Theme 4: A global perspective Flashcards
What may make deciding on macroeconomic policies more difficult for policymakers? (4.5.4)
- Inaccurate information (GDP, BoP faces multiple revisions)
- Risks and uncertainties (difficulty predicting, agent behaviours, SR / LR)
- Inability to control external shocks
What is transfer pricing? (4.5.4)
Price of transactions within TNC, used to reduce tax liability and maximising profits.
What are direct controls and how are they used? (4.5.4)
Government measure affecting price / quantity of product / FoP.
Uses:
- Maximum price controls (price caps)
- Minimum guaranteed prices (e.g. minimum wage)
- Fixed import quotas
- Limiting foreign currency purchase
- Fixed loan interest rates
What policies / measures / agreements can be used to increase international competitiveness in an
economy? (4.5.4)
Supply-side policies:
- Increasing occupational mobility (education & training)
- Macroeconomic stability (stable inflation / exchange rate, public finances)
- Deregulation
- Improving infrastructure
- Privatisation
- Investment incentives
Free trade agreements, easing exportation
How are changes in interest rates and the supply of money used in an economy?
(4.5.4)
Interest rate:
- Influences investment
- For inflation targets
- Business costs rise
- Exchange rate fluctuations
- Confidence may offset (stagflation)
- Time lags
Money supply:
- QE (encouraging lending)
- Cost-push inflation
- Affects exchange rate
What measures can be used to reduce poverty and inequality in an economy?
(4.5.4)
- Welfare benefits
- Provision of goods / services
- Progressive taxation
- Increased minimum wage
What measures can be used to reduce fiscal deficits and national debts? (4.5.4)
- Increased tax, reduced public expenditure
- Reduced AD
What is the significance of a country’s size of their fiscal deficits and national debt, on a domestic and global scale? (4.5.3)
- Opportunity cost for future generations
- Crowding out (interest rates)
- Danger of inflation (AD)
- Credit ratings (country debt rating)
- Less FDI attraction
What factors influence the size of national debts? (4.5.3)
- Fiscal deficits / surpluses
- Unplanned events (wars / disasters)
- Government policy (borrowing)
What factors influence the size of fiscal deficits? (4.5.3)
- Automatic fiscal policy (if GDP 🡇, expenditure on stabilisers 🡅, tax revenue 🡇)
- Demographics (population size / age)
- Discretionary fiscal policy
- Debt interest
- Housing market (stamp duty)
- Political priorities
What is the difference between a cyclical and a structural fiscal deficit?
(4.5.3)
Cyclical: economic downturn → tax revenue 🡇, expenditure 🡅, disappear upon
trend growth
Structural: remains at full potential
What is the difference between fiscal deficit and national debt? (4.5.3)
Fiscal deficit: expenditure exceeds tax revenue, borrowing required
National debt: cumulative past government borrowing
What is are automatic stabilisers? (4.5.3)
- Fiscal policy changes through economic cycle
- Recession 🡆 benefits 🡆 spending 🡅 automatically
- Offsetting effects, increases AD, stabilises
What effect does changing tax rates have on the trade balance and FDI flows?
(4.5.2)
- Increased tax reduces disposable income & consumption, improved trade balance
- High corporation tax disincentivises FDI
What effect does changing tax rates have on the price level? (4.5.2)
Direct: AS/AD equilibrium lower price level
Indirect: Cost-push inflation
What effect does changing tax rates have on tax revenues, and what diagrams
could be used? (4.5.2)
Higher marginal tax rate disincentivises work, less tax revenue, increase in
avoidance, and migration.
What effect does changing tax rates have on incentives to work, real output, and
employment? (4.5.2)
- Lower tax: incentivises, improves supply-side, more overtime, incentivise econ activity
- Corporation tax disincentivises investment
- High tax reduces AD and LRAS, reduces output, increases unemployment
What are the 2 types of crowding out and what are their effects? (4.5.1)
Resource crowding:
- Full employment, increased expenditure results in inefficiency
Financial crowding:
- Expenditure / cut financed by public sector borrowing
- Loan demand 🡅, interest rates 🡅
What is the impact upon living standards and equality of changes in public
expenditure? (4.5.1)
- Lacking intervention 🡆 market failure, poverty
- Improves equal opportunity
- High expenditure 🡆 higher benefits / pensions
What is the impact upon productivity and growth of changes in public
expenditure? (4.5.1)
- Infrastructure, healthcare, education, improve AS
- Increased AD, multiplier on GDP, economic growth 🡅
- Free-market argument: can be transferred to private, more efficient
Why might size and composition of public expenditure change in any given economy in the long-run?
(4.5.1)
- Economic cycle (econ. growth 🡇 → welfare 🡅)
- Changing age distribution
- Changing expectations (tech, innovation)
- Financial crises (bailouts)
- Economic philosophy
- Political priorities
- Discretionary fiscal policy
- Debt interest
What are the different types of public expenditure? (4.5.1)
- Capital expenditure (long-term capital projects)
- Current expenditure (day-to-day)
- Transfer payments (without exchange, e.g. UC)
What are the key functions of central banks? (4.4.3)
- Implementation of monetary policy (credit availability, capital requirements,
QE) - Banker to the government (national debt, loaning, issues bonds)
- Banker to banks - lender of last resort (commercial bank survival)
- Role in regulation of the banking industry (prevent systemic risk and
bailout)
What market failure can occur in the financial system? (4.4.2)
-
Asymmetric information (1 party more informed, exploiting info gap, poor
decisions) - Externalities (costs upon third-party, bailing out banks)
- Moral hazard (increasing risk willingness due to bailout safety net)
- Speculation (buying with profit intent)
- Market bubbles (excessive overvalue falls, price maximises)
- Market rigging (colluding fixed prices, LIBOR scandal 2007)
What are the roles of the financial markets? (4.4.1)
- Facilitates saving (to households / firms)
- Lend to businesses and individuals
- Facilitate exchange of goods and services (payment systems, cheques, transactions)
- Provide forward markets in currencies and commodities (advance buying, reducing volatility risk)
- Provide equity market (issuing shares funding investment)
What are the roles of the World Bank, IMF, and other NGOs in supporting economic development? (4.3.3)
World Bank:
- Low-interest loans / grants supporting infrastructure, healthcare, education
- Supports capital investment encouraging trade
IMF:
- Stability of international monetary system
- Each member quota on resources required by IMF, distributed through loans to
poorer - Provides support on stability maintenance
NGOs:
- Private orgs and charities for reducing poverty, protecting environment /
equality / economic growth. - Small, community scale support
What other strategies can influence a country’s economic development? (4.3.3)
- Industrialisation (primary 🡆 manufacturing, higher productivity): Lewis model (excess in agriculture labour, no opportunity cost moving them to industry)
- Tourism development (create jobs, encourage FDI)
- Fairtrade schemes (minimise externalities & higher wages)
- Aid (reduces poverty, savings gap, creates multiplier)
- Debt relief (freeing government funds)
What interventionist strategies exist to influence economic development? (4.3.3)
- Development of human capital (improving workforce skills / productivity w/ education)
- Protectionism (protecting domestic firm growth)
- Managed exchange rates (correcting imbalance)
- Infrastructure development (easing trade, eliminating barriers)
- Promotion of joint ventures with global companies (combine strengths, increase competitive advantage, minimise risk)
- Buffer stock schemes (reducing price fluctuation, setting ceiling/floor prices through stock transactions)
What market-oriented strategies exist to influence economic development? (4.3.3)
- Trade liberalisation (increasing efficiency, economic growth)
- Promotion of FDI (reducing tax, business ease, grants)
- Removal of subsidies (inefficiency, opportunity cost)
- Floating exchange rate (exports incentivised)
-
Microfinance schemes (low-income loans, encouraging business creation, fix
savings gap) - Privatisation
What non-economic factors can limit economic development? (4.3.2)
- War
- Geography
- Corruption
- Disease
- Poor governance
- Political instability
What economic factors can influence the extent of economic development? (4.3.2)
- Primary product dependency (unreliable, demand fluctuating)
- Savings gap (Harrod-Domar)
- Foreign currency gap (more imports than reserves)
- Prebisch-Singer (primary-reliant has declining ToT)
- Capital flight (moving savings abroad: higher interest, lower tax, stability)
- Education, demographics, skills
- International debt
- Access to credit
- Infrastructure
- Absence of property rights (lacking investment collateral)
What other indicators of nations’ development exist, apart from the HDI? (4.3.1)
- Proportion of population in agriculture
- Energy consumption per person
- Proportion accessing clean water
- Mobile phones per thousand
- Internet access proportion
What are the advantages and limitations of using HDI to compare country
development? (4.3.1)
Advantages:
- Easy to collect / standardise
- Indexed
- Insight into human well-being
Limitations:
- Life expectancy ≠ high life quality
- Quality of education unaccounted
- Inequality not measured
What are the 3 dimensions of the HDI and how are they measured? (4.3.1)
- Health - life expectancy
- Education - average / expected years in school
- Standard of living (GNI per capita at PPP)
What is the significance of capitalism within inequality? (4.2.2)
- Inevitable with private ownership
- Profit motive incentivises
- Encourages enterprise, making businesses
- Encourages employment over benefits
- May trickle-down to poorer
What is the impact of inequality on economic development? (4.2.2)
- Absolute poverty high
- Capital inaccessible for poorest, restricts growth
- Low marginal propensity to save, less investment
- Richer buy imports
- Higher crime rates
What are the causes of inequality within, and between different, economies? (4.2.2)
Within:
- Education & training
- Wage rates
- Unemployment
- Social benefits
- Tax system (progressive?)
- Asset ownership (inheritance)
- Trade unions
Between:
- Geography
- Political state
- Demographics
What measurements of income inequality exist, and what diagrams can be used?
(4.2.2)
Lorenz curve: cumulative population against percentage of income
Gini coefficient: AreaAAreaA+AreaB\frac{Area\ A}{Area\ A+Area\
B}AreaA+AreaBAreaA using Lorenz
What causes changes in poverty rates? (4.2.1)
- Economic growth (rising earnings)
- Education / training (skills)
- Government benefits (low-income support)
- Tax / wage rates
- Trade and FDI
What is the difference between absolute and relative poverty? (4.2.1)
Absolute: income below basic needs levels
Relative: below threshold in economy
What are the benefits of being internationally competitive? (4.1.9)
- Surplus trade balance
- Export-led economic growth
- Low unemployment
- FDI increase
What factors influence an economy’s international competitiveness? (4.1.9)
- Real exchange rate (export demand)
- Wage costs (labour productivity)
- Non-wage costs (regulation & benefits)
- Supply-side policies (productivity)
What measures of international competitiveness exist? (4.1.9)
- Relative unit labour costs (labour cost per output)
- Relative export prices (labour productivity)
- Global competitiveness index
What is the impact of a change in the exchange rate on economic growth,
inflation, and FDI? (4.1.8)
Economic growth:
- If WIDEC, AD and output increase
Inflation rate:
- If WIDEC, AD increase causes inflation
- Imported inflation (rising import prices, shift AS left)
FDI flows:
- Depreciation increase currency demand
What is the impact of a change in the exchange rate on the current account of
the balance of payments? Use diagrams. (4.1.8)
Marshall-Lerner required for SPICED (net export elasiticty > 1).
Currency fluctuation time lags cause J-curve: SR inelastic imports/exports, LR Marshall-Lerner.
What is competitive depreciation and what effects does it have? (4.1.8)
Currency war, other currency retaliation. Effects:
- Increased inflation (expensive imports)
- Declining world trade (uncertainty)
What government intervention methods exist in currency markets? (4.1.8)
- Changing interest rates (affecting currency purchase for foreign savers)
- Forex purchases (buying/selling own currency)
What are the advantages and disadvantages of a fixed exchange rate? (4.1.8)
Advantages:
- Confidence encourages FDI
- Reduced speculation
Disadvantages:
- Unstable current account
- External shock difficulty
What are the advantages and disadvantages of a floating exchange rate? (4.1.8)
Advantages:
- Automatic BoP correction
- Protection from external shocks
- Less reserves required
Disadvantages:
- Instability (difficult planning)
- Speculation (irreflective of trading patterns)
What factors influence a floating exchange rate? (4.1.8)
- Relative inflation rates
- Relative interest rates
- State of the economy
- BoP on current account
- Politics
- Speculation
What are the different exchange rate systems? (4.1.8)
- Fixed, central bank sets rate
- Floating, set by market forces
- Managed, floating with intervention
Why are trade balance imbalances significant? (4.1.7)
- Deficit reliant on external unsustainable finance
- Surplus focused on exports
- Currency fluctuations
What measures can reduce a country’s current account imbalance? (4.1.7)
- Exchange rate changes (WIDEC)
- Deflationary policies (reducing spending)
- Supply-side policies
- Protectionism
What are the causes of imbalances on the current account? (4.1.7)
- Economic growth (import demand 🠝)
- Productivity
- Inflation rate
- Overvalued/undervalued exchange rate
- Import reliance
- Protectionism
- Interest rates (saving 🠝, spending 🠟)
What is the balance of payments comprised of? (4.1.7)
Current account:
- Trade in goods
- Trade in services
- Income balance
- Current transfers
Capital account:
- Non-monetary & fixed assets
Financial account:
- FDI
- Reserves
- Portfolios
How do protectionist policies impact living standards and equality, domestically and globally? (4.1.6)
Living standards:
- Inefficient allocation reduces world output, lowering world standards
- Benefits domestic
Equality:
- Inequality between countries
- Domestic better income distribution / security
How do protectionist policies impact consumers, producers, and governments?
(4.1.6)
Consumers:
- Higher prices
- Less choice
Producers:
- Import-reliant higher costs
- Less incentive for efficiency
- Increased domestic sales
Government:
- SR: higher tax revenue
- LR: changing policies difficult, inefficiency decreasing growth
What types of restrictions exist on trade, and what diagram can be used? (4.1.6)
- Tariffs
- Quotas (limiting quantity)
- Non-tariff barriers: standards, documentation (increasing foreign costs)
Why might an economy restrict free trade? (4.1.6)
- Protect infant industries
- Retain self-sufficiency
- Correct current account imbalance
- Retaliation against other
- Prevent dumping
- Reduce labour competition
- Protect strategic industries
- Raise tax revenue
What are possible conflicts that may occur between regional trade agreements and
the WTO? (4.1.5)
- Common external tariff contradicts WTO
- Can favour developed countries
- Against WTO equal trade treatment objectives
What is the role of the WTO in trade liberalisation? (4.1.5)
- Promotes trade liberalisation negotiations
- Settles member trade disputes
What are the benefits and costs of the different types of regional trade agreements? (4.1.5)
Benefits:
- Trade creation in bloc
- FDI increase
- Lower production costs
- Increased knowledge transfer
- Eliminated transaction costs / currency fluctuations
Costs:
- Trade diversion to inefficient regional producers
- Distorted comparative advantage
- Loss of independent monetary policy
What types of trading blocs are there? (4.1.5)
- Free trade areas
- Customs unions (common external tariff)
- Common markets (labour / capital movement freedom)
- Monetary union (no barriers, single currency, centralised bank)
What are the impacts of an improvement in a country’s terms of trade? (4.1.4)
- Higher living standards
- Reduces cost-push, lower prod. costs
- Current account worsens
- Fewer exports
What factors influence a country’s terms of trade? (4.1.4)
- Relative inflation rate (for exports)
- Raw material prices
- Exchange rate changes
- Relative productivity rates (lower unit costs)
- Tariffs
- Primary product dependency (Prebisch-Singer)
How is terms of trade calculated? (4.1.4)
ToT=indexexportpricesindeximportprices⋅100ToT\ =\ \frac{index\ \exp ort\
prices}{index\ import\
prices}\cdot100ToT=indeximportpricesindexexportprices ⋅100
What factors influence the pattern of trade between countries? (4.1.3)
- Comparative advantage changes (cost advantages)
- Emerging and developing economies (different trade patterns)
- Trading blocs and agreements
- Relative exchange rate changes (SPICED)
What are the advantages and disadvantages of increased international trade/specialisation upon an economy? (4.1.2)
Advantages:
- Lower prices / more choice for consumers
- Innovation, encourages competition
- Efficient resource allocation
- Higher world output and living standards
- Producers economies of scale
Disadvantages:
- Dumping risk, eliminating competition
- Increased unemployment
- Overreliance on imports
- Risk of external shocks
- Environmental degradation
- Infant industry
What assumptions and limitations does the theory of comparative advantage have?
(4.1.2)
Assumptions:
- Constant production costs
- No transport costs
- Perfect knowledge
- No trade barriers
- Perfect resource mobility
Limitations:
- Transport costs exist
- Diseconomies of scale
- Trade barriers
What are absolute and comparative advantages? (4.1.2)
Absolute: production at lower unit cost
Comparative: lower opportunity unit cost
What impacts does globalisation have on workers? (4.1.1)
- Rising employment
- External competition
- Wage decrease as GDP share
What impacts does globalisation have on consumers and producers? (4.1.1)
Consumers:
- Reduced prices
- More choices
Producers:
- Lower costs
- Increased competition
What impacts does globalisation have on countries, governments, environment?
(4.1.1)
- Rising tax revenue
- Better quality jobs
- Increased migration
- Resource depletion
- Climate impacts
What factors have contributed to globalisation? (4.1.1)
- Improved transportation
- Improved communication
- Trade liberalisation
- MNC growth
- Trading blocs
- Improved geopolitics
What are the characteristics of globalisation? (4.1.1)
- Increased FDI
- Increased specialisation
- Increased trade
- Deindustrialisation
- Increased capital / labour movements
