Theme 4

Question 1

Define terms of trade

Answer 1

Index of exports prices over index import prices x 100

Question 2

Define a free trade area

Answer 2

Trade barriers removed between member countries and each member can impose trade restrictions on non-members

Question 3

Define a Customs Union

Answer 3

Free trade between members combined with a common external tariff on non members

Question 4

Define Common markets

Answer 4

Same characteristics as customs union but includes free movement of factors of production between members

Question 5

Define absolute poverty

Answer 5

Minimum amount of resources a person needs to survive

Question 6

Define relative poverty

Answer 6

Measured in comparison with other people in a country (e.g. if people living below a certain income line

Question 7

What value of the Gini coefficient represents perfect equality and which represents perfect inequality?

Answer 7

0 represents equality and 1 represents inequality

Question 8

Define comparative advantage

Answer 8

One country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost

Question 9

Define absolute advantage

Answer 9

It implies that a country can produce more of a good than another country with the same amount of factors of production

Question 10

Give three causes of globalisation

Answer 10

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)

Question 11

Give two assumptions of the law of comparative advantage

Answer 11

Constant returns to scale and no transport costs

Question 12

Give two disadvantages of specialisation and trade

Answer 12

Current account deficit in countries where exports uncompetitive (country has no comparative advantages) and dumping (resulting in unemployment in developing countries)

Question 13

Give two factors affecting a country’s terms of trade

Answer 13

Country’s rate of inflation compared to other countries, exchange rates

Question 14

Give two effects of an increase in a country’s terms of trade

Answer 14

Higher living standards (as can import more for a given quantity of exports), current account deficit

Question 15

Give two reasons for restricting free trade

Answer 15

Reduce a current account deficit and to reduce unemployment

Question 16

Give three reasons why a current account deficit is undesirable

Answer 16

Indicates country’s goods and services are uncompetitive, reduces FDI, causes unemployment

Question 17

Give two reasons a current account deficit is not a problem

Answer 17

Can be caused by imports of capital goods, can be financed be inflows into financial account

Question 18

Give two reasons why a current account surplus is undesirable

Answer 18

Could result in inflation, may cause living standards to drop (as less goods for domestic consumption

Question 19

Explain how a country could reduce the value of its currency

Answer 19

Central bank could sell reserves of its currency on the foreign market, causing its supply to increase

Question 20

How could a depreciation of a currency lead to inflation

Answer 20

More demand for domestic goods causing increased AD, and increased price of imported capital goods, leading to cost push inflation

Question 21

Give three causes of income inequality within countries

Answer 21

Levels of education, levels of unemployment and progressiveness of tax system

Question 22

What are the three elements of the human development index?

Answer 22

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)

Question 23

Give two limitations of HDI

Answer 23

Too narrow, only comprises three aspects of development and it is an average measure meaning does not account for inequalityrin

Question 24

What are the three parts of the financial account?

Answer 24

Portfolio investment (bonds, shares and derivatives), FDI and reserves (currency and gold)

Question 25

Explain why countries which have a current account deficit have a financial account surplus

Answer 25

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)

Question 26

Explain the Harrod Domar Model

Answer 26

Countries with low GDP per capita experience low savings ratios, meaning little to finance investment, leading to low capital accumulation and low output

Question 27

What is an effect of a foreign currency gap?

Answer 27

Countries may have insufficient currency to purchase imported capital goods needed to improve productive capacity

Question 28

How can poor infrastructure and education reduce investment and FDI?

Answer 28

Poor infrastructure means firms cannot run efficiently and ACs higher, poor education means low productivity workers

Question 29

Explain how he absence of property rights can reduce growth

Answer 29

If a person owns no assets can be difficult to secure a bank loan as no collateral

Question 30

What do capital markets do?

Answer 30

Enable individuals and institutions to trade in financial securities, enabling them to earn long term finance e.g. stock and bond markets

Question 31

What are money markets?

Answer 31

Markets for short term loans

Question 32

What is the foreign exchange market?

Answer 32

Market in which currencies are traded