Things To Know P2 Flashcards
Exchange controls
Governemnet imposed limitations on purchase and or sale of currencies to avoid exchange rate volatility
Seen european conuntries post ww2
Limit foriegn investment in counrties too
May ban use of particular foriegn currency or fixed exchange rate
Competition policy
Deregulation, privatisation
Extend market forces witin an economy
Eg thatcher privatised steel and telecoms
Companies motivated to make profit and aso iincrease efficiency
Creation flexible labour markets- supply side e
Decrease tu power
Increase temp and part time contracts
Increase educationa nd training- apprenticeship levy to increase occupational mobility and decrease structural unemp
Eval regional policy
Expensive st
Years to rejevenate area
Barriers to occupational mobility
Cost and duration of education and training- doctor
Lack of ability and sucess= lack of personal attributes- fotballer
Legal barriers- women in afghanisatn, criminal record diff to be a teacher
Discrim- social castes inin dia
Geographical mobility barrierds
lack accest o or oct transport
—cost relocating
-family ties
-lang barriers
-discrim in some areas
Cost of unemp
waste of human resources- econ inefficinecy lower gdp
High cost of welfare ben- increase gov borriwng
Low tax rev
Social cost- increase family breakdown
Ncrease crime- incrrease cost policing, prisons
Socila cots of poor health- depression drug and alchool use
Possible eocn costs of deflation
Holding back on spending
Debts increase
Real cost of borrowing increase
Lower pfoit margins
Confidence and saving
Lower profit margnins- possible econ cost of delfation
unless costs fall further than prices to consumers
Can lead to high unemp as firms seek to reduce their costs
Weaker profit margins, have neg effect on stock markets due to a fall in expected profits and dividens to shareholders
High unemp could lead to decrease ad and recession
Qe how does it work
hoped with extra cash, retail banks lend out extra funds to consumer and busninesses increasing ad
-if bonds pruchased, prices increase, decrease yield on bonds, decrease ir, increase borrowing, spneding on consumer and cpaital goods
-fifnancial institutions use omoney to buy equities- shares in companies ando ther financial assest- increase demand in shares and financial assets, eg increas eprices as profts incrrease wealth efect mean spread more, if increase ad firms spend more on investment, inject to circular flow of income increasng ad
Eval qe retail banks lending to consumer and firms
In deep recession, confiedence low, wealthy bansk sturggle to lend out
Malign deflation consumers and firms hoard rather than invest cash- liquidity trap
Eval qe lwo ir as bonds purchased
Consumer wealth and insecurity of jobs may mean low interest rates not borrow- ad not increasing
Eval qe wealthe ffect as shares pruchased more by bank,
Increase value
Inequality may increase as increase price assets
Danger creating asset bubbles which v fragile and may burst if economic shock or collapse in confidence- send back into recession
Limitations fiscal policy for deflation
Increase national debats and interest payments on debt if fiscal expansionst packages too large- long term repayments
Decrease consumer confidence
Reducing impact any fiscal stimulation
Lower taxes and increased public spending may stoke up inflationary pressure if appluied for too long- limited evidence
Increase disposible income- saved or spent imports- limited impact ad
Tax cuts/public workers seen as temporary- confidence low
Extra income tend to be used to repay debt or restore confidence
Households may see this as a priority rather than fuelling increase in consumptin
Impact of inflation on business
Creates unpredictabiility
Accelerating inflation- cash flow problems
Increase interest rates
Increase meny costs
Export decrease competituve adv
Impact of inflation on poeple
Fixed incomes
Workers little industrial muscle
Interest rates not in line with inflation
Fiscal drag
Shoe leather costs
Factors determine nairu
Level technological developmen of indurties, quality of infrasturcture, competiveness of business on demoestic and international markets
Skills workers- occupational mobilitity and structural unemployment
Replacment ratio- voluntary unemployment
Monetarists- lrpc verticle
No stabletrade off between unemp and inflation in lr
Gov spending ncreases, decreases unemp, increase prices as ad increase
Ad increase prices increaee emp, higher moneywages, decrease boluntary unemp
Newly employed lab suffer money illusion believe financially better off in emp, as mney wage sincrease
Quit jobs realise not better off in emp- inflation
Unemp returns niaru higher price level
Trend growth rate
Rate at which output can grow on a sustained basis, without putting upward or downward pressure on inflation
Reflects annual average percentage increase in productive capacity of econ
Main objectives of uk tax system
Funds gov spendng- able to borrow moeny up to a certan extent but majority must come from taxation to avoid inflationary pressure
Manage economy as a whole- macroecon performance- eg alter taxes and rates to influence econ growth , inflation, unemployment, bop
Decrease certain tax- microecon supply side benefits such as more incentives
Redistribution of iincome- fairness in society
Correct market failure- micro econ improvement workings of market, indirect taxes on demerit goods fund to decrease negative externalities
Cut vat- expansionary fiscal polciy
Hope decrease prices would encourage consuemrs to spend more on other g&s boosting ad
Cut cost in production
Eg. In 2009 lack of confidence- cut vat from 17.5 to 15%^ rather cut in direct tax
History of fiscal policy 1945-1970s
Hope decrease prices would encourage consuemrs to spend more on other g&s boosting ad
Cut cost in production
Eg. In 2009 lack of confidence- cut vat from 17.5 to 15%^ rather cut in direct tax
1979-2008 fiscal pollcu
Automiatic stabilisers not effective
Stagflation- increase unemployment, increase accelerated cost push inflation
End of 1970s- expansionary- artificiail econ growth when supply side econ (structural weakeness) unable to grwo fast enough for existing demand
Poorly judged and misused00- accelerating inflation and increase inports ‘unecessary and decrease cmpetitiveness of british businesses
2001 recession
Collapse dot com bubble and 911
Bush cut tax and increase spending-sucess
Uk econ-avoid recessioin-supply side fiscal rather expansionary fsical
Not structural deficit as capital not current spending
2010-16 fiscal
Osbourne cut budget
Austerity decrease gov spending
Cut welfare 26k to 20k max
Vat increase 17.5 to 20%
Cut local authoritie -libraries
Cut surestart scheme -intridyce more single motehrs into work with better childcare
Changes to welfare benefit system- fiscal supply side
Increase incentives find work, decrease uneemployment trap
Thatcher- increase benefits in line with inflation rather av earnings
Blair- working tax credit meant workers recieived extra benefits
Incapacity benefits decreaes for thhose deemed less sick and capable of carying on with soem sort of wokrk
Current con gov- decrease working tax credit, raise national living wage to 10.42 pounds
Taxpayer not subsidising underpaying employer
Welfare benefits combined uc- no more than 20k per year
Effectiveness supply side policies- free marketeer
No-classical
Private sector more likely to deliver technical and allocative efficiency
Concerned risk gov failure
Keynsian intervetionissm aproach supply side polciies
Market failre concern
Carefully target gov spending n merit goods and infrastructure, r&d, education and training
Lead to crowding in effect- firms attracted to areas with good infrasturcture, good controls within r&d and more skilled workforce
Neutral fiscal stance
Gov runs a balanced budget
Benign impact on level econ activity
Demand management
Influence level ad in econ
Inhibiting factors to global consistent tax
Oecd 15% corp tax
But Ie saudi arabia does not even have corpoerate tax system but instead has a tax system based on islamic principles
Erratics
Distrot monthly bop
Shaps
Ships aircraft preciosu stones
What does the bop inclkude
Current account
Financial account
Capital account
Omissions and errors
What does sthe curent account include
Stig
Services
Transfers and secondary income
Investment income- primary income
Goods trade
Trade gdp
Balance of trade gs
Y does the uk have a deteriorating trade balance
uk often can import goods more cheaply than ccan be produced in uk- deindustrialised
-poor productivity and supply side weakness
-high overvalued exchange rates- strong pound
-competition of no ecconomies eg china
-poor non price competitiveness
Income investment
Interest, profiut and dividens (ipd) or proterty income from abroad
Foreigners also own british assets, so investment income also flows out of the country
Current account balance calculation
Trade balance+ services balance + investmnent income balance + transfer balance
Impacts on current account
Any event trend
Increase uk productivity
Uk producers fail to keep up with changing consumer demands
Uk highr inflationo than other countries
Recession benefiting
Storng pound
Does current acocunt defiict matter- y
defecit may decrease comp- decrease productivity ro lakc of innovation
-decrease emp, if gdp lower growth
-imports a leakage from circular flow- leading to neg output gap
-continued deifict leading to increase foriegn debt paid for the defiict
-many argue tha uk persistant structural defiict due to lack of comp in many sectors
Does current account defiict matter- no
Little impact should correct itself- deficit boom, recessoin demand for imports falls- deficit linkked with er depreciation, restore comp
Current account deficit funded by foriegners willing to lend- uk financial sector st hot money flow in to banking sector financial deifict
If caused by imorts capital equipment- increase in exports in futrue. Nissan invetsment battery plant in ne- increae export lt
Overall does current account deficit matter
Not serious in sr but indicates industrial decline, harmfl lt
Persistahhnt deifict leads to decrease er depreciaties, cost push inflation, decrease lr econ growth
Does a current account surplus matter- y
Surplus net injection- boost to ad
Positive output gap- demand pull ifnlation
Lr supply means lending to foriegn countries too large not to repay
Eg turnkedy surrent account deficit to ger
Some would say if persitsnt surplys missing out popp from foriegn origen gs such as jpn an ds k
Does a current account surplus matter- no
Shows countries industrial indternat comp and earning income from foriegners
Assc with high gdp nad emp
Many countreis aim for export lead growth as a means of pushing towards ppb positive multipleier and creating emp
Overall does a current account surplus matter
St favourable
Litle beneift lt- as living standards improve by spending this income
Disadv storng pound
Increased deriict on current account boe- make exports mroe expensive and imorts cheaper
When demand elastic, likely to improt more and export less
Decrease econ growth exports fall, reduction ad and reduce econ grotwh rate- may reduce employment rate and living standards esp in regions where industries dependent on export market- eg car manufacturing industry- storng exchange rate caused closure of many uk industries 80s and 90s esp textiles
Neg impact on business condifence and capital investment- as investment dependent on strnegth of demand- so less exports decrease willingness to invest
Money
A medium of exchange
An asset accepte din exchange for gs rather than haveing to resort to barter
Functions of money
Store of wealth
Unit of account/measure of value
Standard of deffered payment
Unit of account/meaure off fvalue
Money provides means of expressing value, allows people to compare relational values gs
Price signalling mechanism
Money suppply equation
Money supply x velocity= price level x gdp= m=p
Demand for money dictated by
Income- higher level of income, greater demand for money in order to faciliitate spending
Rate of interest- higher rate of interest, higher opportunity cost of holding money in cash form or in current account that does not pay interest
Money markets
Primarily used for trading of short dated financial assets eg cash, st loans, trade in short dated bonds about to mature
Short dates bonds- treasury bills and commercial bills- considered to be highly liquid asets and can be easily traded for cash
Banks trade on money market and money lent for 24h to 1y
Market price of bonds
Coupon/yield x 100
Relationshp between prices of bonds and yields
Inverse
Bonds mature at issue price and redeemed for cash
Yiedls on bon set benchmark for ir in money market- if yields increase, ir increase
Bond prices rise, yield fall
Insurance companies
Offer financial protection against losses in return regular payment
May use cash suprlus to speculate on financial markets
Pool client risk- assume not every cliant will claim
Eg legal and general
Pension funds
offer social insurance by providing income to the insured persons following their retirement/savings funds for workers
Specultae iwth this money
Aviva
Private equity funds
Purchase equities in other companies, often invest own funds
Usually partnership or plc
Not open to public
Eg boots used to be plc but now private equity
Unit trust
Mutual funds that pass profits directly to investors rather than reinvest
Fund manager directly invests unit trust,
Public buys units in them
Main functions of boe
Helps gov achieve macroecon stability
Implement monetary policy
Maintain financial stability
Gov bank
How credit is made
When a bank creates a loan, it creates creidt
More credit banks create- larger money supply
Loan resulst in creation of an advance of money
Recorded as an asset on banks balance sheet as loan creates inetrest
Bank also creates a deposit equla to value of loan, recorded as a libaility- double entry system
Process of credit multiplier
Banks keep fraction deposit to meet reserve requiremnet
Banks work on the assumption that not all consumers are likely to require cash at the same time
And so invest that money
Multiplier equation
1/bank reserve (as decimal)
Total bank deposit equation
Initial depsoit/bank reserve (deposit)
Order of liquidity assets
Cash
Balances boe
Money at short call
Bills- commercial and treasury
Investment- gilts and corporate bonds
Advances- creidt or loans extended to consumer
Bills
Commercial and treasury bills- max 3 months
St borrow on money markets as near maturity
Gov bonds/gilts
Debt secuirty issued by a gov to support gov spending
Often considered to be low risk as issuing gov backs them
Can pay periodic inetrest payments called capital payments
Long dated
On stock market
Corporate bonds
Debt secuity issued by a company to increase capital
Relatively liquid but less so than gov bonds
Financial policy comm
Boe
Fpc
Identify monitor and take action to remove or reduce systematic risk with protection and enhance resilience of uk financial sustem
Support econ policy of gov
Macroprudential regulation- prevent too much risky interbank lending market
Prudential regulation authority
Pra
Boe
Micro prudential regulation
Supervisory identify and monitor and manage risks of inidvid firms to maintain stability
Stress tests
May set speciifc capital and liquid ratio to avoid disruption to essentail financial servces of individ firms
Finnacial conduct authority
Fca
Not boe yet acountable to gov
Protect consumers from market failure- asymentric info and exploitation- ppi and interest rate hedging
Proetct financial markets to enhance interests of financial system uk
Promote effective comp in interests of consumers
How may a bank fail
Lack of capital- shareholder funds and retained prifts- if value of asdets less liabiilities- insolvent bankrupt
Insufficient liability- bank vulnerable to run on the ban - if bank cannot turn assets into cash quicky meet demands of consumers
If unexpectly high demand for capitla- borrow from other anks or boe
Capital in bank
Shareholder funds and retained profits
Capital ratio
Amount capital as proportion of its loans
Capital ratio strong indicatior of banjs financial health, if value banjk asset fall- vulnerable to be insolvent
Investment bank
a financial instityut that ensures the availbailuty of capital for firms gov and otehr entities
Financial markets
Wide range of financial assets such as equities- shares in plcs, debt obligations, currencies and future contracts for commoduities are traded
Finanica markets are important to encourage saving and investment that ultimately lead to econ growth
Markets are regulated to mitiagte against market faiulure such as asymmetric info
Market failure seenin financial amrkets
Assymetrical info
Financial account
Records financial flows for investment pruposes
Hot money and lt money flows
Lt money flows
Investmengt and saving
Fdi and portfolio investment
Example fdi
Fdi- microsoft research centre in cambs
Purcahse production facility malaysia for dyson- expand productive capscity
Portfolio investment
not productive capsity- buy business shares, remoal of exchange controls
Coca cola deciided to pruchase majority shareholding in costa
Loose monetary polcy
Interest rates too low or qe used too excessively
