Theme 4 - A global perspective Flashcards
This theme develops the macroeconomic concepts introduced in Theme 2 and applies these concepts in a global context. Students will develop an understanding of: ● international economics ● poverty and inequality ● emerging and developing economies ● the financial sector ● role of the state in the macroeconomy.
Define globalisation
the growing rate of interdependence of countries and the rapid rate of change it brings about
the increasing integration of local, regional, and national economies into a single international market
factors contributing to globalisation
- improvement in transport infrastructure and operations
- improvement in IT and communications
- trade liberalisation (since 1945) and reduced protectionism
- international financial markets
- TNCs (large companies around the world)
What does the current account on the BOP consist of?
Trade balance: trade in goods, trade in services
Income balance: investment income (primary income), current transfers (secondary income)
Name examples of what is measured in the capital account (smaller part of BOP)
- debt forgiveness
- inheritance taxes
Name examples of what is measured in the financial account
- Portfolio investments, such as bonds, shares, and derivatives
- foreign direct investment
- reserves e.g. currency, gold
How is a country who has a current account deficit’s BOP balanced?
e.g. USA has CA deficit, FA surplus
China has CA surplus, FA deficit
countries who are running a CA surplus have excess cash reserves - selling more to rest of world than buying, invest in countries where they have a FA surplus like buying bonds or shares. Balances everything out as overwritten
What happens if capital account and financial account together cannot balance BOP?
- Net errors and omissions (part of the BOP) - fiddle out the numbers as a balancing tool
Impact of globalisation on consumers
For
- lower prices as firms take advantage of comparative advantage and produce in countries with lower costs e.g. low labour costs
- consumers have more choice
Against
- higher prices since incomes are rising which leads to increase demand for goods and services
- loss of culture
Impact of globalisation on workers
For
- TNCs provide training for workers and create new jobs
- increased migration - skills - AD increases
Against
- increased migration means current workers may see displacement or lower wages
- not everyone benefits from increased employment as manufacturing jobs transferred to Poland and China
- inequality - more demand for high-skilled workers
Impact of globalisation on producers
For
- more countries, reduces risk
- exploit comparative advantage and work in countries with lower labour costs
Against
- some firms unable to compete internationally
Impact of globalisation on the government
For
- higher taxes since TNC and their workers may taxes
Against
- tax avoidance
- TNC’s have power to bride and lobby governments leading to corruption
Impact of globalisation on the environment
For
- world can work together to tackle climate change, share ideas, and tech
Against
- increased emissions
- more raw materials is bad for enviroment
Impact of globalisation on economic growth
- increased investment by TNCs - multiplier effect
- encourages countries to employ supply side policies to encourage TNCs to operate in their countries
- trade increases ouput - exploitation of comparative advantage
Against
- political instability of TNCs if support unpopular regimes
- comparative advantage change over time
Define comparative advantage
Comparative advantage state that countries should produce goods and services that they can produce with the lowest opportunity cost
- can produce goods and services cheaper relative to other goods and services
Define absolute advantage
Absolute advantage is when a country can produce goods and services in absolute terms cheaper than another country can
Assumptions and limitations of the theory of absolute and comparative advantage (Specialisation and trade)
- assumes factors of production are perfectly mobile - no trade barriers, no tariffs, and there is perfect information
- assumes that for trade to take place depends on the terms of trade
- assumes that the goods are homogenous - L
- assumes that costs are constant and there is no economies of scale - L
- assumes that there are no transport costs - L
Advantages of specialisation and trade
- S - economies of scale - lower prices
- S - increased world output - econ growth
- S - increased comp - incentive to innovate
T - greater choice for consumers
T - access more factors of production
Disadvantages of specialisation and trade
- loss of culture
- loss of soverigty - sign international treaties or trading bloc agreements
- dependence - price cuts affect
- structural unemployment - jobs lost to foreign firms who have comparative advantage
- environment will suffer - transport costs plus increased demand for resources - deforestation
Define developing economies and give examples
Countries that are in the process of rapid industrialisation and significant economic growth
e.g. China, Mexico, Brazil
Name the 4 factors that influence patterns of trade
- developing economies - transporters of manufactured goods
- comparative advantage
- trading blocs and bilateral trading agreements - boost patterns of trade
- weak or strong exchange rates
define trading blocs
group of countries that form agreements to promote trade amongst themselves
define bilateral trading agreements
- agreements between two countries to facilitate trade
Define terms of trade
the rate of exchange for one product for another when two countries trade
what is relative poverty?
people’s income compared to others in the area
when its below 60% of the median household income (£27,300 in 2017)
1/5 people in UK live below poverty line
14m in RP
factors impacting relative poverty
- de-industrialisation
- unemployment
- inequality of wage growth
- under-employment
- trade unions not strong
- benefits and taxes
define income inequality
the extent to which income is distributed in an uneven manner
factors impacting income/wealth inequality
- age
- chance
- wealth levels
- wages
Outline the impact of economic change and development on income/wealth inequality
Kunetz theory states that as a country develops, and moves from agriculture to industrial, inequality increases as wages of industrial worker rise higher than farmer. Taxation and government spending redistribute this spending
Piketty discredited this theory by stating that as inequality increases as the countries develop, rate on capital grows, inequality increases, as rich get richer
Significance of capitalism
- own resources
- some degree of inequality is needed for capitalism to work
- wage differntials
formula for terms of trade
average export price index/ average import price index
factors influencing terms of trade
- pervish-singer hypothesis
- productivity - LR
- inflation, exchange rate - SR
- incomes
What are regional trading blocs
Group of countries in a geographical area protect themselves from imports from non-members
What are the 4 types of trading blocs
PTA - preferential trading areas are when tariffs and other trade barriers are reduced on some goods but not all, between members
Free trade areas - two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members e.g. NAFTA (Mexico, Canada, USA)
Custom unions - fta but wothout the freedpm of trade with non-members - common external tarriff placed on all imports coming from non-members e.g. EU
Common market - customs union of deep integration - common policies, free movememnt of factors of production e.g. EU
Economic and monetary policy - common market with adoption of same currency and bank and monetary polices e.g eurozone
full economic integration - econ and monetary market with same fiscal as well - e.g. UK
Reasons for restrictions of free trade
infant -industries
job protection
dangers of specialisation
potential dumping
name types of no-tariff barriers
embargo
legal and technical standards
import licensing
what are the 4 types of restriction to free trade/protectionist policies
- tarriffs
- quotas
- subsidies
- non-trade barriers
What factors impact floating exchnge rates
speculation
demand for imports/exports
supply of imports /exports
people on holiday
investment
affect of changes in exchnage rate
- econ growth, employment
- FDI investment
- rate of inflation
Name the 2 measures of UK competetivness
- relative unit labour costs
- relative export prices
Name the macro factors influencing short run aggregate supply and long run aggregate supply
SRAS
- changes in price of raw materials and energy
- changes in exchange rate
- changes in tax rates
LRAS
- technological advancements
- competition policy
- changes in gov regulation
- changes in relative productivity
- demographic changes and migration
- changes in education and skills
