Theme 4 Flashcards
Define terms of trade
Index of exports prices over index import prices x 100
Define a free trade area
Trade barriers removed between member countries and each member can impose trade restrictions on non-members
Define a Customs Union
Free trade between members combined with a common external tariff on non members
Define Common markets
Same characteristics as customs union but includes free movement of factors of production between members
Define absolute poverty
Minimum amount of resources a person needs to survive
Define relative poverty
Measured in comparison with other people in a country (e.g. if people living below a certain income line
What value of the Gini coefficient represents perfect equality and which represents perfect inequality?
0 represents equality and 1 represents inequality
Define comparative advantage
One country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost
Define absolute advantage
It implies that a country can produce more of a good than another country with the same amount of factors of production
Give three causes of globalisation
Decrease in transport costs (e.g. through containerisation and economies of scale), reduction in world trade barriers and increased importance of MNCs (which undertake in FDI and offshoring)
Give two assumptions of the law of comparative advantage
Constant returns to scale and no transport costs
Give two disadvantages of specialisation and trade
Current account deficit in countries where exports uncompetitive (country has no comparative advantages) and dumping (resulting in unemployment in developing countries)
Give two factors affecting a country’s terms of trade
Country’s rate of inflation compared to other countries, exchange rates
Give two effects of an increase in a country’s terms of trade
Higher living standards (as can import more for a given quantity of exports), current account deficit
Give two reasons for restricting free trade
Reduce a current account deficit and to reduce unemployment
Give three reasons why a current account deficit is undesirable
Indicates country’s goods and services are uncompetitive, reduces FDI, causes unemployment
Give two reasons a current account deficit is not a problem
Can be caused by imports of capital goods, can be financed be inflows into financial account
Give two reasons why a current account surplus is undesirable
Could result in inflation, may cause living standards to drop (as less goods for domestic consumption
Explain how a country could reduce the value of its currency
Central bank could sell reserves of its currency on the foreign market, causing its supply to increase
How could a depreciation of a currency lead to inflation
More demand for domestic goods causing increased AD, and increased price of imported capital goods, leading to cost push inflation
Give three causes of income inequality within countries
Levels of education, levels of unemployment and progressiveness of tax system
What are the three elements of the human development index?
GDP per head, measured at PPP, health (life expectancy at birth) and education (mean years of schooling at age 25 and expected at age 4)
Give two limitations of HDI
Too narrow, only comprises three aspects of development and it is an average measure meaning does not account for inequalityrin
What are the three parts of the financial account?
Portfolio investment (bonds, shares and derivatives), FDI and reserves (currency and gold)
Explain why countries which have a current account deficit have a financial account surplus
Countries which have CA surpluses will invest some of the excess cash and reserves they have from their surplus into countries which have a deficit (e.g. FDI, buy shares)
Explain the Harrod Domar Model
Countries with low GDP per capita experience low savings ratios, meaning little to finance investment, leading to low capital accumulation and low output
What is an effect of a foreign currency gap?
Countries may have insufficient currency to purchase imported capital goods needed to improve productive capacity
How can poor infrastructure and education reduce investment and FDI?
Poor infrastructure means firms cannot run efficiently and ACs higher, poor education means low productivity workers
Explain how he absence of property rights can reduce growth
If a person owns no assets can be difficult to secure a bank loan as no collateral
What do capital markets do?
Enable individuals and institutions to trade in financial securities, enabling them to earn long term finance e.g. stock and bond markets
What are money markets?
Markets for short term loans
What is the foreign exchange market?
Market in which currencies are traded
