Theme 4 AO1 Flashcards
What is globalisation?
The increased interconnectedness amongst countries marked by the movement of people, goods, ideas and capital across borders.
How does globalisation affect poor people?
They barely benefit as they are only able to produce products and services for themselves and are not able to sell them globally.
How does globalisation affect the middle classes in developing countries?
They would highly benefit through the economic growth associated with globalisation.
How does globalisation affect the working middle class?
They would have a significant loss of income as they would have lost their jobs as firms seeking to expand globally would have employed cheaper labour in foreign countries.
How does globalisation affect the rich?
They would have highly profited as they are the ones owning and controlling the large global firms.
What factors have contributed to globalisation over the last 50 years?
Tech advances, Trade liberalisation, Economic liberalisation (less command economies), Infrastructure, Multinational corporations, Political stability.
How has globalisation impacted the environment?
More environmental degradation via resource extraction however there is a bigger emphasis on sustainability and environmental responsibilities for businesses.
How has globalisation impacted producers and consumers?
Producers gain access to larger consumer markets but face increased competition whilst consumers benefit for more variety and cheaper prices.
How has globalisation impacted governments?
Governments have less control over economies because of more international trade. International cooperation is also key in areas such as sustainability.
How does globalisation affect individual countries?
Globalisation stimulates economies through increasing trade however it increases the inequality between countries as financial benefits are not evenly distributed.
What is meant by terms of trade?
A country’ export prices compared to import prices.
How is terms of trade measured?
By using index numbers. The base year will start at 100 and will go up or down over the years.
What is the terms of trade equation?
(New export index/ new import index) x100.
What is an improvement in terms of trade?
When export prices are more expensive and import prices are cheaper.
What is a worsening terms of trade?
Cheaper export prices and more expensive import prices.
What may occur when the terms of trade worsen due to increased import prices?
cost-push inflation if a high number of imports are raw materials being used for manufacturing.
What may occur as a result of improved terms of trade due to rising export prices?
Less exports due to PED > fall in net trade > fall in AD.
What factors affect terms of trade?
Ex rates, inflation, demand, primary product dependence, changing incomes and productivity.
What is absolute poverty?
When people are unable to afford the necessities in life.
What is relative poverty?
Poverty in comparison to other in a society.
What is the difference between income and wealth?
Income is the amount of money received on a regular basis but wealth is the accumulation of assets.
How is inequality measured?
The Gini coefficient.
How does education cause inequality?
Workers in some countries are more productive due to education.
How does healthcare cause inequality?
People will pay more for healthcare and have less time from working due to injuries in countries with a bad healthcare system.
How does corruption cause inequality?
Governments can unevenly distribute tax revenues.
How does inheritance cause inequality?
Some people inherit more wealth than others.
What is the subsistence trap?
Where people (usually a family) only produce enough of a good (usually agricultural) to sustain themselves.
How does the subsistence trap cause inequality?
People will not receive any income.
What is meant by ‘capital expenditure’?
A type of expenditure that increases the capital stock of the UK, which increases LRAS.
What is meant by ‘Current expenditure’
A type of expenditure that is recurring and required to operate the capital in the UK.
What is a transfer payment?
A type of government spending that does not add any new demand to an economy.
What is the relationship between transfer payments and AD/GDP?
Transfer payments do not increase AD.
What is the relationship between capital expenditure and the UK economy?
Capital expenditure increases economic capacity (LRAS).
What is the relationship between current expenditure and the UK economy?
Current expenditure is an increase in government spending and therefore AD increases.
Define ‘Automatic stabilisers’.
Payments made that are associated with the economic cycle.
How do automatic stabilisers work during a recession?
The government will increase spending on things like benefits to dampen the negative effects of falling GDP.
What happens when the automatic stabilisers cause a budget deficit.
A cyclical deficit occurs.
What happens when discretionary expenditure causes a budget deficit?
A structural deficit occurs.
What is discretionary expenditure?
Government expenditure that is voluntary and not needed.
What are the assumptions for comparative advantage?
Two countries and two goods, always opportunity cost, fixed resources, perfect competition, free trade, homogenous goods.
What are 3 limitations of the theory of comparative advantage?
Ignores EOS, resources may be distributed unevenly, does not focus on short-term.
What are three advantages of specialisation?
High EOS, Increases international cooperation, Efficient resource allocation.
What are 3 disadvantages of specialisation?
Poor income distribution, Loss of control as they rely on imports, Possible environmental concerns.
What is a comparative advantage?
When a country has superiority in producing a good because they have a lower opportunity cost with producing another good.
What is an absolute advantage?
When a country can produce a good at a lower cost than any other country.
What is specialisation?
When a country focuses on producing one good or service rather than multiple.
What is a floating exchange rate system?
Were the exchange rate is valued by the supply and demand of the currency. Governments and central banks do not directly intervene to change the market.
What is a fixed exchange rate system?
The government and central banks set an exchange rate and try to maintain it. They may buy or sell their currency to do so.
What is a managed exchange rate?
When authorities occasionally intervene to change the exchange rate. There is flexibility but there is still a degree of stability that the government will want.
What is meant by revaluation/devaluation?
When the exchange rate is changed by the government to strengthen/weaken the currency’s value.
What is meant by appreciation/depreciation?
The natural increase/ decrease of a currency’s value due to market forces.
What factors impact a floating exchange rate?
Interest rates, Economic data like GDP growth, Speculation, Political stability, Trade balance.
How can governments intervene in currency markets,
Buy/sell their own currency, Changing interest rates.
What is the purpose of competitive devaluation/ depreciation?
To gain a competitive advantage in international trade.
What is the marshall-lerner condition?
A depreciation of a currency will only improve the trade balance if the sum PED for all imports and exports in that country is greater than 1.
What is the J curve effect?
In the short-term, a depreciation will worsen the trade balance before improving it.
What is a free trade area (FTA)?
A form of trade agreement where member countries eliminate or reduce tariffs and quotas so goods can be traded freely.
What are customs unions?
Countries remove or reduce barriers like FTAs but also have common import tariffs for non-member countries.
What are common markets?
Countries remove barriers and allow for the free movement of the factors of production.
What is a monetary union?
Where a group of countries share the same currency.
What are the conditions that a successful monetary union must have?
Responsible fiscal policy, A convergence criteria for joining, One central bank dictating the monetary policy.
What are 3 benefits of regional trade agreements?
Increased trade, Higher efficiency through resource allocation, Political cooperation.
What are 3 drawbacks of regional trade agreements?
Exclusion for non-members, Trade diversions Complex rules for domestic businesses.
What are the 4 main functions of the WTO?
Facilitate negotiations, Resolve disputes, Monitor countries to ensure compliance, Offer assistance to developing countries.
Who sells shares?
Public limited companies (PLCs).
What is the main goal of buying a share?
To make a profit by selling it after it increases in value.
What happens when a PLC releases shares?
They receive money from the public who are purchasing shares.
How may shares negatively affect a business?
Releasing a great number of shares means that the business will have to pay out higher amounts of dividends.
How do banks facilitate saving?
Provide savers with interest rate and borrow their money for investments.
How do banks lend to firms and households?
They provide loans as a source of finance for firms and mortgages and credit cards for households.
How do banks facility the exchange of goods and services.
They allow for buyers and sellers to transfer money between accounts to allow for greater exchanges and globalisation.
How do banks provide forward markets in currencies and commodities?
They allow for currencies to be exchanged and on set days.
What is the difference between retail and commercial banks?
Retail banks deal with households and commercial banks deal with businesses but retail banks usually provide commercial services.
What do investment banks do?
They do not accept deposits but trade in foreign exchange, commodities, bonds and shares.
What is meant by derivatives?
Assets that derive their value from the performance of a separate entity or asset.
How do financial markets fail due to moral hazards?
When economic agents make decisions based on their own interests rather than in favour of households.
How do financial markets fail due to asymmetric information?
When economic agents do not tell other parties key information.
How do financial markets fail due to market rigging?
When firms collude to fix prices or exchange rate to benefit themselves rather than other market participants.
How do financial markets fail due to negative externalities?
When a third-party is affected by the actions of firms like irresponsible lending by banks.
What is meant by de-globalisation?
A reversal of the globalisation process.
How is EOS gained from globalisation?
Consumers and producers are incentivised to reap benefits from the division of labour.
How is innovation gained from globalisation?
More competition reduces monopoly profits and forces firms to innovate to become more competitive.
How are lower prices and higher quality goods gained from globalisation?
Firms must sell goods at lower prices or better quality to stay competitive.
How does globalisation bring about inequality?
Gains from globalisation are unequal between countries leading to higher poverty in some countries.
How does globalisation lead to environmental costs?
Firms pollute, damage eco-systems, and contribute to deforestation when producing higher numbers of goods.
How does globalisation cause a loss of jobs?
Businesses find it easier to outsource production to cheaper countries causing job losses in the production sector.
What is meant by a systemic risk?
When external shocks in one region can easily spread to other regions due to the global interconnection.
How does protectionism cause de-globalisation?
Barriers to trade restrict the movement of goods and services across countries.
How do health crises cause de-globalisation?
Pandemics and other events cause restrictions in travel and trade.
Name two benefits of globalisation for a developed nation.
Increased access to foreign markets, Increased innovation.
Name 3 costs of globalisation for a developed nation.
Unemployment, Income inequality, environmental degradation.
Name 2 benefits of globalisation for a developing country.
Increased foreign investments, Increased access to global markets.
Name 2 costs of globalisation for a developing country.
Primary product dependency, Emigration.
What is meant by emigration?
People leaving an area.
Why is emigration a problem for developing countries?
Loss of potential workers, typically the most productive ones.
What is meant by pattern of trade?
The mix of goods that a country imports and exports and where to and from.
What is the gravity theory of trade?
Countries tends to trade more with other countries who are in a close proximity to them.
What are three issues with free trade?
Job losses, Wage suppression, Income inequality.
