Theme 4 Flashcards
what is globalisation?
this is when economies of countries become very interconnected through global network of trade due to advancements in communication, technology and transport
what factors drive globalisation?
containerisation
technological advancements
differences in tax systems
differences in global prices
trade deals
what characteristics does globalisation have?
transnational brands
labour migration
international trade
global supply chains
what is trade
trade occurs when countries take advantage of being able to specialise in goods that other countries cant produce in exchange for other goods that they cant produce
what is absolute advantage?
when a country specialises in making a good so they should focus on using their resources for that good and then trade it for another good that is specialised to be made in another country
what is comparative advantage?
when the opportunity cost of producing a good is lower in one country in comparison to another country so they make that good then trade for another good that has a lower opportunity cost in other country
what are the assumptions of comparative advantage?
no transport cost
no trade barriers
no externalities
high mobility of capital and labour
what are the limitations of comparative advantage
infrastructure
import control
exchange rate
benefits are unbalanced
what is the pattern of trade?
the nature of trade between countries by considering the nature of imports and exports
factors that influence the pattern of trade
comparative advantage
changes in relative exchange rates
growth of trading blocs
impact of emerging economies
what is the terms of trade
measures the value of a country’s export and imports as a numerical indicator
what is the formula for index of Term of trade
index of export / index of imports x100
factors that influence term of trade
changes in exchange rates
relative productivity rates
relative inflation rates
impacts of changing terms of trade
living standards can either better or worsen
balance of trade worsen or improve
fall or rise in GDPM
what are Trading bloc
groups of countries that protect themselves from impact from non member countries. they are usually geographically close to each other and promote trade within the group by eliminating tarrifs and quotas
What are the types of trading blocs and their definition
Free trade area –> two or more countries agree to trade with complete elimination of barriers on all goods
custom union –> removal of tariffs to all members but they decide on common external tariffs on non member imports
common markets –> free movement of labour and capital and also common external tariffs
monetary union –> countries share the same monetary policy , central bank, currency and all have free trade.
what is trade creation
a country joins a trading bloc leads to them buying goods from a high cost to a lower cost country
what is trade diversion
when a country joins the trading bloc but ends up increasing the cost of imports. this can lead to a decrease in economic efficiency
what are types of protectionisms
tarrifs –> a tax on imported goods
quotas –> a physical limit on quantity of a certain good thats imported
subsidies to domestic producers –> to improve and lower their average costs to become competitive
non tarrif barriers –> embargoes, importing licenses, legal and technical standards, environment regulations
what is a tariff diagram?
s global increases in price and causes a higher tax revenue which lowers the amount of imported goods from q5-q1 –> q4-q2
what is the subsidies diagram?
when s domestic shifts outwards to increase the producer surplus and increase the level of goods they sell thus making them competitive
what are the impacts of protectionism
consumers –> higher prices, lower choice and perhaps even quality reduction
producers/ firms –> if domestic based they increase the ability to sell to consumers but if globally based they can end up suffering the producer burden of tax
Govt –> short term leads to increase in tax revenue long term its bad since it can restrain economic growth
equality –> good = protect local jobs
bad = lower disposable income since income is spent of inelastic goods from abroad
what are the 3 components of the balance of payment and what are they made up of
current account –> net balance of trade, primary income, secondary income
capital account –> capital transfers, non financial assets like patents
financial account–> net balance of FDI, net balance of portfolio investment like equity, foreign currency and gold reserve
what is primary and secondary income
primary –> monetary flows of financial assets from international sources like dividends, wages and salaries
secondary income –> monetary trabsfers that dont include trading goods like grants and aids
causes of current account deficit and surplus
deficit –> economic growth, inflation, international competitiveness
surplus –> natural resources, exchange rate manipulation, high interest rates
what are the ways to reduce imbalance
exchange rate changes
deflationary policies
protectionism
supply side policies to increase labour productivity
demand side policies like fiscal or monetary policy to reduce AD
what is the exchange rate
comparison of a country currency in regards to another country’s currency
what is appreciation and depreciation
SPICED AND WPIDEC
what does appreciation and depreciation look like on a diagram
appreciation: AS shifted inward and AD shifts outwards
depreciation: AS shifts outwards and AD shifts outwards
what are the types of exchange rates
free floating system –> determined by the forces of supply and demand , no intervention from central bank, currency value isnt a target of the monetary policy
Fixed system –> determined by the government since they tie it to another country currency (peg) (if it falls they use their reserve and buy their own currency to appreciate it), currency are pegged and it becomes the official rate and the govt may devalue or revalue to make their currency competitive
what is the marshall lerner condition
it states a depreciation/ devaluation will improve the current account position only if the sum of PED for both exports and imports are greater than 1
what does the j curve show
demonstrates that the current account will worsen before it gets better after a depreciation/ devaluation. This is because there is a time lag and imports that are seen as inelastic will continue to be bought thus increasing the trade balance deficit worsening then eventually it goes better since exports star to pick up
what is international competitiveness
factor that effects the current account deficit since it shows how much consumers buy a country’s goods & service
what is a measure of international competition
competition= average wage/ productivity
factors that influence competitiveness
exchange rates ( strong pound = less exports = not competitive)
productivity
regulations
investment
taxation
inflation
economic stability
flexibility
competitiveness and demand at home
factors of production
openness to trade
benefit for competitiveness
more export led growth economically, short run economics growth = positive multiplier effect
drawback for competitiveness
current account surplus = rise in exchange rate= strong pound= expensive exports = less competitive
what is absolute poverty
unable to afford basic necessities due to insufficient resources. A person in absolute poverty lacks clothing, shelters, food and water. If a person is living on less than $2.15 a day they are classified as being in absolute poverty
what is relative poverty
when someones income falls under the average income of that economy. The uk declares someone may be in relative poverty if they fall below by 60% of the median income
factors that influence the rate of poverty
economics growth –> if GDP RISES absolute poverty may fall
trade and FDI –> when trade and globalisation increases opportunities for employment also rise thus reducing poverty since a source of income is presented
taxation and wage rate
government benefits
what is income
income is the flow of earnings that an individual receives through sources like wages, interest received, dividend, salaries
what is wealth
the value in money of assets that a person may hold. This includes land, buildings and shares this is distributed unequally this may be due to inheritance
factors that lead to income and wealth inequality
access to education and training
tax system
trade union
wage rates
ownership of assets
impact of inequality
-absolute & relative poverty remain high
-crime and violence rise
-restrict growth, peoples talents are wasted
the rich get richer thus further increasing inequality
what is the lorenz curve
shows the distribution of income. The line of perfect equality. the lorenze curve is below the line of perfect equality. The X axis; cumulative income earner Y axis; cumulative income earnt
what is the gini coefficient
uses the lorenz curve to generate a numerical statistic of inequality within an economy
what is the gini coefficient formula
a/ a+b = gini coefficient when gini is closer to 1 there is a higher inequality
describe inequality in the free market
its inevitable since some possess higher skills however, it may lead to incentives to find employment, incentivise harder work to earn more
encourage enterprise
what are the measurements of economics development
HDI: this is the human development index which measures living standard through:
- GNI –> through PPP of basket of goods approach
- Education –> PISA test & years of schooling
- Health –> life expectancy
the higher HDI is, the greater the human development
what are the - and + of HDI
_
longevity of life expectancy isn’t the same as high quality of life
schooling years isn’t quality of education
+
easy to collect
index can track levels of development over time
gains insight
what is primary product dependency
countries rely on commodities. This can influence development as these goods are very unreliable due to natural disasters and external shocks occuring. This makes it harder to encourage development
what is the prebisch singer theory
overtime countries exporting commodities will get a bad deal compared to rich countries since price for raw material decreases and manufactured goods increase meaning countries selling raw materials will have to sell more to afford the same amount of manufactured goods
what is dutch disease
country discovers a valuable natural resource and attracts foreign money which makes the currency stronger but also makes exports expensive and less comp causing domestic industries to struggle and then when the natural resource runs out leaves the currency extremely weak
what is volatility of commodity prices
when primary products have both inelastic PED and PES meaning a small change can lead to huge fluctuations in price causes income and earnings to to also fluctuate. This leads to uncertainty from investors and development
what is a saving gap
when a poor country is incapable to save and later invest in industries as their earnings are directly spent on necessities
what is the harrod domar model
saving ratio/ capital output ratio = real GDP growth
increasing either of these factors will ultimately lead to faster rates of economic growth
what is the foreign currency gap
when a country doesnt have enough foreign money due to capital outflows being greater than capital inflows. this is due to:
- dependency on exports of primary products
high proportion of income serving debt
what is debt?
reduces the economic growth as its a constant burden that must be repaid back to the developed country from which it was borrowed but interest payment must also be paid
what is capital flight
when people move their savings abroad instead of holding them domestically.
what are the reasons for capital flight
lower tax rates and or higher interest rates abroad
political instability
absence of property rights
what is absence of property right
without clear laws and legal controls, property rights ,ownership of land and asset may be uncertain
how is infrastructure and economic development linked?
allows movement of factors of production to occur more efficiently. Without infrastructure there are barriers to trade
how is access to banking and economic development linked in both LIC and HIC?
high developed countries:
allows systems like stock markets to increase consumption and savings.
low developed countries:
Banking systems aren’t advanced or major sources of finance since its govt revenue is spent on necessities
what are some non economic factors for economic development?
War –> disruption to international trade
Disease –> HIV/ AIDS/ MALARIA
geographical locations
corruption–> economic policy isnt applied in the best interest of society
what are the types of ways to fix economic growth restraints?
market oriented interventions
interventionist strategies
what are market oriented interventions?
governments removing barriers to allow market forces to create incentive for investment
what are examples of market oriented interventions?
Trade liberation–> removing certain protectionist measures like tariffs and quotas
removal of govt subsidies –> encourages X inefficiency thus removing it will allow more innovation
floating exchange rate system–> allows chance to improve net trade but there is a risk of volatility
what are some examples of interventionist strategies?
Buffer stock scheme –>govt buys excess supply when the product is in low demand and stores it. Then when there excess demand it is released and sold to the producers to help with price stability. A minimum price scheme is also set into place
Joint venture with global companies–> when FDI is encouraged as well as partnership with international companies thus causing less exploitation, creating jobs and improved capital flow
Protectionism–> protecting domestic jobs, tarrifs, quotas etc
What are other strategies for economic development
aid and debt relief –> grants from other govts that dont need to be repaid, cancelling a country’s debt so their economy can grow but in exchange a public sector is offered up for competitive tendering and becomes private
the lewis model–> shows that a country can move from an agricultural based economy to an industrialised economy through splitting their economy into 2 sectors consisting both.
what are assumptions and criticisms of the lewis model?
assumptions –>
- excess labour meaning no opportunity cost of labour
criticisms –>
- transferring labour requires investment in education and training
- industry may not create as many jobs as needed
- agriculture is seasonal and when in high demand, there is no excessive labour thus creating opportunity cost during those times
what are financial markets?
places and systems where people and businesses sell financial assets like bonds, stock, currencies and derivatives
what are bonds, stocks and derivatives
bonds are loans offered to govts or firms for a period of time. During the time of the bond, the person in possession of the bond receives regular payment of a certain amount. When bond expires its repaid in full
Stock is a share of a company
derivative is a contract for the value of another asset. This means not actually having the product but the value of that asset through another persons possession. EG having stock in Apple but not actually having an apple product
what are the roles of financial markets?
- facilitate savings
- lending to businesses and individuals
- facilitating the exchange of goods and services
- providing forward markets in commodities and currencies
- efficient allocation of capital
-Economic growth
what is a forward market? in commodities and currencies
this is when a producer and consumer create a contract where the consumer pays today but the goods will be sold at a later time.
In commodities it may be oil and gold being bought now but provided once extracted
in currencies it may be when they agree on todays currency rather than when it fluctuates (£1 =1.60 euro)
what is market failure
when the free market fails to deliver an efficient or socially optimum allocation of resources
types of market failures and explanation
- asymmetric information
- creating negative externalities (tax payers bailing out banks during crisis rather than the financial institution)
- moral hazard (banks taking bigger risks because they know govt will help and has created a safety net )
- speculation and market bubbles (buying assets at a price where its low then selling at a very high price in hope of profit only it becoems failure when asset falls in price)
- market rigging (when there is information/ collusion occuring to benefit in financial markets like stock markets thus creating profit for them but for the rest involved, there isnt the same outcome) also known as insider trading which are both illegal.
what are the roles of the central bank?
- setting the monetary policy
- banker to government
-banker to banks (lender of the last resort) - setting out recommendation on banking regulations
how are central banks bankers to govt?
- make short term loans to govt – manage national debt,
- hold foreign exchange reserve
how do central banks set out recommendations on banking regulations?
- Ring fence banking
banks cant use deposits of personal savings on stock markets - setting reserve capital ratio
banks must have a certain percentage of deposits in liquidity - regular stress testing
economic stimulations are carried out to identify which banks are most vulnerable
why does the central bank do certain measures when setting out recommendations on banking regulations
ring fence banking —>prevent moral hazard
setting reserve on capital reserve–> prevent run on the banks
regular stress testing –> prevents systematic risks like run on the banks
what are the 3 types of public expenditure (components of fiscal policy)
transfer expenditures
capital expenditure
current expenditure
what is the definition and an example of the 3 public expenditures
transfer –> gs helping improve social welfare like benefits tax helping redistribute income
Capital –> investment into long term capital projects like infrastructure
current –> govts day to day spending on goods and services like salaries
what is the UKs public expenditure made up off
- health
- defense
-education
-net debt interest
social protection
how do the public expenditures impact the economy
Growth and productivity –> infrastructure improves supply side performance
Living standards –> without public expenditures there would be market failure and very high absolute poverty
Level of taxation –> public expenditures need to be funded so high PE = high tax
Equality= PE grants more equal opportunities
what is the difference in fiscal deficit and national debt?
fiscal deficit is when tax< GS in a financial year
national deficit is the total accumulation of govt borrowing
what is an automatic stabiliser ?
this is when the fiscal policy moves automatically from expansionary to contractionary ( or the other way round) without the govt intervening or deciding
what is discretionary fiscal policy
when the govt makes the actual decision to move from expansionary to contactionary (or the other way round )
what is discretionary income
this is the income households have after paying taxes and mortgages
what effects the size of the fiscal deficit and national debt
Fiscal deficit:
economic cycle
housing market (period of growth means more stamp duty which is a tax of house sales)
political priorities and unplanned events (govt having to bail out banks during crisis or 2020 furlough scheme)
National debt:
high level of borrowing (may increase debt in short run but in long run can reduce it since govt can own a new asset from borrowing )
Macroeconomic policies in global context:
Fiscal policy: manages demand to fix fiscal balance and therefore national debt
for developed countries: reduces poverty through welfare benefit, provision of public goods and progressive tax
factors that influence fiscal deficit and national debt
interest rates: high govt borrowing –> high interest rates –> low AD = high FD and ND
rate of inflation: increased money supply–> high inflation = high FD and ND
Debt servicing: National debt growing means more interest needed to pay = high ND
credit rating : countries are given credit rating by private firms–> worsens if interest isnt paid
what are other policies that effect the overall economy
Monetary policy and supply side policy
what are the 5 transmission mechanisms of BoE reducing interest rates
Lowering borrowing costs –> increase wealth effect because HH will consume more so AD rises
Lowering borrowing cost –> firms borrow more to invest –>business confidence increases and AD rises
Reduces current repayment for HH –> increases discretionary income meaning more consumption and AD rises
Lower Govt borrowing cost –> frees up money and allows GS to increase and AD rises
Increases money supply –> £ depreciates and hot money outflows which causes X to increase and M to decrease so AD rises
( THIS IS THE COMPLETE OPPOSITE WHEN BOE INCREASES INTEREST RATES )
give examples of real life trading blocs:
Free trade agreement: australian FTA
customs union: Gulf cooperation council
common market : CARICOM (caribbean community and common market)
monetary union: EU
