Theme 4 Flashcards
1
Q
What is the definition of globalisation?
A
The integration of local, regional and national economics
2
Q
What factors boost globalisation?
A
- More trade in goods and services
- More trade liberalisation (WTO)
- The growth of MNC’s
- Increasing financial flows such as FDI
- Easier communication
- Cheaper and faster transportation of goods
3
Q
Globalisation can cause countries to run…
A
Account deficits
4
Q
Drawbacks of globalisation?
A
- Benefits aren’t fairly distributed causing inequality
- Can lead to weakening cultural identity
- May reduce sovereignty
- More production can damage the environment
5
Q
What is an absolute advantage?
A
Where you can produce more of a good or service with the same input
6
Q
What is a comparative advantage?
A
When you can produce a good or service with a lower opportunity cost
7
Q
The theory of comparative advantage assumes…
A
- Its a perfectly competitive market
- Doesn’t take into account exchange rates
- Only takes into account two countries
8
Q
Advantages of countries specialising?
A
- Greater world output
- Potentially higher quality goods
- Lower average costs
- Outward shift of PPF
9
Q
Disadvantages of countries specialising?
A
- Countries become dependent on each other
- Causes structural employment
- Venerable to economic shocks on other countries
10
Q
Trade blocs cause…
A
Trade to be created between members but create to be diverted from elsewhere
11
Q
What do trading blocs impose on non-members?
A
Protectionist barriers
12
Q
How is terms of trade calculated?
A
(index price of exports) / (index price of imports) *100
13
Q
Factors affecting terms of trade?
A
- Reduction in price of manufactured goods has meant service based economies like UK has seen improvements
- How elastic demand fro exports is
- An appreciation of the currency will boost the ToT
14
Q
Impacts of changing terms of trade?
A
- Improvements means the economy can import more but that could damage the BOP
- Worsening means the exports need to cost more reducing productivity
15
Q
What is a free trade area?
A
Where countries agree to trade goods and services with no protectionist measures
16
Q
What is a customs union?
A
Where countries have free trade but also a common trade policy with the rest of the world
17
Q
What is a common market?
A
Where countries have free trade and common policy but also have the free movement of labour and capital
18
Q
What is a monetary union (currency union)?
A
Where members share the same currency like the EU
19
Q
What are the benefits of trade agreements?
A
- Trade creation between members
- Reduced transaction costs
- More economies of scale due to larger market
- More competition so more efficiency
- Migration can fill labour shortages
20
Q
What is the WTO?
A
Its an organisation which promotes world trade through reducing trade barriers and policing existing agreements
21
Q
Issues with the WTO?
A
- It’s too powerful
- Ignores developing countries
22
Q
What are the reasons for restricting free trade?
A
- To reduce a trade deficit
- To help weak domestic industry
- To correct market failure (demerit goods)
- To retaliate on restrictions being opposed on them
23
Q
What types of restriction that can be opposed on free trade?
A
- Tariffs
- Quotas
- Subsidies to domestic firms
24
Q
What are the other barriers which aren’t tariffs?
A
- Voluntary export restraints between two countries
- Embargoes
- Excessive red tape
25
What is the impact of protectionism?
- Can distort the global market
- Tariffs effect those on the lowest wages more
- Risks of retaliation
- Can lead to government failure
26
What is the balance of payments?
It is a record of all the financial transactions made between consumers, firms and the government with other countries
27
What does the current account include?
Trade in goods and services (also income transfers)
28
What does the capital and financial account include?
Transfers of fixed assets and investment
29
Causes of surpluses and deficits in the current account?
- Changes in the exchange rate
- Economic growth
- How competitive firms are
- Costs of membership to a union (EU)
30
Measures to reduce the current account deficit?
- Increase income tax
- Reduce government spending
- Impose taxes on trading partners
- Supply side policies to improve productivity
- Deregulation and privatisation
31
What is the significance of global trade imbalances?
- It leads to countries becoming interdependent
| - Deficit may be hard to finance in the future
32
What is the value of the exchange rate determined by in a floating system?
Supply and demand
33
How is the value of an exchange rate determined in a fixed system?
By the by the central bank buying and selling foreign currency
34
What happens in a managed floating exchange rate?
The currency is allowed to fluctuate in a certain range
35
What is a revaluation/devaluation?
Where a currencies value is changed relative to others
36
What is appreciation/depreciation?
Where a currencies value either increases or decreases due to market powers
37
What factors effect floating exchange rates?
- The amount of inflation
- What speculation there is
- The strength of other currencies
- The amount of government debt
38
How do governments intervene in a currency market?
- Change interest rate
| - The supply of quantitive easing
39
What is the Marshall Learner condition?
It states that a devaluation only improves the balance of trade if the sum of the long term export and import demand elasticities are greater than or equal to one
40
What is the J-curve effect?
If theres a devaluation, in the short term the BOP will actually worsen
41
Why do exchange rates effect AD?
Because they effect imports and exports
42
What is international competitiveness?
It is a nations ability to compete overseas
43
What measures of competitiveness are there?
- Relative unit labour costs, average output per unit labour
| - Relative export prices
44
What factors effect international competitiveness?
- Ability to attract FDI and skilled workers
- Ability to produce entrepreneurs
- The unit labour costs
- The relative value of the currency
- How stable the economy is
- Tax policies
- How regulation/ red tape there is
45
What is absolute poverty?
It's defined as living below subsistence, normally assumed to be less than $1.25 a day
46
What is relative poverty?
In the UK its defined as people living off less than 60% of the media income
47
Why is there inequality?
- Varying levels of quality of education across the country
- Decreases in welfare payments
- Regressive taxes
- Health issues
- Wars and natural disasters
- Corruption and political oppression
48
What is wealth?
The total stock of assets
49
What is wealth inequality?
The unequal distribution of assets
50
What does the Lorenz curve show?
The actual distribution of income and wealth
51
What value would show perfect equality for the Gini-coefficient?
0
52
What does Kuznets hypothesis suggest?
That inequality increases as a country develops but then wealth is redistributed by the government and education
53
What does the price mechanism and the free market ignore?
Inequality
54
What are the components of HDI?
Education, Life expectancy, standard of living (GNI per capita)
55
The average world HDI rose from ___ to ___ ?
0.48 (1970) to 0.68 (2010)
56
What are the advantages of HDI?
- Easy to compare countries
| - Much broader than GDP
57
What are the disadvantages of HDI?
- Doesn't consider how free people are
- Doesn't take in account the environment
- Doesn't consider distribution of income
58
What issues come with primary product dependency?
- Commodity prices are volatile
| - May overproduce and run out
59
What is the savings gap (Harrod Domar model)?
The Harrod Domar model states savings, investment and technological change for economic growth. The savings gap is where theres not enough saving which stops investment occurring
60
What is a foreign currency gap?
When a country is not attracting sufficient capital flows to make up for the deficit in the capital account
61
How does infrastructure effect growth?
MNC and domestic firms won't be able to operate and without investment and jobs there will be no economic growth
62
How do property rights effect growth?
If entrepreneurs can't protect their ideas then they're unlikely to innovate
63
What market-orientated strategies can be used to increase growth and development?
- Trade liberalisation
- Promotion of FDI
- Reduction/removal of government subsidies
- Use a floating exchange rate
- Microfinance schemes
- Privatisation
64
What interventionist strategies can be used to increase growth and development?
- Development of human capital
- Protectionism
- Managed exchange rate
- Infrastructure development
- Buffer stock scheme
65
What other strategies can be used to increase growth and development?
- Industrialisation (Lewis model)
- Developments in tourism
- Development of primary industries
- Fairtrade schemes
- Aid/debt relief
66
What can the world bank do?
It can offer loans to other member countries to promote economic and social progress
67
What does the IMF aim to promote?
Free trade and exchange rate stability
68
What is the role of financial markets?
- To facilitate savings
- To lend to businesses and individuals
- To provide forward markets in currencies and commodities
- To provide a market for equities (stock market)
69
What types of market failure are in the financial sector?
- Asymmetric information
- Externalities (due to their importance in the economy)
- Moral hazard
- Speculation and market bubbles
- Market rigging
70
What is the role of central banks?
- To implement monetary policy
- Banker to the government
- Lender of last resort to banks
- Roles in regulation for the industry
71
What is current government expenditure?
Spending which recurs, on goods and services which are consumed
72
What is capital government expenditure?
Spending on assets which can be used multiple times
73
What are transfer payments?
They are welfare payments from the government
74
Effects of government spending?
- Changes in productivity and growth
- Crowding out
- Equality and living standards
75
What does the Laffer curve show?
That there is an optimal rate of tax to maximise revenue
76
What is discretionary fiscal policy?
Is a one of policy change due to economic conditions
77
What are automatic stabilisers?
Policies which offset fluctuations in the economy automatically
78
What is the fiscal deficit?
The difference between spending and money received in tax receipts in a year
79
What is the cyclical deficit?
A temporary deficit occurs during recessions
80
What is the structural deficit?
Is due to an imbalance between spending and tax receipts and exists at every stage in the business cycle
81
What is the significance of the size of the deficit and debt?
- Cost of borrowing may increase
- Confidence may fall
- Higher taxes an austerity
- Crowd out private sector
82
How to reduce a fiscal deficit?
- Reduce spending and increase taxes
- Promote growth
- Issue bonds to finance it
83
What measures are there to reduce inequality?
- Use more progressive tax systems
- Implement a minimum wage
- Improve education
84
Transfer pricing is known as...
The price of the transactions for the same MNC across different countries
85
Problems facing policy makers?
- Inaccurate information
- Risks or uncertainty
- Inability to control external shocks
