Theme 4 Flashcards
What is meant by globalisation
Integration of national economies
What are some causes of globalisation
- Trade in goods and services
- Trade liberalisation/eradication of protectionist barriers
- Increase in multinationals
- International financial flows
- Foreign ownership of firms
- Developments in communication and IT
- Developments in infrastructure and transport routes
What is a multinational
A company that operates in two or more countries
What’s are some of the impacts on consumers of globalisation
- Greater consumer choice
- Price increases
- Price decreases
How has globalisation caused an increase in some prices but a reduction in others
Increase is because the are more developed economies and so more people demand goods, causing demand-pull inflation
However, moving production to places where costs are lower has meant that prices can also be reduced
What are some impacts on workers of globalisation
- Increased employment in some areas
- Increased unemployment in others
- Increased migration
- Increased income
- Reduced income
How has globalisation caused both high rates of employment and unemployment
Employment opportunities have moved to developing economies where production and labour costs are lower
How has globalisation both increased and reduced income
Increased because more opportunities (low skilled), and multinationals are profitable so can pay workers more (high skilled)
Decreased because production moved to other countries, so workers in domestic countries have lost income
What are the impacts of globalisation on producers
- Reduce costs
- Economies of scale
- Enter new markets
- Increase competition
- Tax avoidance
What is meant by footloose capitalism
When firms are able to move from country to country to reduce costs
What are impacts of globalisation on governments
- Changes in employment
- Due to international trade, possible to import inflation
- Less sustainable
- Allows for Greater growth through more opportunities
What is the impact of globalisation on the environment
- Less sustainable due to larger amount of transport, manufacturing and waste
What is an evaluation point of the fact that globalisation has had a negative impact on the environment
Although emissions in developing nations have increased, they have fallen in developed nations eg UK and Sweden
What is meant by Transfer pricing
An account technique used by multinationals to reduce tax on profits by selling goods at a low price internally from a high tax country to another part of the company in a low tax country
What are some reasons for international trade
- Differences in quantity of factors of production
- Prices and costs
- Product differentiation
- Political power (reliance)
What is meant by an absolute advantage
When a country is able to produce a good more cheaply in absolute terms than another
What is meant by a comparative advantage
When a country is able to produce a good more cheaply relative to other goods produced domestically than another country through specialisation
What are some examples of the many assumptions of the theory of comparative advantage
- No transport costs
- Costs are constant and no economies of scale
- Only the 2 economies produce the goods
- No tariffs or trade barriers
What are some of the costs of trade
- Over-dependence
- Loss of jobs
- Environment
- Loss of culture
What is meant by Terms of trade
The ratio of export prices to import prices
What is the formula for the index of terms of trade
Index of export prices/index of import prices x 100
What is a trade bloc
A group of countries within a particular geographical region that have signed an agreement to reduce protectionist barriers between themselves, and often erect them between themselves and other nations
What is meant by a regional trade agreement
Between atleast 2 countries, the same thing as a trade bloc
What are the five main types of trading bloc
- Preferential trading areas
- Free trade areas
- Customs union
- Common markets
- Economic unions
What is meant by a preferential trading area
A group of countries with an agreement to lower or abolish protectionist barriers between themselves on some but not all goods
What is meant by a preferential trade agreement
The agreement in a preferential trading area
What is meant by free trade areas
A group of countries with free trade between themselves, but each nation is able to impose its own tariffs on goods from outside the bloc
What is meant by customs unions
Where there is free trade within the block and common external tariffs and quotes on goods from outside the bloc
What is meant by common markets
A customers union also with Free movement of capital and labour, common external tariffs and there are common product standards and laws concerning free movement of goods and services
What is meant by economic unions
A group of countries that are as fully interested as regions within one country, so are a fiscal union and monetary union
What is meant by a fiscal union
A group of countries where a central body has some powers over government borrowing, spending and setting tax rates
What is meant by a monetary union
A group of countries that share a common currency
What is meant by a bilateral trade agreement
Between 2 countries, or between on trade bloc and another country
What is meant by multilateral or plurilateral agreements
Trade agreements between atleast 3 countries
What is meant by trade creation
The switch from purchasing products from a high-cost producer to a lower-cost producer
What is meant by trade diversion
switching from purchasing products from a low-cost producer to a higher cost producer
Why may trade diversion occur
Country joins a bloc, so has to now import goods from other countries within that block with may be at a higher cost to importing them from other countries
Eg when UK joined EU, we could no longer import food from New Zealand so instead did so from France and Italy
What is a reason that free trade is better than custom unions
Avoids trade diversion
Means nation still has control over other trade
What does the European Central Bank do
Has similar role to Bank of England, but for EURO
What is meant by an optimum currency area
A group of countries where efficiency would be maximised by sharing a common currency
What is meant by harmonisation
Establishing common standards, rules, and levels on everything from safety standards to tariffs, taxes and currencies
What is the world trade organisation driven by
Trade liberalisation
What is meant by trade liberalisation
The move towards greater free trade through the removal of protectionist barriers to trade
What are the 2 main functions of the WTO
- Encourage countries to lower protectionist barriers
- Ensure countries act according to the trade agreements they have signed
What is meant by protectionism
The use of economic policies to regulate trade between countries mainly to reduce imports
What is an import/customs duty
A tariff, a tax on imports
What is meant by a quote
A physical limit on the quantity of an imported good
Other than tariffs and quotes, what other examples are there of protectionism policies
- Subsidies to increase exports or reduce imports
- Administrative barriers
- Exchange rate manipulation
How can subsidies increase exports
Subsidy to domestic firm reduces their cost, they can then reduce price to be more internationally competitive
How can subsidies be used to reduce imports
Subsidy given to domestic firm so they can reduce price, no need for consumer to import if domestic prices are as competitive
What are examples of administrative barriers that may reduce imports
- Impose quality standards
- Have a full nan on imports of that product
- Importers have to have licences
- Only imports in certain ports or airports
How can exchange rate manipulation be used as a protectionist policy
If it is a fixed exchange rate, government can peg the exchange rate to depress the value of their currency, therefore increasing exports and reducing imports
What reasons are there for restrictions on trade
- Encourage growth of domestic firms who in the short run have higher costs than international competitors
- Protect domestic jobs
- Gain revenue from tariffs
- Retaliation/economic power eg increase other economies’ reliance on you and decrease yours on theirs
What is the impact of protectionism on consumers
- Usually harmed as they can’t import so there is reduced choice and most likely higher prices
What is the impact to producers of protectionism
- Can be positive as it encourages domestic trade for firms who are unable to compete internationally, and can increase sales for firms who export
- However, purchasing materials from abroad will come at a higher cost and so result in them having to increase prices
What is the impact of protectionism on workers
- Protects jobs in short term
- However stops workers from doing what the free market would force them to do, which is find a new job in a new industry that is likely to have greater security
What is the impact of protectionism on the government
- Positive in short term due to higher revenue from tariffs, higher employment, better balance of payments
- Can be negative in long run if it results in a dynamically inefficient economy because firms can’t grow
What is meant by a trade barrier
Any measure or policy that artificially restricts international trade
What are the 2 parts of the balance of payments
- Current account
- Capital account and financial account
What is the current account made up of
- Balance of trade on goods and services
- Net primary income (interest profits and dividends gained from foreign investment, and payments from migrant remittances eg uk citizens working abroad)
- Net secondary incomes (EU contributions, spending on overseas aid, spending on overseas military defence and aid)
What is the capital account made up of
- Sale/transfer of patents, copyrights, franchise leases
- Transfer of ownership of fixed assets
What is the financial account made up of
- Net balance of FDI
- net Balance of banking flows eg hot money
- Portfolio investments (Net balance of debt and equity, eg buying government bonds)
What is FDI
Foreign direct investment
Investment made by an individual or firm into a business located in another country
What are some examples of causes of surpluses and deficits on the current account
- Availability of natural resources
- Underlying competitiveness that makes a nations goods more attractive to foreign buyers eg German cars
- Exchange rates
- Inflation
- Discretionary income of domestic citizens to invest abroad
What measures can governments enforce to reduces imbalances on the current account
- Changing exchange rate
- Deflationary policies
- Supply-side policies
- Protectionism
- Currency controls
What do changes in exchange rate to reduces trade imbalances rely on
The marshall Lerner condition
What is meant by the marshall Lerner condition
States that if combined elasticity of imports and exports is greater than 1, then a fall in the exchange rate will reduce a deficit and a rise will reduce a surplus
What is meant by deflationary policies
Aimed at aggregate demand, for example by raising interest rates or increasing taxes
Therefore households and firms reduce spending so reduce demand pull inflationary pressure
What are deflationary policies examples of
Expenditure reducing policies
What is meant by expenditure reducing policies
Government policies to reduce AD to reduce imports and increase exports
What conditions will make deflationary policies more effective
- High MPM
- Fall in inflation which will increase attractiveness of exports
How can supply side policies reduce imbalances in the current account
Increase investment and skills of labour force and therefore more exports and less imports
What are currency controls
Controls or limits on the purchase of foreign currency by domestic citizens and firms, so that they can’t import as much
What is an evaluation of using currency controls
Lead to corruption and bribery
What is meant by the effective exchange rate/trade weighted exchange rate/exchange rate index
Measure of the exchange rate of a country’s currency against a basket of other currencies, rather than a bilateral exchange rate
What is meant by the foreign exchange markets
Trading arrangement where currencies are bought and sold for each other
What causes the exchange rate to change
If there is a change in supply or demand for a currency
What factors may cause a change in the exchange rate for pound
- Rise in UK exports (demand for £)
- Rise in UK imports (buy $, so increase supply of £)
- Rise in UK interest rate (demand for £)
- Inflow of investment to UK
- Confidence/lack of confidence in value of pound (demand and supply)
What is meant by real exchange rate
The ratio of the cost of a typical bundle of goods in one country compared to its cost in another country in the currencies of each country
What is meant by nominal exchange rate
The rate at which one currency is bought and sold on the foreign exchange markets
How are real exchange rates calculated
By measuring purchasing power parities
Eg if same basket costs $600 and £300; real exchange rate is $2 = £1
What is nominal and real exchange rate often different
Nominal reflects speculative activity on the foreign exchange markets
What is meant by a floating or free exchange rate system
When exchange rates are solely determined by the free market
What is meant by a fixed exchange rate system
Where a currency has a fixed value against another currency or commodity
What is an example of a fixed exchange rate
Gold standard
In 1914 £1 = 0.257 ounces of gold
What is a fixed exchange rate system that some countries today use
Currency board system, where the price of one currency is fixed against another currency
What is meant by a Managed exchange rate system or hybrid or intermediate system
An exchange rate system where free markets determine the value of a currency but where central banks intervene from time to time to change the value of their currency
What is meant by an adjustable peg system
An exchange rate system where currencies are fixed in value in the short term but can be devalued or revalued in the longer term
What is meant by a crawling peg system
An adjustable peg system of exchange rates where there is an inbuilt mechanism for regular changes in the central value of the currency
What is meant by a managed float or dirty float exchange rate
Where the exchange rate is determined by free market forces but governments intervene from time to time to alter the free market price of the currency
What are some ways that the government can influence the exchange rate under a managed exchange rate system
- Buy and sell currencies
- Changing the interest rate
- Currency controls
- Borrow money from international institutions
- Devaluation
What does a government do with its currency to raise or lower the exchange rate
- Buy it’s own currency from central bank to raise it
- Sell it’s own currency if it wants to lower it
How does changing the interest rate influence exchange rate
If interest rates rise, more pounds demanded due to hot money flows and se value increases
What is meant by currency or exchange controls
Limits on the amount of foreign currency that can be bought
What is an international institution that government could borrow money from
IMF
International Monetary Fund
How does borrowing from IMF help exchange rate
Borrowed money can be used to buy back currency to raise exchange rate
Usually last resort
What is meant by devaluation of a currency
Means that the value of the currency officially falls
What is meant by revaluation of a currency
Means the value of the currency officially rises
What is meant by depreciation of a currency
Value falls because of free market forces or central bank intervention
What is meant by appreciation of a currency
When it’s value rises due to free market forces
What condition must there be for devaluation or revaluation to occur
Must have a pegged currency to another currency or basket of currencies
Why is volatility of a floating exchange rate a negative impact
International trade and investment is more risky
Why may a floating exchange rate still be better than a fixed one
It is robust, so is unlikely to collapse
Why may a fall in the value not result in more exports, less imports and therefore and improved current account balance
Depends on elasticity of products and ability to produce them or reliance on other countries
What is the marshall-Lerner condition
States the devaluation will lead to an improvement in the current account so long as the combined price elasticity was of exports and imports are greater than 1
What are three issues that are associated with governments and central banks using devaluation as a policy to improve the current account
- J curve
- Cost push inflation
What does the J curve show
In the short term the devaluation of currency is likely to lead to a deterioration in the current account position before it starts to improve
Why does the J curve occur
- In short term demand for exports and imports will tend to be inelastic
- Eg firms may be stuck in contracts with suppliers, consumers may not notice a difference or firms may not be able to change price quickly
Draw the j curve
Pg 435
How can devaluation of a currency cause cost-push inflation
Firms buying materials at a higher cost, so pass this on to consumer and spending increases rapidly
How can a lower exchange rate effect unemployment
Higher costs to firms importing may mean they have to reduce costs through redundancies
Higher prices to consumers will reduce spending, reducing AD and growth, so unemployment
Higher revenues to firms exporting may cause a rise in employment
What is an impact to growth of change in exchange rates
Higher exchange rate
What is the impact of a rising exchange rate on inflation
Will be controlled
Due to a fall in import prices
What is meant be capitalism
A system where trade and industry is controlled by private owners for profit, rather than the state
What advantages are there of capitalism
- Incentive for innovation
- Incentive to be efficient
- Consumers choose how to spend their money
What are some disadvantages of capitalism
- Firms gain monopoly and monopsony power
- Environmental externalities
- Leads to large inequality
- Prone to boom and bust
What is meant by personal distribution of income
The distribution of the total income of all individuals
What is the lorenz curve
A graphical representation of the degree of income or wealth inequality in society
Draw the Lorenz curve
Pg 449
What is the Gini coefficient
A statistical measure of inequality of income
What is the formula for gini coefficient
A/A+B
A = area inside Lorenz curve
B = area outside Lorenz curve
Explain what the result of the gini coefficient mean
Will be between 0 and 1
The higher the number, the more inequal the distribution of income
What is meant by absolute poverty
When individuals do not have the resources to be able to consume sufficient necessities to survive
What is meant by relative poverty
Poverty that is relative to existing living standards for the average individual
Eg in uk it is seen as having an income 60% or more, lower than the median income
What is meant by equity
Fairness
What is meant by horizontal equity
The identical treatment of identical individuals or groups in society in identical situations
Eg men and women in same job on same income
What is meant by vertical equity
The different treatment of individuals or groups which are dissimilar in characteristics
Eg paying a lower wage to a 16 year old than a 40 year old due to experience
How can government intervene to reduce inequality/increase equity
- Taxation
- Government spending
- Minimum wage
- Laws such as equal pay
- Maximum wages
- Welfare payments
What is a progressive tax
A tax where the higher the income of the taxpayer, the large the proportion of income is paid in tax
What is meant be regressive tax
A tax where the higher the income of the taxpayer, the smaller the proportion of income is laid in tax
Eg VAT
What is meant by proportional tax
A tax where as the income of taxpayers increases, the same proportion of income is paid in tax
What is the difference between economic growth and development
Growth concerns the rate of a change in national income eg GDP, whereas development does concern this, but also how that GDP is distributed
What are examples of indicators that can be used to measure economic development
- Education
- Life expectancy
- Social mobility
- Equality
- Access to medical care
- Environment
- Access to food and water
- Rate of homelessness
What is the correlation between economic growth and economic development
Economic development is likely to occur as a result of growth
What is an example of an actual measure of economic development
- Human development index (HDI)
What is HDI based upon
- Health (measured by life expectancy at birth)
- Education (measured by average years of schooling of adults aged over 25, and expected years of schooling for current five year olds)
- Income (measured by real gross national income per capita)
What does an HDI score show
Between 0 and 1
Higher to one, better standard of living
What are some examples of factors that influence growth and development
- Strength of law
- Level of corruption
- education and skills
- Level of government spending
- Infrastructure
- Technology
- Level of poverty
- Income distribution/inequality
- Access to credit
- Ability to trade internationally
- Availability of commodities and factors of production
What is meant by the savings gap in developmental economics
The difference between the actual level of savings in an economy and the level of savings needed to finance investment required for a higher rate of economic growth
What is meant by the foreign exchange gap
The difference between the actual level of exports and the level of exports needed to create higher economic growth
What is meant by a resource curse
Where an abundance of natural resources in a country is exploited, but where there is consequently little increase in economic development eg mining towns
What is meant by capital flight
When savings are sent abroad by citizens and firms, to a country that is seen as being more secure or where money can be hidden
What is meant by the Harrod-Domar growth model
A model which suggests that economic growth is dependent on the saving ratio and technological process
Draw the Harrod-domar growth model
Slattery book 29th January
How do different governments use different strategies to influence growth and development
Some leave it to the free market, through removal of government intervention such as subsidies, through trade liberalisation and privatisation
Some use interventionist policies
What is the Lewis model
A model that shows the strategy of development, where labour move from a traditional agricultural sector to the manufacturing urban sector
Why does labour move to urban areas for development to occur (Lewis model)
- More efficient
- More capital
What are some limitations of the Lewis model
- It assumes mobility of labour (geographical and occupational)
- Causes reduces output in rural areas (inequality)
- Ignores that cost of labour will increase in long term
What is meant by a financial market
Where buyers and sellers can buy or trade a range of services or assets that are monetary in nature
What are some of the key roles of a financial market
- Facilitate saving (eg bank account, stocks, bonds, shares)
- Lend to firms and individuals
- Facilitate exchange of goods and services Eg print money, bank transfer, cheques
- Provide forward markets
- Provide a market for equities (shares)
- Provide insurance
What is meant by equity
The value of the assets owned by the shareholders (shares)
What are the different types of financial institutions
- Retail banks
- Commercial banks
- Investment banks
- Saving vehicles
- Speculators
- Insurance companies
What is a retail bank
Banks that provide services to individuals
What are commercial banks
Banks that provide services to businesses
What are investment banks
Banks that engage in a variety of activities in financial markets eg foreign exchange, stock exchange
What are some examples of saving vehicles
- pension funds
- Private equity and hedge funds
- Bank accounts
What are examples of financial institutions who are speculators
Hedge funds
Investment banks
What are money markets
Financial markets that provide short term borrowing and lending
What are capital markets
Financial markets which provide long term borrowing and lending
What are foreign exchange markets
Financial markets where different currencies are traded
What are examples of market failure in financial markets
- Asymmetric information
- Moral hazards
- Speculation and market bubbles
- Market rigging
- Externalities
Why may asymmetric information exist in financial markets
Seller may have greater knowledge of future value of asset
What is meant by a moral hazard
When an economic agent makes decision in their own best interest knowing that there are potential risks, but the risks will be borne by other economic agents
What is an example of a moral hazard in financial markets
Traders in investment banks can earn great bonus’s for high risk trades, so will trade someone’s money with this risk in an attempt to get a bonus
What is meant by a market bubble
When speculation causes the price of a particular asset to be driven to an excessive high and then collapse
What is an example of a market bubble in financial markets
Housing market, by a large amount of credit being offered relatively cheaply to buyers, demand rose and therefore so did prices at an unsustainable rate
What is meant by market rigging
Collusion within financial markets
What is a central bank
A financial institution in a country or group of countries responsible for issuing money, setting interest rates, controlling monetary policy, managing gold and currency reserves
What is meant by a lender of last resort
Occurs when financial institutions require money from the central bank to balance their accounts when they are failing
What is meant by a systemic risk in financial markets
The danger that the failure of parts of the financial system will lead to the collapse of the whole of the financial system
What are some reasons for public expenditure
- Resolve market failure and increase efficiency
- Improve equity and equality
- Reduce negative externalities eg subsidise firms to be more sustainable
What is total government spending made up of
Capital government expenditure
Current government expenditure
What is capital government expenditure
Spending on investment such as infrastructure and schools, that are consumed over a long period of time
What is current government expenditure
The total of general government final consumption, transfer payments and debt interest
What is general government final consumption
Spending on goods and services that are consumed over a short period of time eg teachers wages, hospital electricity
What are transfer payments
Welfare payments such as state pension and child benefit
What is meant by crowding out
When extra government spending leads to lower private sector spending
Why does crowding out occur
Increased public spending is likely to be as a result of increased tax revenue, so money has been spent by government instead of privately
Why may public sector spending not crowd out private sector spending
- Spending in transfer payments will also then by spent privately, so no change
- government spending may lead to crowding in due to the multiplier effect
- Government spending may lead to growth, with causes accelerator effect and firms have to spend more to grow as well
What is meant by crowding in
When government spending leads to higher private sector spending
What are the reasons for taxation
- Pay for government expenditure
- Correct market failure such as externalities (tobacco)
- Control inflation
- Redistribute wealth/income
What are the 4 characteristics that Adam Smith argues a good taxation system should have
- Cost of collection must be low relative to yield
- Timing of collection and amount to be paid should be clear and certain
- Means and timing of payment should be convenient to taxpayer
- Taxes should be levied according to the ability of the taxpayer to pay
What is the laffer curve
A curve that shows as tax rate increases, tax revenue will increase to an optimum, but then begin to fall as labour withdraw supply
Draw laffer curve
516
What is meant by a cyclical deficit
The part of fiscal deficit that is caused by government spending and taxation changing through the trade cycle
What is a reason that government spending and revenues may change at a point in the trade cycle
In a recession tax revenues will be low and government spending will be high so deficit will be larger
What is meant by the range of a cyclical deficit
That difference between the deficit at a boom and at a recession
What is meant by the structural deficit
Fiscal deficit that exists when the cyclical deficit is zero at the top of the boom
Draw a graph showing a structural deficit in the trade cycle
Pg 525
What is meant by the actual deficit
The combination of the structural deficit and the cyclical deficit at that point in time
What is meant by a current budget deficit
When government revenues are less than current expenditure
Does not include capital expenditure
What is meant by the primary budget deficit or surplus
The actual fiscal deficit not taking into account interest payments on the national debt
What is meant by demand management
Government use of fiscal or other policies to manipulate the level of demand in the economy
What is meant by expansionary fiscal policy
Fiscal policy leading to larger budget deficits, through more spending and less taxation
What is meant by contractionary fiscal policy
Government aims to reduce budget deficit or increase surplus through less spending and more taxation
What is meant by automatic stabilisers
Mechanisms that reduce the impact of changes in the economy or national income
What is an example of an automatic stabiliser
During a boom period, employment will be higher so welfare payments will be reduced, meaning the rise in AD is controlled
What measures are there to reduce fiscal deficits
- Fiscal austerity
- Do nothing, leave it to free market and automatic stabilisers
What is meant by fiscal austerity
Same as contractionary fiscal policy
Increase tax and reduce government spending
What measures can be used to reduce debt
- Austerity
- Automatic stabilisers
- Inflation to reduce real value of debt
- If economy grows, debt will reduce as a % of GDP
What is meant by exchange rate policy
Manipulating the exchange rate either through buying and selling currency or monetary policy, in order to achieve macroeconomic objectives eg balance of payments
What is meant by direct control
A government measure that is imposed on the price or the quantity of a single product or factor of production
What is an example of direct control
- Imposing maximum prices
- Setting minimum wages
- Quotas
