative advantage model
Assumers consumers will always have perfect knowledge/know what the lowest price is
Assumes there is no transport costs
Rates of inflation ignored
Discounts different benefits to products - brand loyalty, quality - non-price competitiveness ignored
Exchange rate movements ignored
R+D investment ignored
Assumes goods are homogenous
No barriers to trade
Only two countries producing two goods
Perfect competition
No externalities
Assumes all factors are perfectly mobile between production of two goods
Advantages of country specialisation / comparative advantage
Higher exports
Greater choice of higher quality products
Prices are likely to be lower
Lower costs may lead to further comparative advantage + consumers benefit from lower prices
Increases productivity and living standards across the world
Competition acts as incentive to minimise costs which leads to lower prices
Deeper specialisation which could lead to EoS
Disadvantages of country specialisation / comparative advantage
Potentially increased risk as all resources are directed towards one or two areas
Increase in structural unemployment when demand for a good falls / global patterns change
May suffer from resource depletion
Increased CO2 emissions due to additional transportation
Too risky to become wholly dependent on another country for strategic industries
Not every country benefits to the same extent
Limitations of comparative advantage
Unrealistic assumptions
Ignores EoS
Ignores non-economic factors - strategic and national security concerns
Long term theory which may not explain SR fluctuations in trade patterns
Distributional effects - may benefit a country as a whole, but it doesn’t show benefits to individuals
Patterns of trade
Reflects the nature of trade between countries by considering their imports and exports
Developed countries can export high-value services and import low value goods (vice versa for developing countries)
Trading blocs impact patterns of trade
Supply chains where different components of one product are made in different countries - intra-industry trading
China and patterns of trade
Moving from low-value to high-value goods - going up the value chain
Countries like Bangladesh now have a comparative advantage in low value goods such as textiles
Factors affecting world trade - comp/absolute advantage
CA impacts the pattern of trade as countries will export more of the goods that they are specialised in
Advanced countries tend to specialise in hi-tech industries whereas developing economies tend to specialise in land/labour intensive production
Factors affecting world trade - emerging economies (BRICS)
Experienced rapid economic growth in 2000s, closing gap on developed economies
They have now shifted into sectors that were previously the province of advanced economies, wile the advanced economies have shifted into service/quaternary sector
Emerging economies have increased their share of world exports (33%-48%, 1990-2019) and imports (42%-58%) which has changed trade patterns
Factors affecting world trade - trading blocs and bilateral agreements
Trading blocs encourage trade between member countries (EU -27 members)
Trade patterns grow within trading blocs as trade diverts to countries in the bloc
Europe accounts for 38% of global trade
Factors affecting world trade - changes in relative exchange rate
If the £ strengthens, you can buy more foreign goods but for other countries, our goods become dearer
Over time, exchange rates adjust to maintain relative international competitiveness
Terms of trade
Relationship between the prices at which a country sells its exports and the prices paid for its imports - the amount of imports a country can buy with a unit of export
Measured with a weighted index
(Index of export prices/index of import prices) x 100
If export prices increase, there is an improvement in ToT - a unit of export buys relatively more imports (vice versa for trade deterioration)
SR influences on ToT and impacts
Changing demand for exports, perhaps due to changing preferences (leads to increased price)
Different inflation rates in trading partners (If UK has higher inflation than another country, the price of its exports would increase)
Appreciating exchange rates (if the £ becomes more valuable the price of exports would increase (may lead to reduced demand for exports)
LR influences on ToT and impacts
Competitiveness of firms (if a business improves productivity then it is likely to reduce costs of production and prices of exports may be reduced
Changes in income (could lead to consumers purchasing different types of goods e.g. increase demand for tourism if income rises
Is improvement in ToT always good
If ToT have an improvement due to higher relative inflation, there may be a decrease in demand (depending on PED) from other countries for exports. Decrease in AD which may have contractionary effects on economy and reduce inflation but also negative growth and perhaps job loss
Appreciation of exchange rate - £ becomes stronger may have negative impact on UK firms as cheap imports into UK and less competitive global exports (may incentivise innovation and productivity)
Increased demand for goods and services (increased demand means increased price - likely to be beneficial ToT → increase in revenue for firms
Benefits of EU using the Euro
Convenience - no exchange rate
Stability + certainty - not at risk of exchange rate volatility
Increase in FDI as businesses outside EU would benefit from moving operations into EU
Increased exports -Ireland has experienced 5% growth per year in 2010s
Trading Blocs
An agreement between two or more countries that promotes trade between member states. Through reducing protectionism, aim is for creation of trade and integration between economies
Free trade
No barriers to trade
Why has international trade increased
Reduction of trade barriers.
Increasing FDI
Political change - collapse of the Soviet Empire
BRICS
Improvement in communications and transportation links
Preference area
Members offer preferential i.e low tariffs but retain independent policies to non-member states
Free trade area
No trade barriers between member states but independent trade policies to non members
Common market
No trade barriers between member states and a common trade policy to non member states
Customs union
Free movement for all FoPs, such as labour and capital. Plus common policies
In EU can work in different countries with no additional paperwork
Economic monetary union
Members adopt a single currency (plus single official interest rate)
EU is a customs and economic monetary as some countries don’t adopt Euro
Advantages of trading blocs
Increased trade between member countries due to reduced barriers to trade - job creation → disposable income → increased MPC → economic growth
Beneficial for smaller countries that may not have bargaining power
Pooling resources and expertise (technology and skills transfer) can lead to EoS - increase in global market competitiveness
Increase in consumer surplus from lower prices
Encourages FDI
Increased mobility of labour (customs union) can fix skills gaps
Disadvantages of trading blocs
Trade diversion occurs when member countries shift trade from non-member countries, even if the non-member countries are more efficient producers
Increased dependency on member countries making them vulnerable to economic + political shocks (one country going into recession may cause others to do so)
Can lead to a loss of national sovereignty - may have to give up some control over trade policy
Regulations on labour market may make country less globally competitive
No protection for domestic firms may lead to structural unemployment
Advantages of monetary union
Monetary efficiency encourages trade - gains from reduced transaction costs and reduction uncertainty (no exchange rate)
May lead to increased trade
Price transparency (fuller information) for consumers
Increase in attractiveness for FDI because of greater stability in trade
Disadvantages of monetary union
Loss of independent monetary policy (particularly important that the economic cycles of economies are well synchronised)
Loss of exchange rate flexibility
Cost of leaving is very high
Trade creation
Occurs when there is an increase in the total amount of goods + services traded because of reduced trade restrictions within a trading bloc. Typically an increase in trade caused by moving from a high cost producer to lower cost cost one. Trade creation stimulates an increase in trade within the customs union and ought to lead to a more efficient allocation of resources leafing to higher welfare
Trade diversion
Occurs when a trading bloc reduces imports from non-member countries, enabling businesses within member countries to increase sales inside the bloc. Will typically have the effect of diverting trade away from lower cost / more efficient countries potentially harming welfare
World Trade Organisation
An international, multi-lateral organisation that governs global trade
Main goal is to ensure trade in goods + services flows freely
Aims to facilitate the reduction of protectionism / trade liberalisation
164 member countries
98% of trade in 2014
Main functions of WTO
Administering trade agreements - trade liberalisation
Dispute resolution
Monitoring trade policies
Technical assistance + training - support to developing countires
Promoting trade negotiations
US - China WTO dispute
US + China disputed over tariffs and trade practices
US imposed tariffs on Chinese goods which China argued violated WTO rules
Centres around unfair trade practices, intellectual property rights, use of national security as a justification for trade measures
Dispute still ongoing from 2018 highlights complexities of international trade agreements
Benefits of WTO
Access to markets through negotiated trade agreement, reducing tariffs + trade barriers
Dispute resolution - trade conducted fairly
Trade policy transparency
Technical assistance - helps countries build capacity to engage in international trade effectively
Promoting economic growth by facilitating trade
Rules-based system of the WTO helps create a stable, predictable trading environment
Trade simpler for businesses, cutting company costs and increasing confidence which may mean more job opportunities
Free trade cuts the cost of living
Provides more choice of products and qualities
Drawbacks of WTO
Loss of sovereignty
Vulnerability to global market fluctuations
Disparities in power - developed countries may have more influence in negotiations
Compliance costs
Trade imbalances due to increased competition from foreign goods
Rules can limit countries ability to respond swiftly to changing economic circumstances
Domestic resistance due to decrease in protectionism
Failure to tackle ethical/environmental issue
Developing countries need some trade protection to be able to develop new industries - infant industry argument
Disputes take a long time to resolve
Protectionism
The act of guarding a country’s businesses from foreign competition, by imposing restrictions on free trade
Reasons for protectionism
Reduce trade deficit
Protect infant/strategic industries
Retaliation
Protect jobs
Raise government tax revenue (in SR)
Response to dumping
Dumping
Stockpile of old iPhones being sold at below cost in developing nation to get rid of them
Tariffs
A tax imposed on imported goods. The effect will be to raise the price to the consumer, leading to a fall in demand. This may mean that consumer will switch consumption from imports to domestically produced substitutes
Arguments for tariffs
To protect strategic industries or sectors from foreign competition
To protect jobs maybe in struggling or less efficient industry - sunset industries (however this is likely to be just putting off the inevitable and certainly goes against the theory of comparative advantage)
- To raise tax revenue
- To deter dumping
- Infant industry argument - if protected at the start, industries may be able to grow and reap benefits of EoS and compete effectively in the LR
Arguments against tariffs
- Reduction in choice for UK consumers and increase in price - welfare loss for consumers
- May increase revenues but likely to cause retaliation from the exporting country
- May protect UK jobs but likely to be limited if firms don’t become competitive globally. This may just delay the inevitable structural change that is necessary
- X-inefficiency
- May have minimal effect if an imported good is price inelastic
Quota
Limit on the total quantity of a product that can be supplied to a market. An import quota therefore restricts the supply of an imported product. Price is likely to rise and black markets may develop. Quotas limit market access to imported goods
X-inefficiency in tariffs and quotas
Firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary
Quotas and tariffs can lead to x-inefficiency in domestic firms and keep workers in unproductive sectors where the country doesn’t have a comparative advantage → deadweight loss
Protectionist policy - producer subsidies
Payment by the government to help domestic businesses become more competitive
Encourages production. However, unlike a tariff, consumers will still be able to purchase at world price
Likely to be ↓ dependence on imported goods
Government has to pay for this and this is an opportunity cost
Subsidy may lead to x-inefficiency as domestic firms become complacent due to ↓ competition
May also encourage a surplus to be produced
Protectionist policy - non tariff barriers
Or technical barriers to trade
Any regulation, standard, or procedure that could make exporting goods to another country more difficult
Safety/product standards - putting stringent standards onto imported goods and deterring imports
If standards are set so high it may mean that exporters cannot meet those standards.
China ruled all avocados coming from Kenya had the be frozen to -30 degrees and peeled
Fruit from North Macedonia → Serbia are subject to customs + cleanliness. Long wait times at the border which means fruit may deteriorate
Undervalued exchange rate
Keeping the exchange rate undervalued:
China sets an artificially low exchange rate. This makes imports more expensive and exports cheaper. Therefore Chinese-made goods would be more competitive in both domestic + foreign markets
Impact of protectionism on consumers
Generally likely to be worse off. Depending on the type it may reduce consumer surplus, choice and ↑ prices. May result in ↓ living standards as ↑ prices mean less disposable income for other products.
There may be a loss of allocative efficiency. However may benefit from ↑ gov. tax revenue or potentially increased jobs
Impact of protectionism on producers
Gain due to producer surplus. Demand may transfer from the more expensive imports to relatively cheaper domestic goods. Not guaranteed to be price competitive in LR due to complacency or lack of innovation. There may be a loss of productive efficiency and a lack of incentive to innovate.
Impact of protectionism on government
May gain tax revenue in the SR which may benefit both consumers and producers as more revenue can be ploughed back into better infrastructure, education etc. May be GDP growth in the SR. But in the LR this could lead to retaliation and trade wars may not be sustained. May also be an expensive use of public funds (subsidies) and involve O/Cs
Impact of protectionism on living standards
Overall lower due to a lack of choice and increased prices. This may impact those on low incomes to a greater extent (regressive as will take up a larger proportion of their income) particularly if these goods are necessities. This may increase inequality.
The balance of payments
Record of all financial transactions between economic agents of the UK and all other countries
Must always balance, meaning we have to pay for all we consume and be paid for all we sell
If a country is running a deficit, it must be running a surplus on the financial/capital accounts. In order to fund UK’s current account deficit, it sells assets to foreign investors and borrowing
Current Account
Trade in goods
Trade in services
Primary Income - UK ownership of overseas assets or working abroad - dividends, investment income, wages
Secondary Income - transactions of money without counterpart item of economic value - remittances, international aid
Financial Account
Tracks financial assets and liabilities, such as FDI, portfolio investment, and changes in reserves
Capital Account
Records capital transfer, such as the sale of of non-produced, non-financial assets - patents, debt forgiveness, franchise
Credit
Money coming in
Debit
Money going out
UK trade deficit in goods - past 20 years
Constant trade deficit in goods - driven by high imports of manufactured goods, energy, and machinery
2024 - deficit reached $53bil
4th largest importer in the world
Brexit has led to ↓ exports to EU
UK trade surplus in services - past 20 years
Maintains surplus in services - financial, professional, and business services
2010-18 - exports in of services grew significantly
2024 - $43bil surplus
Current Account in the UK as a whole
Consistent current account deficit, typically 2-4% of GDP
UK relies on imported goods and its competitive strength in service industries
Causes of a CA deficit
High domestic consumption - high MPC fuelled by low interest rates or expansionary fiscal policy
Weak export competitiveness - structural issues, such as high production costs, lack of innovation, low labour productivity
Dependence on imports - reliance on imported energy, raw materials or manufactured goods
Non-price factors - low levels of R+D/investment, weaknesses in design/branding/quality
Price factors - relatively strong exchange rate, high levels of inflation
Strong domestic growth - increase imports
Are current account deficits sustainable?
Selling assets or borrowing abroad has future implications for the current account as there will be outflows of investment income and debt repayments
Consequences of large current account deficit
Loss of aggregate demand/weaker real GDP growth and potentially reduced living standards and rising unemployment
Depreciated exchange rate, potentially leading to higher cost-push inflation and deterioration of terms of trade
Potentially increase in foreign ownership of domestic assets
Borrowing to achieve required financial account surplus
Can lead to a loss of investor confidence leading to capital flight
Evaluation of consequences of current account deficit
Could be a deficit due to rapid economic growth drawing in more imports
UK has a persistent deficit since 1980s. Countries with large current account surplus have not necessarily done better - Japan had stagnation
Financial flows are easier to attract in era of globalisation
Is it financed by borrowing or capital flows?
Solutions to current account deficit
Supply side policy - ↑ competitiveness - LR improvements in FoPs - but cost to gov, O/C, quality?, LR
Devalue the exchange rate - PED?
Protectionist barriers - retaliation
Expenditure switching - shift spending from imports to domestic goods
Contractionary fiscal policy - decrease demand for imports
Countries with current account surplus
China - $260bil - $610bil surplus in trade in goods
Germany - $280bil
Causes of current account surplus
Export-oriented growth
Undervalued exchange rate
High MPS / low rate of MPC
Closed economy - protectionist barriers/preference of domestic goods
Strong income from overseas investments
Boom in export revenues from sharp rise in world price of a key export
Negative consequences of current account surplus
Appreciation of exchange rate due to ↑ demand for the currency - threat to countries with export-led growth
Misallocation of resources if too much focus on export industries and not enough on domestic ones
Trade tensions? - undervaluing exchange rate
Economic stagnation risk if surplus arises from suppressed domestic demand
Positive consequences of current account surplus
Boost domestic employment? Yes if due to ↑ competitiveness, or consistent high domestic demand. Not if surplus is caused by a recession which decrease demand or a global recession
Increase ownership of foreign assets will ↑ income
Economic growth due to ↑ exports
Key point for current account evaluation
Bottom line is the impact that a current account surplus/deficit has on an economy is dependent on the cause of it.
Sustained improvement in UK BoP requires
UK business utilising foreign markets
Focussing on comparative advantage
↑ R + D
↑ efficiency and productivity in export sectors
Exchange rate and acronyms
The value of one currency expressed in terms of another currency
SPICED/WIDEC
Winners with depreciating exchange rate
Businesses who export
Tourist attractions in UK
Overseas firms competing in domestic market
(Exporters)
Losers with depreciating exchange rate
Businesses importing goods and services
Businesses making profits in overseas currencies
British people living abroad on UK pensions
(Importers)
Factors to consider when evaluating exchange rate
Magnitude of change
SR/LR
Whether businesses import or export significantly
PED of imports and exports
Free-floating exchange rate
Value of a currency is determined by the forces of D+S in the foreign exchange market
US$ / €
Fixed exchange rate
System where the value of a country’s currency is tied to another currency, a group of currencies, or a commodity like gold.
HKD - fixed to USD
Managed exchange rate
Currency’s value is primarily determined by market forces but is occasionally influenced by gov. or central bank
Indian Rupee, Chinese Yen
Appreciation
Occurs when a currency increases in value relative to another currency
Depreciation
Occurs when a currency decreases in value relative to another
Impact of inflation on exchange rate
High relative inflation rate will reduce demand for currency. This will depreciate currency. However, automatic stabiliser as decreased price will increase demand for exports which will then appreciate currency
Impact of interest rates on inflation
High interest rates attract foreign capital due to higher ROI. Currency appreciates. Can be mitigated if high I/R are due to inflation
Impact of quantitative easing on exchange rate
Since QE has the effect of increasing money supply, it is likely that this will cause a depreciation in the country’s exchange rate.
Impact of net investment on exchange rate
Increase in FDI is likely to lead to an appreciation of the ER as there is an increase in demand for £s
Impact of speculation on exchange rate
Anticipation of appreciation will increase demand and increase value before anticipated rise. Vice versa if expecting depreciation.
Collective actions of speculation can cause sharp and excessive fluctuations
Demand and supply for currency
Inflow of money into an economy
Demand for a currency is derived from demand for exports and speculators looking to profit from change in currency values
Supply of a currency is an outflow of money in an economy. Determined by level of domestic demand for imported goods.
How does a fixed E/R system work
To the currency where it wants to be fixed, the central bank will have to buy/sell its currency.
Dependent on the level of currency reserves held in central bank
Devaluation
Depreciation under a fixed or managed exchange rate
Give exports and competitive advantage as they become relatively cheaper
Increased demand for exports, decreased for imports
Improving BoP
Can be seen as protectionism
Done by selling reserves
Revaluation
Appreciation coming from gov. intervention
Raise interest rates to attract foreigners to place cash in country’s banks.
Advantages of free-floating E/R
Monetary policy autonomy - can address issues such as inflation with out being constrained by E/R considerations
Shock absorption - can absorb shock by helping rebalance the economy - e.g. a recession might cause the E/R to depreciate which acts as a boost to export businesses and domestic firms facing import competition
Reduced speculative attacks - investors are less likely to attempt coordinated efforts to manipulate E.R for short-term gains
Trade balance adjustment - can help correct trade imbalances over time - trade deficit causes depreciation which means more competitive exports and expensive imports, narrowing deficit
Currency reserves - central bank doesn’t need to hold large foreign currency reserves because there is no specific currency target, financial capital can flow freely.
Drawbacks of free floating E/R system
Exchange rate volatility - currencies can experience rapid and unpredictable fluctuations, which can introduce uncertainty for firms in international trade
Currency risk for investors due to volatility
Inflation pass-through - fluctuations can lead to change in price of imports which can impact domestic inflation
Loss of E/R as a policy tool - can’t manage exchange as a deliberate policy tool. Can limit the direct influence of E/R on trade and competitiveness
Advantages of fixed exchange rate system
Price stability - provides stability since fluctuations in E/R are minimised. Can help control inflation and provide a predictable environment for firms and consumers
Trade confidence - firms can plan transactions without worrying about sudden currency value changes
Reduced E/R risk - eliminate currency risk
Foreign investment - can attract foreign investment due to predictability
Disadvantages of fixed exchange rate system
Lack of flexibility when responding to external shocks
Loss of monetary policy autonomy
Balance of payments can’t be maintained by monetary policy
Risk of speculative attacks if investors believe currency is overvalued
Needs strong reserves but these can quickly be diminished
Currency hedging
Buying lots of currency at low price but collecting at a later date. Done by airlines to reduce risk of volatile costs through sudden fluctuations in exchange rate
Impact of change in exchange rate on current account
Depreciation/devaluation will make goods more competitive by ↓ price of exports and ↓ CA deficit
However, Marshall-Lerner condition states there will only be improvement in CA if sum of PEDs for exports and imports is <-1
J-Curve states PED is inelastic in SR - have to find alternative suppliers, contractually obliged to buy from a foreign company and over time, businesses become more willing to charge suppliers which results in LR elasticity
CA deficit also has an automatic stabiliser
M>X
More supply of £
Causes depreciation
Increases cost of imports and decrease cost of exports so will reduce CA deficit
However other determinants of supply of currency mean this isn’t be all and end all
DRAW GRAPH
International competitiveness
Refers to ability of a country to sell their goods/services abroad
Factors impacting international competitiveness
Relative rate of inflation
Relative unit labour cost
Relative non-wage costs
Regulation compared to competitors
Non-price competitiveness
Relative unit labour costs - international competitiveness
Labour costs per unit of output
Impacted by:
- Minimum wage
- Productivity of labour
- Average wages
- Availability of (skilled) labour
Factors affecting productivity
Capital investment
Real wages
Skills gaps
Education
Cultural work ethic
Non-wage costs of employment
Pensions
NI
Sick pay
Holiday pay
Maternity leave
Healthcare insurance
Regulation + legislation - international competitiveness
Costs of meeting environmental regulation
Environmental taxes
Employees protection law - H+S - cost of compliance
Competition legislation
Advantages of international competitiveness
Export led growth
Decrease in unemployment
CA surpluses as X likely >M
Increased FDI
Improved SoL
Higher tax revenue
Problems of international competitiveness
Government will have to focus resources on reducing CA deficit which creates costs and opportunity costs
Absolute Poverty
A person’s continued daily resistance is threatened because they have insufficient resources to meet basic needs (low in UK)
World Bank defines International Poverty Line at $2.15 per day
Relative poverty
Household has insufficient income for it’s members to participate in the normal social life of the country.
2021 - 17% of UK
Poverty across the globe
700mil people in absolute poverty (9.2%)
Youth accounts for 2/3
Largely concentrated in sub-Saharan Africa
Causes of changes in poverty
- Countries with lower economic growth tend to have high levels of U
- State welfare system will influence how the most vulnerable in society are supported - UK spends £160bn
- Changes in income tax, VAT, or wages will influence amount who fall below 60% income
- FDI will decrease U (China)
- Poor health and education
- High wage differentials
- Corruption
- Regressive taxation
Advantages of using GDP
Measured frequently and widely
Does act as an indicator of economic productivity
Easily comparable
Some correlation with standards of living
Disadvantages of using GDP
The Hidden Economy - drugs, prostitution - ONS included in GDP in 2014 and GDP increased £10bn
Doesn’t account for distribution of wealth
↑ GDP may not be sustainable if scarce resources are being used up - e.g. Dubai
Ignores living conditions
Advantages of HDI
Easy to collect and standardise across nations
Uses an index which can easily track development over time
Looks at wellbeing rather than just economic metrics
Disadvantages of HDI
Long life expectancy doesn’t mean happy life
Average schooling years doesn’t equate to quality education
Two countries can have same score but still be different
Externalities, crime and corruption aren’t measured
Growth vs development
Growth can stimulate development through jobs, reducing poverty, tax revenue spent on health etc.
However, growth does not necessarily mean a country is developing. If the increase is from one sector (Nigeria and oil). Negative externalities can arise from GDP growth and it can also stimulate inequality.
Sector distribution of India
18% farming
30% manufacturing
53% services
Market-based strategies influencing growth and development - trade liberalisation
Opening up an economy to the free market
Create opportunity to specialise
Same negatives as free trade
Market-based strategies influencing growth and development - FDI
Increased employment
Provides LICs with funds to invest, helping to overcome the savings gap
Transfer of knowledge - increase productivity
However, often repatriate profits and exploit workers with low wages and poor conditions
Market-based strategies influencing growth and development - removal of subsidies
Subsidies can support domestic industries and reduce poverty
However, artificially low equilibrium prices encourage inefficiency
Big opportunity costs but unpopular to stop
Market-based strategies influencing growth and development - floating exchange rate system
Government does not have to worry about keeping enough currency reserves
But the currency will be volatile and this will make it difficult for importers and exporters
Market-based strategies influencing growth and development - microfinance
Small scale loans to entrepreneurs. Allows them to break away from aid
Don’t have access to banking
Developing countries have weak financial sector so improving banking can support businesses and plug the savings gap
Market-based strategies influencing growth and development - privatisation
Private sector gives firms incentives to operate efficiently which increases economic welfare
This is because firms operating in the free market have a profit incentive
Increase in allocative efficiency
May be ineffective if privatising natural monopolies
Interventionist strategies influencing growth and development - development of human captial
Businesses struggle to expand where there are skills shortages and this limits innovation
Developing human capital allows a country to move from primary product dependency to manufactured goods and services
More attractive to FDI
Costs a lot, and takes time
Interventionist strategies influencing growth and development - protectionism
Can help protect domestic firms that are struggling to compete
Sustainable?
Could lead to x-inefficiency
Can reduce trade deficit
Interventionist strategies influencing growth and development - managed exchange rate
Central bank of the country buys and sells currencies to try and influence the exchange rate
More stability than a floating system and therefore better for planning and investing
Interventionist strategies influencing growth and development - infrastructure development
Private sectors will only invest in infrastructure if it is profitable to them (rarely) and these are under-provided in a free market
Economic and social benefits with improved infrastructure so gov will fund this
Huge opportunity cost
Interventionist strategies influencing growth and development - promotion of joint ventures with TNCs
Leads to capital inflows, creating jobs and increasing output
Transfer of knowledge
Similar problems to FDI
Interventionist strategies influencing growth and development - buffer stock schemes
Developing countries rely on primary products which have volatile prices
So the government will keep extra stocks reserved to set a max and min price range
If there is excess supply, the government will buy up extra stocks + stockpile it, vice versa for a shortage
However, costly to buy up and to store it (as organic produce tends to be perishable)
Causes inefficiency as suppliers will produce as much as they want as they know the gov will but it
Common agricultural policy
Contained a number of subsidies for wine producers, leading to a supply glut: the surplus forced an overhaul of EU farm policies
European countries had been producing 1.7b more bottles of wine than they sold
Direct controls
government-imposed regulations that directly limit or control certain economic activities, rather than influencing them indirectly through market mechanisms
e.g. max/min prices
Functions of financial institutions
Facilitate saving
Lend to business and individuals
Facilitate the exchange of goods and services - e.g. debit cards
Provide forward markets in currencies and commodities - useful for currency/commodity hedging
Provide a market for equities - buying and selling of shares
Apple tax avoidance
Didn’t register companies to be taxed anywhere and Ireland let companies base there without paying tax. EU stopped this after classing it as illegal state aid
So, moved management to Jersey to pay lowest tax rates
Financial sector market failure - speculative bubbles
A bubble exists when the market price of a financial asset is driven above what it should be such as a speculative boom in housing, crypto, commodities or share prices. Speculation can be amplified by herd behaviour where many people take same decision
e.g. crypto, ‘Dot Com’ boom 1997-2000
Real estate bubbles - GFC
5 stages of speculative bubbles
Displacement stage - excitement grows, Demand surges and inelastic supply causes price rises
Euphoria as more investors look to take advantage
Profit-taking stage - some investors sell as they realise prices are out of line
Panic - desperate selling and rapid price drops
Financial sector market failure - market rigging
Form of anti-competitive behaviour
Collusive behaviour might involve fixing a price such as the rigging of interest rates in London Interbank Money Market
Financial sector market failure - asymmetric information
e.g. financial markets often use complex information. A borrower may have better information on whether they can afford to repay a loan
Financial sector market failure - moral hazard
An individual or organisation takes greater risks than they should do because they know that they are either covered by insurance, or the a gov. will protect them from any damage incurred as a result of these risks
The Central Bank
The monetary authority and major regulatory bank in a country. A central bank is responsible for monetary policy and maintaining financial stability e.g. BofE, Federal Reserve
Roles of the Bank of England
Implementation of monetary policy
Banker to the banks - lender of last resort - banks can borrow directly if they run into liquidity problems. e.g. lending to Northern Rock
Banker to the government - issues and sells bonds on behalf of gov.
Regulating the banking industry through the Prudential Regulation Authority - i.e. setting the amount of reserves banks have to hold. Increased regulation following GFC
Issuing secure bank notes and supervising payments services
Making the system safer following the GFC
Banks are less dependent on each other in terms of interbank lending
Gov. protects savings up to £85,000
UK banks hold over £700bn of high quality liquid assets
Businesses have diversified their sources of funding
Causes of GFC
1990s - Clinton relaxed lending standards and allowed rise of sub-prime lending
Securitisation occurred where sub-prime mortgages were bundled into securities to spread risk
Ratings agencies assigned high ratings to Mortgage-Backed Securities, which made them appear much safer than they were
Moral hazard - lenders issued riskier loans knowing they would not bear the consequences
What happened in the GFC
Sub-prime borrowers began defaulting on their loans, leading to the failure of major financial institutions (Lehmans), a banking crisis as liquidity dried up, a global recession due to the interconnected nature of bank
Impact of economic factors in development - primary product dependency
Primary commodities have unstable global prices due to factors like weather, geopolitical events, and market speculation
Unstable earnings make long-term investment difficult
Dutch disease - a resource boom causes currency appreciation making other export sectors less competitive
Primary products have little processing in original country, impacting profit margins
Impact of economic factors in development - savings gap
Refers to the difference between a country’s needed investment for growth and the actual level of domestic savings available to finance it
↑ savings → ↑ investments → ↑ capital stock → ↑ output
Economic growth requires investment. If domestic savings are insufficient, there is not enough capital to finance investments
This leads to dependence on FDI, foreign aid, and debt to fill the savings gap
Cycle of poverty as people have high MPC (low income) and businesses have little savings
Impact of economic factors in development - foreign currency gap
Occurs when a country lacks sufficient foreign currency reserves to pay for essential imports, service external debt, and support economic growth
Common in economies that rely on exporting primary products while importing capital goods
May lead to ↑ debt from foreign borrowing
Impact of economic factors in development - capital flight
Occurs when individuals, firms, or gov. transfer large amounts of money or assets out of a country
- loss of investment
- decreased demand for currency, causing depreciation
- decrease in foreign exchange reserves
Impact of economic factors in development - demographic factors
High pop. growth rate can put strain on resources, low or negative pop. growth can lead to labour shortages
Aging population can ↑ spending on welfare and healthcare
Migration can result in brain drain
Impact of economic factors in development - debt
Productive debt - used for infrastructure, education
Unproductive debt - used for recurrent gov. spending
- High levels of debt require large interest payments
- Gov. may increase taxes or cut essential services to meet debt obligations
- Argentina had to default on its debt as borrowing didn’t lead to growth
- Countries heavily reliant on foreign creditors may be forced to implement austerity measures (e.g. IMF)
Impact of economic factors in development - access to credit and capital
Access to credit allows businesses to invest in capital, expand operations, and innovate and provides entrepreneurs with funds to start and scale businesses
Impact of economic factors in development - lack of property rights
Lack of incentive for investment
Property rights are often used as collateral on loans. Without clear ownership, individuals and firms can’t secure financing, as lenders are unwilling to take risks on assets that can’t be legally claimed
Capital expenditure
Long term investments - HS2
Current expenditure
Day to day expenditure on goods and services - salaries for civil servants
Transfer payments
Payments to individuals without an exchange of goods or services - benefits
Reasons for changes in expenditure
Stage in economic cycle
Changing age distribution - ↑ pressure on health systems
Changing expectations - technological advancements may come with expectation to improve health + education
External shocks - GFC/WW2
Economic philosophy - US is market-oriented country
Wealth inequality
Measures the unequal distribution of assets between individuals and households
Income inequality
Measures uneven distribution of income between individuals and households
Gini coefficient
Numerical index quantifying income inequality.
0 - perfect equality
1 - perfect inequality
A/A+B
Causes of inequality within countries
Disparities in access to quality education
Wage differentials in the labour market - based on skills, experience, and demand for certain jobs
Those with access to to investment opportunities and assets accumulate more wealth over time
Gov. policies such as taxation, social security and welfare can mitigate or exacerbate equality
Causes of inequality between countries
Globalisation - uneven benefits such as outsourcing and offshoring can widen income disparities
Historical factors such as colonialism, trade imbalances, and unequal access to resources have left lasting impacts on global wealth distribution
Geopolitical factors such as conflicts or political instability
Significance of capitalism
Capitalism can incentivise innovation, entrepreneurship and wealth creation, which can benefit society as a whole
Unregulated capitalism can lead to income and wealth concentration among the elites
Gov. intervention plays key role in shaping how capitalism impacts inequality
Condition for comparative advantage
Needs to be suitable rate of exchange to make it worth trading with another country - exchange rate must lie within the OC ratios of the goods
