Theme 4: A global perspective Flashcards
1
Q
What may make deciding on macroeconomic policies more difficult for policymakers? (4.5.4)
A
- Inaccurate information (GDP, BoP faces multiple revisions)
- Risks and uncertainties (difficulty predicting, agent behaviours, SR / LR)
- Inability to control external shocks
2
Q
What is transfer pricing? (4.5.4)
A
Price of transactions within TNC, used to reduce tax liability and maximising profits.
3
Q
What are direct controls and how are they used? (4.5.4)
A
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
4
Q
What policies / measures / agreements can be used to increase international competitiveness in an
economy? (4.5.4)
A
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
5
Q
How are changes in interest rates and the supply of money used in an economy?
(4.5.4)
A
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
6
Q
What measures can be used to reduce poverty and inequality in an economy?
(4.5.4)
A
- Welfare benefits
- Provision of goods / services
- Progressive taxation
- Increased minimum wage
7
Q
What measures can be used to reduce fiscal deficits and national debts? (4.5.4)
A
- Increased tax, reduced public expenditure
- Reduced AD
8
Q
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)
A
- Opportunity cost for future generations
- Crowding out (interest rates)
- Danger of inflation (AD)
- Credit ratings (country debt rating)
- Less FDI attraction
9
Q
What factors influence the size of national debts? (4.5.3)
A
- Fiscal deficits / surpluses
- Unplanned events (wars / disasters)
- Government policy (borrowing)
10
Q
What factors influence the size of fiscal deficits? (4.5.3)
A
- 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
11
Q
What is the difference between a cyclical and a structural fiscal deficit?
(4.5.3)
A
Cyclical: economic downturn → tax revenue 🡇, expenditure 🡅, disappear upon
trend growth
Structural: remains at full potential
12
Q
What is the difference between fiscal deficit and national debt? (4.5.3)
A
Fiscal deficit: expenditure exceeds tax revenue, borrowing required
National debt: cumulative past government borrowing
13
Q
What is are automatic stabilisers? (4.5.3)
A
- Fiscal policy changes through economic cycle
- Recession 🡆 benefits 🡆 spending 🡅 automatically
- Offsetting effects, increases AD, stabilises
14
Q
What effect does changing tax rates have on the trade balance and FDI flows?
(4.5.2)
A
- Increased tax reduces disposable income & consumption, improved trade balance
- High corporation tax disincentivises FDI
15
Q
What effect does changing tax rates have on the price level? (4.5.2)
A
Direct: AS/AD equilibrium lower price level
Indirect: Cost-push inflation
16
Q
What effect does changing tax rates have on tax revenues, and what diagrams
could be used? (4.5.2)
A
Higher marginal tax rate disincentivises work, less tax revenue, increase in
avoidance, and migration.
17
Q
What effect does changing tax rates have on incentives to work, real output, and
employment? (4.5.2)
A
- 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
18
Q
What are the 2 types of crowding out and what are their effects? (4.5.1)
A
Resource crowding:
- Full employment, increased expenditure results in inefficiency
Financial crowding:
- Expenditure / cut financed by public sector borrowing
- Loan demand 🡅, interest rates 🡅
19
Q
What is the impact upon living standards and equality of changes in public
expenditure? (4.5.1)
A
- Lacking intervention 🡆 market failure, poverty
- Improves equal opportunity
- High expenditure 🡆 higher benefits / pensions
20
Q
What is the impact upon productivity and growth of changes in public
expenditure? (4.5.1)
A
- Infrastructure, healthcare, education, improve AS
- Increased AD, multiplier on GDP, economic growth 🡅
- Free-market argument: can be transferred to private, more efficient
21
Q
Why might size and composition of public expenditure change in any given economy in the long-run?
(4.5.1)
A
- Economic cycle (econ. growth 🡇 → welfare 🡅)
- Changing age distribution
- Changing expectations (tech, innovation)
- Financial crises (bailouts)
- Economic philosophy
- Political priorities
- Discretionary fiscal policy
- Debt interest
22
Q
What are the different types of public expenditure? (4.5.1)
A
- Capital expenditure (long-term capital projects)
- Current expenditure (day-to-day)
- Transfer payments (without exchange, e.g. UC)
23
Q
What are the key functions of central banks? (4.4.3)
A
- 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)
24
Q
What market failure can occur in the financial system? (4.4.2)
A
-
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)
25
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)
26
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
27
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)
28
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)
29
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**
30
What non-economic factors can limit economic development? (4.3.2)
* War
* Geography
* Corruption
* Disease
* Poor governance
* Political instability
31
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)
32
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
33
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
34
What are the 3 dimensions of the HDI and how are they measured? (4.3.1)
1. Health - life expectancy
2. Education - average / expected years in school
3. Standard of living (GNI per capita at PPP)
35
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
36
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
37
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
38
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: Area AArea A+Area B\frac{Area\ A}{Area\ A+Area\
B}Area A+Area BArea A using Lorenz
39
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
40
What is the difference between absolute and relative poverty? (4.2.1)
Absolute: income below basic needs levels
Relative: below threshold in economy
41
What are the benefits of being internationally competitive? (4.1.9)
* Surplus trade balance
* Export-led economic growth
* Low unemployment
* FDI increase
42
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)
43
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
44
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
45
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.
46
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)
47
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)
48
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
49
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)
50
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
51
What are the different exchange rate systems? (4.1.8)
* Fixed, central bank sets rate
* Floating, set by market forces
* Managed, floating with intervention
52
Why are trade balance imbalances significant? (4.1.7)
* Deficit reliant on external unsustainable finance
* Surplus focused on exports
* Currency fluctuations
53
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
54
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 🠟)
55
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
56
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
57
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
58
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)
59
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
60
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
61
What is the role of the WTO in trade liberalisation? (4.1.5)
* Promotes trade liberalisation negotiations
* Settles member trade disputes
62
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
63
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)
64
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
65
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)
66
How is terms of trade calculated? (4.1.4)
ToT = index export pricesindex import prices⋅100ToT\ =\ \frac{index\ \exp ort\
prices}{index\ import\
prices}\cdot100ToT = index import pricesindex export prices ⋅100
67
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)
68
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
69
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
70
What are absolute and comparative advantages? (4.1.2)
Absolute: production at lower unit cost
Comparative: lower opportunity unit cost
71
What impacts does globalisation have on workers? (4.1.1)
* Rising employment
* External competition
* Wage decrease as GDP share
72
What impacts does globalisation have on consumers and producers? (4.1.1)
Consumers:
* Reduced prices
* More choices
Producers:
* Lower costs
* Increased competition
73
What impacts does globalisation have on countries, governments, environment?
(4.1.1)
* Rising tax revenue
* Better quality jobs
* Increased migration
* Resource depletion
* Climate impacts
74
What factors have contributed to globalisation? (4.1.1)
* Improved transportation
* Improved communication
* Trade liberalisation
* MNC growth
* Trading blocs
* Improved geopolitics
75
What are the characteristics of globalisation? (4.1.1)
* Increased FDI
* Increased specialisation
* Increased trade
* Deindustrialisation
* Increased capital / labour movements
