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Economics > Theme 4 - A Global Perspective > Flashcards

Theme 4 - A Global Perspective Flashcards

1
Q

What is the balance of payments (simple definition)?

A

A record of all inflows (positive) and all outflows (negative) of money/currency

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2
Q

UK’s top 5 trade partners:

A
  • US - 22.1%
  • Germany - 7.0%
  • Ireland - 6.6%
  • Netherlands - 6.2%
  • France - 5.2%
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3
Q

The top 6 items the UK imports:

A
  • mineral fuels
  • mechanical appliances
  • electronic equipment
  • precious metals
  • motor vehicles
  • pharmaceutical products
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4
Q

The top 6 items the UK exports:

A
  • cars
  • mechanical power generators
  • medicinal and pharmaceutical products
  • crude oil
  • aircraft
  • refined oil
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5
Q

What are the 3 accounts in the BOP?

A
  • current
  • capital
  • financial
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6
Q

What is the current account?

A

The balance of trades in goods (imports and exports) and services.
Also looks at net primary income (and net secondary income).

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7
Q

What is net primary income?

A

The net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers

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8
Q

What is net secondary income?

A

The annual contributions to the EU, military aid and overseas aid

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9
Q

What is the capital account?

A

The sale/transfer of patents, copyrights, franchises, leases and other transferable contracts, and goodwill.
Transfers of ownership of fixed assets.

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10
Q

What is the financial account?

A

Includes transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents.
Takes into account - balancing item, changes to the value reserved of gold and foreign currency, overall BOP = 0

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11
Q

What is the balance of trade?

A

The difference between the value of exports of goods/services and the value spent on imported goods/services

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12
Q

What are some ways to decrease the amount imported and increase the amount exported? (3)

A
  • depreciate/weaken the value of the £ which lowers interest rates
  • decrease AD by tight fiscal policy (decrease G, increase tax)
  • decrease supply-side policies (privatisation, red-tape and other barriers)
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13
Q

Which account has a surplus?

A

The financial account

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14
Q

Which account has a deficit?

A

The current account

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15
Q

What are 2 tools the financial account uses to ensure a surplus?

A
  • interest rates
  • selling bonds
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16
Q

Reasons for surpluses + deficits (8)

A
  • uneven distribution of natural resources
  • differential competitiveness
  • exchange rates
  • inflation
  • investment + long term economic growth
  • domestic and government spending
  • recession
  • volatile global prices
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17
Q

What are structural and cyclical changes to the economy?

A

A structural change in the economy is one that is permanent or very long-lived, while a cyclical disturbance tends to return to its previous level over a few years

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18
Q

What are the significances of have a deficit on the economy? (5)

A
  • net outflow of AD from circular flow
  • loss of jobs in sectors affected by an increase in imports
  • fall in foreign exchange reserves (smaller, developing nations are especially effected)
  • can lead to exchange rate weakness (higher yield on government debt)
  • a deficit cannot really be financed by hot money + portfolio investments
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19
Q

Consequences of a deficit in the economy?

A
  • lower AD
  • debt burdens
  • lowered exchange rates
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20
Q

What is meant by a “default on payments”?

A

The failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security

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21
Q

What the Marshall-Lerner condition?

A

States that a devaluation will improve the balance of trade if the sum of the price elasticities of demand for exports and imports (in absolute value) is greater than 1.

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22
Q

Examples, specific to the UK, of causes for a deficit in the BOP (6)

A
  • elasticity of demand for imports
  • decline of manufacturing
  • growth of emerging markets
  • net importer of food & fuel
  • lack of competitiveness
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23
Q

Does a deficit in the current account matter? (4)

A
  • partial auto-correction (exchange rates mean the value of the £ fluctuates)
  • investment and supply side policies
  • capital flows
  • the financial account
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24
Q

What may the deficit in the current account lead to? (5)

A
  • structural weakness
  • an unbalanced economy
  • loss of output & employment
  • money flowing out and problems financing the debt
  • downward exchange rate pressure
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25
Q

What is the meaning of “expenditure switching policies”?

A

Ways to switch the economy to increase the amount of domestic goods/services being purchased (decreasing imports) and to increase the amount other countries export from the UK to themselves (increasing exports)

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26
Q

Expenditure switching policies (5)

A
  • exchange rate policy
  • protectionism
  • government investment in domestic industry
  • deflationary policy
  • supply-side policy
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27
Q

What does the J-curve illustrate?

A

The way that a country’s balance of trade initially worsens following a devaluation of its currency (time-lag), then recovers and finally surpasses its previous performance

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28
Q

What are the 2 exchange rate policies that are used to improve the BOP?

A
  • decrease interest rates (decreases hot-money to depreciate the value of the £)
  • increase the number of £s in the supply (QE) (by buying lots of a foreign currency to increase demand for the foreign currency and increase supply of the £)
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29
Q

Evaluation for using exchange rates to improve the BOP (7)

A
  • time-lag (J-curve)
  • priority of objectives
  • conflict of objectives
  • decreasing interest rates, may lead to inflation
  • limit to how much you can increase the supply of £s because banks can’t just create more money (hyper-inflation)
  • magnitude of interest (liquidity-trap)
  • Marshall-Lerner condition
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30
Q

Examples of protectionism (6)

A
  • tariffs
  • embargos (ban of exports from a country)
  • subsidies
  • red tape
  • quotas
  • import duties (increase prices)
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31
Q

Evaluation for protectionism improving the BOP (8)

A
  • retaliation
  • price isn’t the only factor that decides whether someone buys something
  • foreign firms can relocate to avoid import duties
  • hard to enforce
  • loss of efficiency
  • may be inflationary
  • higher prices for consumers
  • WTO rules
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32
Q

What are the 2 deflationary fiscal policies that are used to improve the BOP?

A
  • decrease government spending
  • increase tax rates
    (decreases imports because it puts-off customers from spending and decrease AD)
    (increases exports because the decrease in price makes them more competitive)
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33
Q

Evaluation for using deflationary fiscal policy to improve the BOP (8)

A

Imports:
- martial learner condition
- brand loyalty
- still have to import some things e.g. food and fuel
Exports:
- there are other factors that determine exports (quality)
- prices may not fall significantly (magnitude)
- government spending is a small % of AD
- MPM
- output gap

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34
Q

What is “game theory”?

A

Related to the concept of interdependence between firms in an oligopoly. It is used to predict the outcome of a decision made by one firm, when it has incomplete information about the other.

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35
Q

What is the “prisoner’s dilemma” (game theory)?

A

Type of game theory - a situation where two parties, separated and unable to communicate, must each choose between cooperating with the other or not.

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36
Q

What is the “dominant strategy” (game theory)?

A

Eliminates the need for players to anticipate or predict the behaviour of others, as it guarantees the best outcome regardless of what other players do.

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37
Q

What is “the first mover”/what does it mean to “break first” in terms of collusion?

A

First to break rank/collusion to avoid being the one worse off (drop prices, start advertising etc)

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38
Q

Why would firms want to be the “first mover” in terms of collusion? (2)

A
  • increase market share
  • increase profit/revenue
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39
Q

Evaluation points for being the “first-mover”

A
  • firms unlikely ro trust each other in future negotiations
  • collusion is still more profitable
  • damage to brand image of both businesses
  • size of fine might be small anyway
  • not enough/inaccurate information provided (would have never been caught)
  • game theory round 2
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40
Q

What are the 3 deflationary monetary policies that are used to improve the BOP?

A
  • increase interest rates
  • decrease credit availability
  • QT
    (decrease imports by decreasing AD)
    (increase exports by making them more competitive)
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41
Q

Evaluation for using deflationary monetary policy to improve the BOP (5)

A
  • martial learner condition
  • liquidity trap (may need to increase interest rates by a lot to make a difference)
  • depends on the exchange rate (increased strength of the exchange rate due to hot money)
  • MPM
  • output gap
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42
Q

How are supply-side policies used to improve the BOP?

A
  • increase supply to decrease price by increasing productivity (done by increasing the number of people who work or increasing the number of businesses)
  • increase government spending/investments to increase competition
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43
Q

Examples of supply-side policies (7)

A
  • reducing taxes
  • reducing regulations
  • reducing benefits
  • investing in education and healthcare
  • encouraging R&D
  • privatisation
  • subsidies (makes exports cheaper & allows for import substitution industry)
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44
Q

Evaluation for using supply-side policies to improve the BOP (6)

A
  • time-lag (long-term) - other factors may change in the time it takes
  • opportunity cost
  • price isn’t the only determinant
  • AD may increase if the number of people working increases (to improve productivity)
  • firms may become reliant on subsidies & may not actually use it on what it was given to them for
  • no guarantee of success
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45
Q

What 3 diagrams could be used to illustrate how supply-side policies improve the BOP?

A
  • AS/AD diagram (shows an increase in exports and decrease in price)
  • LRAS/AD diagram (shows an increase in exports and decrease in price)
  • PPF diagram (shows the opportunity cost)
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46
Q

What 3 diagrams could be used to illustrate how supply-side policies improve the BOP?

A
  • AS/AD diagram (shows an increase in exports and decrease in price)
  • LRAS/AD diagram (shows an increase in exports and decrease in price)
  • PPF diagram (shows the opportunity cost)
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47
Q

Points for evaluation judgement in an essay about reducing the current account deficit (4)

A
  • conflict of objectives
  • cause of the current account deficit
  • time lags/cost
  • is the current account deficit actually a problem? (it isn’t sustainable over time if the deficit as a % or GDP > real GDP)
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48
Q

What is globalisation?

A

The interdependence of world economies for trade (includes people, products, services, and ideas)

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49
Q

Factors contributing to globalisation in the last 50 years (7)

A
  • technological advances
  • trade liberalization
  • economic liberalization
  • transport infrastructure
  • financial integration
  • multinational corporations
  • political stability
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50
Q

What impact has globalisation had on peoples’ lives? (6)

A
  • access to a wider variety of goods/services
  • more education opportunities for developing countries
  • scientific research is carried out by a larger community of people
  • more international cooperation in regards to controlling global warming
  • lower production costs of products, passed onto consumers as lower prices
  • greater cultural exchange
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51
Q

Examples of firms that demonstrate globalisation (6)

A
  • Coca-cola
  • Starbucks
  • Nike
  • Gap
  • Google
  • Mcdonals
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52
Q

Examples of exciting, emerging economies (6)

A
  • Brazil
  • Russia
  • India
  • China
  • Nigeria
  • Saudi Arabia
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53
Q

Why are emerging economies considered economies of the future?

A

Globalisation has and will allow them to trade across larger distances and with more countries, which will expand trade volume and lead to more modern financial institutions

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54
Q

What happens to worker employment in the UK as a result of globalisation?

A

Employment may increase for skilled workers but decrease for unskilled workers.
Employment may increase because there are more firms and trade.
Employment may decrease because there are more people fighting for limited jobs.

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55
Q

What happens to worker wages as a result of globalisation?

A

Minimum wage may increase as firms need to give offer a more competitive wage

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56
Q

What happens to consumer choice, price, and availability as a result of globalisation?

A

May increase due to the increase in the number of firms and amount of trade which means more goods/services are on offer.
There is also economies of scale for the firms so a lower price for consumers.

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57
Q

What happens to producer specialisation as a result of globalisation?

A

May increase because the UK specialises in producing high-quality goods.
However, the inequality gap may increase, and the UK industry becomes dependent on the area it is specialised in.

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58
Q

What happens to producer footloose locations as a result of globalisation?

A

More firms are happy to move to the UK and operate here.
However, if lots of UK firms are happy producing in other countries, there may be an increase in unemployment.

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59
Q

What happens to environmental and social concerns as a result of globalisation?

A

Increase in concerns as more is being produced to be traded.

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60
Q

Globalisation’s impact on individual countries (2)

A
  • economic growth
  • income inequality
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61
Q

Globalisation’s impact on governments (2)

A
  • reduced control
  • policy coordination
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62
Q

Globalisation’s impact on producers and consumers (2)

A
  • access to markets
  • consumer choices
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63
Q

Globalisation’s impact on workers (2)

A
  • job opportunities
  • labour standards
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64
Q

Globalisation’s impact on the environment (2)

A
  • environmental degradation (resource extraction & pollution)
  • growing emphasis on sustainable practices
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65
Q

Demand-side causes, leading to a surplus in a country’s BofP (3)

A
  • high incomes abroad
  • low incomes at home
  • weak exchange rate (WIDEC)
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66
Q

Supply-side causes, leading to a surplus in a country’s BofP (7)

A
  • low inflation rate at home
  • low unit labour costs
  • low minimum wage
  • weak trade unions
  • strong investment at home
  • new resources
  • gains in comparative advantage
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67
Q

Consequences of a surplus in the BofP (5)

A
  • increase in (X-M) —> increase in AD —> increase in growth —> decrease in unemployment —> increase in inflation
  • appreciation of exchange rate
  • financial account deficit
  • can harm international relations
  • sign of an unbalanced economy
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68
Q

What are the types/systems of exchange rates? (3)

A
  • fixed
  • managed-floating (dirty float)
  • free-floating
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69
Q

What is a fixed exchange rate system?

A

A system in which the value of one currency is tied to another, a basket of currencies, or another measure of value, such as gold

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70
Q

What is a managed-floating exchange rate system?

A

A system that allows a nation’s central bank to intervene regularly in foreign exchange markets to change the value of the currency to meet specific macroeconomic objectives

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71
Q

What is a free-floating exchange rate system?

A

A system that occurs when a government allows the exchange rate to be determined purely by market forces and there is no attempt to ask the central bank to influence the external value of the exchange rate

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72
Q

Which type of exchange rate system does the UK have?

A

Free-floating (since 1992)

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73
Q

Countries with a fixed exchange rate system (5)

A
  • Qatar
  • Saudi Arabia
  • Panama
  • Iraq
  • Hong Kong
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74
Q

Countries with a managed-floating exchange rate system (5)

A
  • China
  • Costa Rica
  • Brazil
  • South Korea
  • New Zealand
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75
Q

Countries with a free-floating exchange rate system (5)

A
  • UK
  • Australia
  • Mexico
  • Poland
  • USA
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76
Q

Define appreciation

A

An increase in the value of an exchange rate (floating exchange rate systems)

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77
Q

Define depreciation

A

A decrease in the value of exchange rate (floating exchange rate systems)

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78
Q

Which exchange rate system uses the terms “revaluation” and “devaluation”?

A

Fixed exchange rate currency system

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79
Q

Which exchange rate system uses the terms “appreciation” and “depreciation”?

A

Free-floating and managed-floating exchange rate systems

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80
Q

What are the 2 main types of fixed exchange rate systems?

A
  • crawling peg (the value of currency is adjusted gradually over time, done usually to keep the currency’s value in line with inflation)
  • fixed peg (the value of the currency is fixed at a specific rate and is not allowed to fluctuate)
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81
Q

Main arguments for a country to adopt a fixed exchange rate (5)

A
  • reinforcing gains in comparative advantage
  • trade and investment
  • some flexibility permitted
  • reduction in the costs of currency hedging
  • disciplines on domestic producers
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82
Q

Advantages of fixed exchange rates (3)

A
  • it provides greater certainty for businesses and investors, as they know exactly how much their currency is worth in other currencies
  • they can help to stabilise the economy, as they make it more difficult for the value of the currency to fluctuate wildly
  • they can help to promote trade, as businesses are more likely to trade with countries that have a fixed exchange rate
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83
Q

Disadvantages of fixed exchange rates (3)

A
  • they can make it difficult for the government to use monetary policy to manage the economy
  • they can make the economy more vulnerable to shocks, as a sudden change in the value of the pegged currency can have a significant impact on the economy
  • they can be difficult to maintain, as they require the government to intervene in the foreign exchange market to keep the currency’s value at the desired level
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84
Q

Motivations for managing a floating currency through intervention (2 –> 5)

A

The central bank might attempt to either:
bring about a depreciation to:
- improve the balance of trade
- reduce the risk of a deflationary recession
- rebalanced the economy
Or
bring about an appreciation of the currency to:
- curb demand-pull inflationary pressures
- reduce the prices of imported capital and technology or essential inputs to enhance long run growth potential

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85
Q

Limits to central bank intervention to manage a currency’s value (6) (aka, evaluation)

A
  • requires large-scale foreign exchange reserves - many smaller and relatively poorer countries do not have these
  • central banks intervening on their own may have little or no market power against the sheer weight of speculative buying and selling in global currency markets
  • changing the interest rates ro I fluency a currency might conflict against the other macroeconomics objectives - raising interest rates to support a currency might stifle growth
  • the J-curve
  • the martial-lerner condition
  • may be inflationary
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86
Q

In terms of free-floating exchange rates, what would each of the following cause (chain of development):
- a fall in the value of exports
- a rise in spending on imports
- the BofE raising interest rates

A
  • a fall in the value of exports –> reduced demand for £s –> currency depreciation
  • a rise in spending on imports –> increased supply of £s –> currency depreciation
  • the BofE raising interest rates –> inflow of hot money into UK banks –> increased demand for sterling among speculators –> currency appreciation
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87
Q

What are the 2 measures of international competitiveness?

A
  • relative unit labour costs (compare the cost of labour in one country to another)
  • relative export prices (compare the prices of a country’s exports to those of its competitors)
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88
Q

Factors influencing international competitiveness (4)

A
  • cost factors
  • quality and innovation
  • infrastructure and logistics
  • government policies
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89
Q

Benefits of being internationally competitive (4)

A
  • increased exports
  • job creation
  • higher standards of living
  • foreign direct investment (FDI)
90
Q

Problems of being internationally competitive (4)

A
  • trade deficits
  • economic decline
  • unemployment
  • income inequality
91
Q

Distinction between capital expenditure, current expenditure and transfer payments

A
  • capital expenditure - refers to government spending on long-term investments and assets that are expected to provide benefits over multiple years.
  • current expenditure - consists of day-to-day government spending on recurring items, such as salaries, maintenance, and operational costs.
  • transfer payments - government payments made to individuals or groups without any expectation of goods or services in return.
92
Q

Reasons for the changing size and composition of public expenditure in a global context (4)

A
  • economic conditions
  • government priorities
  • demographics
  • political ideologies
93
Q

What does “terms of trade” (TOT) mean?

A

A measure of a country’s purchasing power for imports relative to exports.
It tells you the amount of imports a country’s can buy for each unit of exports.

94
Q

In terms of TOT, what do the terms “improvement” and “deterioration” mean?

A
  • improvement - when a country’s export prices increase relative to its import prices.
  • deterioration - when a country’s import prices increase relative to its export prices.
95
Q

TOT equation

A

(index of export prices / index of import prices) x 100 = TOT

96
Q

Factors influencing a country’s terms of trade (6)

A
  • exchange rate
  • commodity prices
  • added value
  • inflation rates
  • productivity
  • technology
97
Q

What is a trading bloc?

A

Usually groups of countries in specific regions that manage and promote trade activities. Trading blocs lead to trade liberalisation (the freeing of trade from protectionist measures) and trade creation between members, since they are treated favourably in comparison to non-members.

98
Q

Types of trading blocs (4)

A
  • free trade areas (FTAs)
  • customs unions
  • common markets
  • monetary union
99
Q

What are “free trade areas” (FTAs)?

A

A free trade area is a bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries
e.g. Canada–United States–Mexico Agreement (CUSMA)

100
Q

What are “customs unions”?

A

A customs union is an agreement between countries in which all goods/services produced by members are traded tariff free. Additionally, countries agree on common tariff rates on imports from all external (third-party) countries
e.g. the European Union (also a common market)

101
Q

What are “common markets”?

A

Similarly, to a customs union, goods/services are traded tariff-free in common markets
Additionally, the four factors of production flow freely between member countries
The goal is to improve the allocation of resources between the common market members and lower the costs of production
e.g. the European Union (also a customs union)

102
Q

What are “monetary unions”?

A

A monetary union takes integration a step further. Members enjoy all of the benefits of a customs union and common market, but then also establish a common central bank which issues a common currency and controls the monetary policy of member countries
e.g. the European Monetary Union

103
Q

Factors effected by differing levels of public expenditure as a proportion of GDP (5)

A
  • productivity and growth
  • living standards
  • crowding out
  • level of taxation
  • equality
104
Q

Main factors to think of when question asks about micro (8)

A

POPSICLE:
- price
- output
- profits
- structure of market
- inefficiency
- competition
- labour market
- externalities

105
Q

Main factors to think of when question asks about macro (8)

A

DIGESTIF:
- development
- inflation
- growth
- employment
- structure of economy
- trade
- inequality
- fiscal balance

106
Q

What is the UK’s debt as a % of GDP?

A

40%

107
Q

What is debt servicing?

A

When the government pays back interest on the debt

108
Q

What is debt interest?

A

The interest paid on the National debt

109
Q

Current government expenditure = … + …

A

Current government expenditure = general government final consumption + debt

110
Q

What % of AD is G?

A

25%

111
Q

What is the theory of crowding-out?

A

Excessive government spending can lead to an increase in government borrowing which raises interest rates, potentially reducing private sector investment and economic growth.

112
Q

What is the multipler value for the UK?

A

x1.5

113
Q

When and why was crowding-out introduced into the UK?

A

In the 70s/80s to lower the high interest rates (17-18%)

114
Q

What are the steps of crowding-out? (8)

A
  • if the government runs a big budget deficit, it will have to sell debt
  • getting institutions to purchase debt may require higher interest rates
  • a rise in interest rates may then crowd-out private investment and consumption
  • eventually higher government spending needs to be funded by higher taxes
  • this squeezes spending and investment by the private sector
  • a fiscal stimulus is therefore less effective in an expansion
  • at full capacity, an increase in public demand crowds out private demand
  • leaving output unchanged (with higher prices)
115
Q

Evaluation points for crowding-out (4)

A
  • the probability of 100% crowding out is remote, especially if the economy is operating below its capacity and if there is a plentiful supply of saving available to purchase newly issued state debt
  • Keynesian economists argue that fiscal deficits crowd-in private sector investment
  • well-targeted, timely, and temporary increases in government spending can absorb under-utilised capacity and also provide a strong multiplier effect that generates extra tax revenue
  • the available supply of loanable funds is not limited to domestic sources, external finance is available from other countries
116
Q

What is crowding-in?

A

It is a Keynesian economic theory that suggests that an increase in government spending can lead to an increase in private investment.
The theory argues that higher government spending can stimulate economic activity and create a more favourable macro-economic environment for private capital investment.
The idea behind crowding in is that government spending can boost aggregate demand (C+I+G+X-M) which can lead to increased real economic growth, higher employment and higher real incomes.
This, in turn, can increase consumer and business confidence (an improvement in animal spirits) leading to increased private investment in new projects and businesses.

117
Q

Why is the National debt sustainable for the government? (3)

A
  • majority of the debt is held by the government’s own bank, the BoE
  • interest rates are low (1%)
  • finance is available overseas because people from abroad are willing to buy the bonds)
118
Q

Reasons why crowding-in might occur (4)

A
  • increased confidence
  • more jobs
  • the multiplier effect (MPC)
  • spending on targeted infrastructure
119
Q

Reasons why National debt may be a cause for concern (7)

A
  • increased prices (inflationary)
  • may limit expansionary policy in the future if it gets too large
  • decreased economic growth
  • crowding-out
  • default payments
  • increased taxes
  • increased unemployment
120
Q

What is a ‘common market’?

A

The free movement of goods, services, capital and labour

121
Q

What is a ‘social chapter’?

A

Common laws on Employment Law and Consumer Law

122
Q

What are ‘harmonising standards’?

A

Once you pass the Quality Standards in one country, you’ve passed them in all 27

123
Q

What is the ‘Cohesion Fund’?

A

Money that is used for structural projects in the EU (roads, schools etc)

124
Q

What is the ‘Common Agricultural Policy’?

A

Grants and subsidies for farming

125
Q

The EU is an example of a … and a … and a …

A

Customs union and common market and economic union

126
Q

What is protectionism?

A

Protecting your domestic markets from foreign goods + services

127
Q

What are tariffs?

A

Taxes on imports

128
Q

What are quotas?

A

A physical limit governments impose on trade

129
Q

What are embargoes?

A

A ban placed on the importation or exportation of goods/services or currency to another state

130
Q

What are subsidies?

A

A payment from the government to a producer to lower their costs of production and encourage them to produce more

131
Q

What are quality standards?

A

Established benchmarks and guidelines that ensure the consistency and safety of products + services across various industries

132
Q

What is admin + red-tape?

A

Excessive regulations and administrative processes

133
Q

Tariffs reduce … and increase …

A

Reduce consumption of foreign goods
Increase production of domestic goods

134
Q

What are “automatic stabilisers”?

A

Are automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow during a recession or an increase in state welfare benefits when unemployment is rising.
This leads to a surplus in the fiscal balance to prevent the economy from growing too quickly and “over-heating”

135
Q

What is “discretionary fiscal policy”?

A

Involves deliberate changes in government expenditure and taxes with the intention of influencing aggregate demand.
Eg. furlow scheme in Covid

136
Q

Actual deficit = … + …

A

Actual deficit = cyclical deficit + structural deficit

137
Q

What is “cyclical fiscal balance”?

A

The size of the fiscal deficit is influenced by the state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low.

138
Q

What is “structural fiscal balance”?

A

Part of the deficit which is not related to the state of the economy. This part of the fiscal deficit will not disappear when the economy recovers. A structural factor might be the long-term effects of an ageing population or perhaps the underlying level of personal and corporate tax avoidance.

139
Q

Why might another country such as the U.S. not like the EU subsidising UK businesses

A
  • makes foreign goods cheaper and more competitive
  • impact on AD as domestic consumption-demand decreases
140
Q

For (3) and against (4) tariffs:

A

For:
- protect domestic goods
- protect new industry
- government revenue

Against:
- loss of economic welfare
- rewards production inefficiencies
- trade wars
- damages global economy

141
Q

Primary budget deficit doesn’t include …

A

Debt interest

142
Q

Factors affecting the size of the fiscal deficit (4)

A
  • unseen events
  • debt interest
  • structural deficit
  • cyclical deficit
143
Q

Evaluation points for the factors affecting the size of the fiscal deficit (4)

A
  • depends on GDP figures + the rate of change of GDP
  • depends if GDP is increasing or decreasing
  • depends on the state of the economy
  • national + private debt
144
Q

Top 5 taxes that pay for government spending

A
  • income tax - 25.6%
  • NIC - 16.4%
  • VAT - 15.5%
  • company taxes - 9.5%
  • council tax & business rates - 7.0%
145
Q

Definition of “progressive taxes”

A

The marginal rate of tax rises as income rises
E.g. income tax

146
Q

Definition of “proportional taxes”

A

The marginal rate of tax is constant, leading to a constant average rate of tax
E.g. NICs

147
Q

Definition of “regressive taxes”

A

The marginal rate of tax falls as income rises
E.g. excise duties on tobacco & alcohol

148
Q

What is “fiscal drag”?

A

A phenomenon that occurs when inflation pushes taxpayers into higher income tax brackets, resulting in higher tax payments.

149
Q

What are the 4 principles Adam Smith said a tax system should follow?

A
  • fairness
  • certainty
  • convenience
  • efficiency
150
Q

What did Adam Smith say about tax systems?

A

The burden should be proportional to the ability to pay and there should be a low cost of collection

151
Q

Embargoes are often …-based

A

Politically-based

152
Q

For (3) and against (4) quotas:

A

For:
- open trade deals back, in return
- more choice and variety for consumers
- encourages domestic firms to be more efficient, innovative and competitive
- increases the supply
- lower prices due to (EoS) which could be deflationary
- more affordable for low-income groups due to the cheaper prices

Against:
- may be worse quality (inferior goods) for the consumers (may be bad for them)
- smaller firms can’t compete with the lower prices
- worse animal welfare regulations and environmental impact (air miles, fertilisers, deforestation)

153
Q

Explain the Laffer curve

A

Y-axis - total tax revenue collected
X-axis - tax rate (%)
Under certain circumstances (before the optimum), lifting the tax rate may lead to a reduction in tax revenue.
On the other hand (after the optimum), a reduction in tax rate may lead to an increase in revenue because more people are willing to work.

154
Q

The optimum rate of tax, which maximises total revenue, can be used to reduce the …

A

Government’s debt

155
Q

Reasons tax revenue may fall (4)

A
  • increased rates of tax avoidance - greater incentive to seek out tax relief, make max use of tax allowances
  • greater incentive to evade taxes (illegal) - i.e. non–declaration of income and wealth
  • possible disincentives in the labour market - depending on which taxes have been increased
  • ‘brain drain’ effects - the loss of highly skilled and innovative people which means fewer high-income taxpayers
156
Q

Evaluation points for why tax revenue may fall

A
  • lower tax rates on higher income earners - lower top rate taxes might increase income inequality
  • little strong evidence that top rate income tax is a major barrier to inward migration of skilled labour
  • many people are on fixed hours / zero hours contracts - so tax rates have little bearing on work incentives
  • tax rates not the only factor affecting work incentives - we must also consider the impact of the benefits system
  • for some people, tax cuts - cause them to take more leisure time instead of work - a backward bending labour supply curve effect (especially at higher wages/earnings)
  • there is a solid Keynesian explanation for some aspects of the Laffer Curve - cuts in direct and indirect taxes increase real disposable income and therefore lead to higher consumer spending and aggregate demand
157
Q

Reasons that cutting taxes will positively impact the economy (7)

A
  • firms will have more profit to reinvest into their companies, therefore increasing investment, aggregate demand, and therefore output
  • consumers have higher disposable income so consumption will increase
  • greater injections into the circular flow of income
  • fewer withdrawals form the circular flow of income
  • relevant AD/AS diagram illustrating an increase in AD
  • increase in size of multiplier
  • less incentive for tax evasion/avoidance
158
Q

Reasons that cutting taxes will negatively impact the economy (4)

A
  • firms may not reinvest money, many other factors affect investment decisions-
    e.g. confidence
  • consumers may save any extra disposable income, thus withdrawing it from the circular flow of income
  • likely to result in higher government debt leading to increased crowding out
  • the Government will have less money to spend on infrastructure/education etc. that may negatively affect economic growth
159
Q

Direct taxes are … e.g. …

A

Taxes on individuals and/or corporations
E.g. income tax & corporation tax

160
Q

Indirect taxes are … e.g. …

A

Taxes on goods & services
E.g. VAT

161
Q

Impact of tax changes on the distribution of income

A

A rise in income tax for people on high incomes can lead to a more equal distribution of income, as people with high incomes will receive a smaller share of overall income.
Evaluation: The impact of a rise in income tax on income distribution will depend on the size of the tax increase and the distribution of income in the economy. In general, the greater the tax increase, the greater the reduction in income inequality.

162
Q

What effects will an increase in tax mean for output, employment and price level?

A

Output - decreases
Employment - decreases
Price level - decreases

163
Q

Will an increase in tax make the government trade budget better or worse (and why)?

A

Better trade balance because:
Imports decrease (less disposable income)
Exports increase (lower price level and therefore domestic firms may be more competitive)

164
Q

Will FDI increase or decrease with a decrease in tax?

A

Investment may increase if taxes such as corporation or NICs decrease

165
Q

A drop in tax may increase FDI but why would it also increase tax revenue for the government?

A

The laffer curve - a reduction in tax rate may lead to an increase in revenue because more people are willing to work (if past the optimum tax rate)

166
Q

Why might FDI decrease if tax is very high?

A

The government needs to pay back high debts which shows economic uncertainty - FDI may hold off investing until the tax rate lowers

167
Q

An increase in VAT rate leads to… distributions

A

Unfairer distributions

168
Q

An increase in the top rate of income tax leads to… distributions

A

Fairer distributions

169
Q

Definition of “relative poverty”

A

Measure people whose income is below 60% of the UK median incomes (<60% of £35,000)

170
Q

Definition of “absolute poverty”

A

Measures people whose income is below what is socially acceptable as a minimum living standard (£2/day)

171
Q

What are some of the most deprived areas in the UK? (9)

A
  • Kingston upon Hull
  • Hull
  • Middlesbrough
  • Liverpool
  • Burnley
  • Manchester
  • Blackpool
  • Great Yarmouth
  • Jaywick (Essex)
172
Q

Causes of poverty in the UK (11)

A
  • deindustrialisation
  • geography (i.e. the North has less investment, seaside towns have fewer places to trade with)
  • lack of employment opportunities
  • lack of public goods (education, healthcare)
  • low-paid jobs
  • lack of skilled workers
  • little to no savings
  • the poverty cycle/generational poverty
  • young people leave the area as soon as they can
  • a benefits culture
  • fewer transport links
173
Q

Negative impacts on the UK as a result of poverty (3)

A
  • cost to government (welfare payments, opportunity cost, public services)
  • smaller workforce when people have to be off work, ill (earlier age of death)
  • crime & drugs
174
Q

Solutions/suggestions for poverty in the UK (8)

A
  • increase facilities
  • increase salaries in areas of poverty to attract workers who would otherwise choose other places
  • lower childcare costs
  • build affordable homes
  • higher minimum wage
  • increasing employment opportunities
  • improve access to good quality education and skills training
  • invest in the NHS and education
175
Q

Who owes public sector debt vs private sector debt?

A

Public - the government & public corporations
Private - individuals (private households & businesses)

176
Q

What is the current UK public sector debt as a % of GDP?

A

98%

177
Q

What is the current UK budget deficit as a % of GDP?

A

4.4%

178
Q

Problems with sustained government debt and borrowing (6)

A
  • interest payments become so large and take up a lot of the budget
  • low confidence
  • crowding-out of private sector investment spending
  • may have to increase taxes to pay back the debt
  • structural deficit will get worse as an ageing population places greater strain on pension liabilities
  • potential of rising interest rates as markets become more reluctant to lend the UK government money
179
Q

Problems with high government debt (6)

A
  • potential negative impact in the exchange rate
  • a rapid increase in national debt means the government has to borrow more from the private sector
  • if borrowing is high/unmanageable, then investors won’t want to hold UK government bonds. They will invest abroad instead.
  • lower confidence
  • unsustainable in the long-term
  • burden on people have to pay for it
180
Q

How long does the average UK bond take to mature?

A

~12-13 years

181
Q

How could the government debt issues be solved? (8)

A
  • increase taxes
  • increase domestic supply/production & decrease imports
  • privatisation
  • depreciation policies
  • expansionary policies - monetary policy (lower interest rates to boost economic growth)
  • efficiency policies in the public sector
  • decrease spending
  • decrease tax avoidance & evasion
182
Q

Reasons why the national debt may be sustainable or not as bad as argued (6)

A
  • government borrowing is required to fund investments in critical infrastructure (supply side)
  • severe external shocks make an increase in the National debt inevitable
  • rational to borrow to invest when the market bond yields are very low
  • the bonds remain attractive to overseas investors
  • borrowing to stimulate the economy can be partly self-financing (BoE) via higher tax revenues
  • modern monetary theory (MMT)
183
Q

Reasons for homelessness (11)

A
  • unemployment
  • addiction
  • domestic violence
  • family breakdowns
  • rising rents & cost of living
  • discrimination
  • systematic inequality
  • poor mental health
  • childhood poverty or childhood trauma (care)
  • no support network
  • language barriers
184
Q

Possible solutions to poverty (5)

A
  • provide affordable housing
  • build social rented homes
  • assistance for the most vulnerable
  • increasing employment & income
  • investment in welfare support
185
Q

What does the Harrod Domar Model state?

A

States that investment, saving and technological change are required in an economy for economic growth. The rate of growth increases if the savings ratio increases. This leads to increased investment and technological progress, which leads to higher productivity.

186
Q

What is meant by Primary Product Dependancy (PPD)?

A

When a nation is over dependent on a primary product (oil, metals, gold, coffee, etc) for economic output and government revenue

187
Q

Why is corruption bad for an economy/economic growth?

A
  • lowers consumer confidence so fewer people invest
  • no incentive to become an entrepreneur
  • less money to be spent on public goods (healthcare, education, etc)
  • hard to change it
188
Q

Benefits to a country of having a highly sort-after Primary Product (5)

A
  • source of government revenue
  • encourages supply side investment
  • attracts in FDI
  • creates jobs
  • fund long-term development
189
Q

Negatives to a country of having a highly sort-after Primary Product (3)

A
  • volatile prices
  • lack of whole economy investment
  • only benefits the minority
190
Q

What is the “Dutch-Disease”?

A
  • a term that broadly refers to the harmful consequences of large increases in a country’s income
  • an economic phenomenon where the rapid development of one sector of the economy (particularly natural resources) precipitated a decline in other sectors
  • it is often characterised by a substantial appreciation of the domestic currency (strengthens it)
191
Q

What was the UK government’s debt at the end of 2024?

A

£2.8 trillion

192
Q

What was the UK’s national deficit in 2024?

A

£127.5 billion

193
Q

Do rising debt interest payments matter? (5)

A
  • it must be paid, which might squeeze out the chances for extra spending (opportunity cost)
  • harder for the government to cut personal taxes
  • rising inflation will increase debt interest since many of the UK bonds issued are “index-linked”
  • higher interest rates will also increase the debt service burden
  • 1/3rd of the UK government debt is owed to the BofE through QE - which is recirculated to the Treasury
194
Q

The steps of QE (6)

A
  1. The central bank (BoE) creates new money electronically to make large purchases of assets from the private sector.
  2. In nearly all cases, these asset purchases have been of government bonds bought from pension funds and high-street commercial banks.
  3. Increased demand for government bonds causes an increase in the market price of bonds and therefore causes their price to rise.
  4. A higher bond price causes a fall in the yield on a bond (there is an inverse relationship between bond prices and yields).
  5. Those who have sold their bonds may use the funds to buy assets with relatively higher yields such as shares of listed businesses and corporate bonds.
  6. Commercial banks receive cash from asset purchases and this increases their liquidity. This in turn may encourage them to lend out to customers which will - hopefully - help to stimulate an increased in loan-financed capital investment
195
Q

Evaluation for why QE may not work (4)

A
  • liquidity trap
  • existing debt
  • hard to measure
  • people from abroad or with a low MPC buy the bonds - little impact on UK economy
196
Q

Advantages to QE (4)

A
  • gives central banks an extra tool of monetary policy besides changing interest rates
  • increasing the size of the monetary vase helps to lower the threat of price deflation. Without QE, the fall in real GDP would have been deeper, and the rise in unemployment greater
  • lower long-term interest rates have kept business confidence higher and given the commercial banking system extra deposits to use for lending
  • QE can lead to a depreciation of the exchange rate, which will help to improve the price competitiveness of export industries
197
Q

What does the Lorenz Curve illustrate?

A

It Illustrates the distribution of income (or wealth). It shows the cumulative share of income from different deciles of the population. If there was perfect equality, then the poorest 20% of the population would gain 20% of total income. The poorest 50% of the population would get 50% of income. Income would fall the line of perfect equality. In reality, income is skewed towards the richer deciles among the population.

198
Q

How does QE affect the macroeconomy? (4)

A
  • wealth effect
  • borrowing cost effect
  • lending effect
  • currency effect
199
Q

Disadvantages of QE (4)

A
  • may contribute to rising wealth inequality due to surging house prices and rents
  • increase in the monetary base (money supply) may lead to inflationary pressure
  • ultra-low interest rates can distort the allocation of capital and also keep zombie companies alive
  • low interest rates reduce the annual incomes from pension funds, making life tougher for those with savings and who rely on their occupational pension
200
Q

Main aims of supply-side policies (8)

A
  • improve incentives to work & invest in people’s skills (human capital)
  • increase labour & capital productivity
  • increase occupational & geographical mobility of labour
  • increase capital investment & research and development spending
  • promote contestability & stimulate innovation (dynamic efficiency)
  • encourage start-ups & expansion of new businesses especially those with significant export potential/ promote economic diversification
  • improve price & non-price competitiveness in global markets
  • improve the trend rate of sustainable growth of real GDP to help support improved living standards & better regional economic balance
201
Q

Main UK supply-side weaknesses (8)

A
  • low R&D spending
  • low investment
  • skill shortages
  • economic inactivity
  • low labour mobility
  • ageing infrastructure
  • regional economic imbalances
  • productivity gap
202
Q

Some examples of recent UK supply-side policies (4)

A
  • privatisation - Royal Mail in 2016
  • deregulation of the UK retail energy market
  • super-deduction tax incentive for business capital investment (125% tax allowance)
  • funding for rollout of electric vehicle charging infrastructure
203
Q

Market-based supply side policies (6)

A
  • tax cuts
  • cutting red tape
  • privatisation & liberalisation
  • free trade & capital mobility across boarders
  • flexible labour markets
  • deregulation of markets
204
Q

Supply-side policies to improve incentives (4)

A
  • tax cuts
  • deregulation
  • trade liberalisation
  • intellectual property protection
205
Q

Criticisms of market-based supply-side policies (5)

A
  • income inequality
  • reduced social safety nets
  • underinvestment in public goods
  • market failure
  • financial instability
206
Q

Possible solutions to reduce the size of the Lorenz curve gap (4)

A
  • invest in R&D
  • encourage FDI
  • invest in education/healthcare
  • subsidies to businesses
207
Q

The Gini Co-Efficient can be anywhere from 0 to …

A

1

208
Q

The bigger the Gini co-efficient value, the … the inequality

A

Bigger

209
Q

What are the axes labelled on the Lorenz curve?

A

X-axis - ‘% of population’
Y-axis - ‘% of income’

210
Q

What part of the Lorenz curve graph is labelled “A” and “B”?

A

A - the gap between the line of equality (45°) and the country’s Lorenz curve
B - the space outside the Lorenz curve that is below the line of equality

211
Q

Equation for Gini Co-Efficient

A

A / (A + B) = Gini co-efficient

212
Q

What is “the Lewis Model”

A

A model outlining the development from a traditional economy to an industrialized one.
Arthur Lewis put forward a development model of a dualistic economy, consisting of rural agricultural and urban manufacturing sectors
Initially, the majority of labour is employed upon the land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in: there may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product (output produced by an additional worker) and underemployment.
Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts. The resultant higher urban wages (Lewis stated that a 30% premium was required) might therefore tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity. High urban profits would encourage firms to expand and hence result in further rural-urban migration.

213
Q

Advantages of “the Lewis Model” (7)

A
  • better use of labour (more productive)
  • greater value of output & quicker to grow economy when using technology
  • land is a fixed resource (diminishing marginal returns)
  • higher urban wages which is then spend in the economy
  • decreases inequality
  • encourages FDI
  • achieves macroeconomic objectives
214
Q

Disadvantages of “the Lewis Model” (6)

A
  • may lead to a surplus amount of labour in cities so the unemployment rate increases
  • profits may be retained by capitalist entrepreneurs at the workers expense
  • may be hard for workers to move from the countryside to the cities
  • expensive to train the new workers
  • relies of FDI
  • creates inequality in the cities
215
Q

Measures to reduce the deficit and the debt (6)

A
  • tight fiscal (increase taxes & lower government spending)
  • loose monetary (decrease interest rates)
  • decrease subsidies
  • privatisation
  • increase exports (weaker £ means goods are more competitive)
  • decrease union power so wages can be lower or increase minimum wage to increase consumption
216
Q

Measures to reduce poverty & inequality (6)

A
  • loose fiscal (decrease taxes & increase government spending)
  • loose monetary (decrease interest rates)
  • increase the minimum wage
  • encourage investment in R&D
  • invest in education & training
  • increase the number of job opportunities
217
Q

Limits to government ability to control global companies (6)

A

GDP
Revenue
Gifted individuals
Bribery corruption
Tax avoidance
Power of the firms

218
Q

Definition of “transfer-pricing”?

A

The practice of determining the price at which goods or services are bought and sold between related companies, such as subsidiaries of the same multinational corporation operating in different countries.

219
Q

What is FDI?

A

Foreign direct investment - when a global firm sets up a factory or makes an ownership investment in another country

220
Q

Problems as a result of FDI (10)

A
  • job reliance
  • unsustainable practises that impact on the environment
  • subsidies are an opportunity cost (loss of entrepreneurial opportunities)
  • displacement of local businesses
  • profit taken away from the country (remittances)
  • politcal/cultural effects
  • tax avoidance
  • big firm benefits from EoS which is unfair to local businesses
  • workers move from local businesses/farms
221
Q

What is microfinance?

A

Microfinance involves borrowing small amounts of money from lenders to finance enterprises. It increases the incomes of those who borrow, and can reduce their dependency on primary products. There could be a multiplier effect from the investment of the loan.
They are small loans for usually unbankable people. It allows them to break away from aid and gives borrowers financial independence. In Bangladesh, 95% of microfinance cohorts are women.
Microfinance loans detach the poor from high interest, exploitative loan sharks. They could help businesses to be set up, although the money could also be spent on immediate consumption, rather than investment. Since the money goes directly to SMEs, it can stimulate employment.
However, the data collected on microfinance loans might not be reliable if there is dishonesty regarding where the money was spent.
In Tamil Nadu, India, less than 2% of microenterprises were still operating after their establishment.
Microfinance loans have high repayment rates.

Economics (4 decks)

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