Unit 4 Flashcards
Define Globalisation.
(Edexcel Definition): The ability to produce any goods or service anywhere in the world; using raw materials, component, capital + technology from anywhere; sell the resulting product anywhere, and place the profits anywhere.
(Textbook Definition): A process by which the world’s economies are becoming more closely integrated.
What are the 7 causes of Gloabalisation?
Improvements in Transportation
Improvements in Technology + Communications
Reduction of Trade Barriers
Trading Blocs
Deregulation of Markets
Increased Capital Mobility
Increased Significance of MNCs
How does Globalisation impact Consumers?
A: Increased Competition = Cheaper prices, Better Quality / Efficiency
A: Increased Variety
How does Globalisation Impact Producers?
A: Cheaper Raw Materials
Access to a Larger Market
More Revenue for MNCs
D: Reduced prices means less profit
Prices have to lower due to more competition; less revenue
How does Globalisation Impact Workers?
A: More job opportunities in developing countries (resources are cheaper)
Multiculturalism
D: Less job opportunities in developed countries
Labour Exploitation
How does Globalisation Impact Individual Countries?
A: Less Unemployment (more labour to keep up with demand)
Better Standard of Living
D: Westernisation
Possible BoP deficit
How does Globalisation Impact the Government?
A: Possible Trade Surplus
More tax revenue
D: Possible trade deficit Possible recession (which spreads quicker)
How does Globalisation Impact the Environment?
A: (possibly) more awareness on environmental issues; more caution
D: more transportation means more pollution
What are the Characteristics of Globalisation?
It involves the:
free trade of goods and services
free movement of capital and labour
free interchange of technology and intellectual capital.
more trade between nations
more transfers of capital including FDI
brands developed globally
labour has been divided between several countries. more migration and
more countries participate in global trade, such as China and India
higher levels of investment.
Countries have become more interdependent
(This could be seen in 2008 / 2009.)
What is Comparative Advantage?
A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost.
What is Absolute Advantage?
A country has absolute advantage if it can produce more of multiple goods with the given resources.
What are the Assumptions made in Comparative Advantage theory?
- There are only two countries producing two goods.
- There are no transport costs.
- Traded goods are identical.
- There are no tariffs or trade barriers.
- Buyers and sellers have perfect knowledge of prices.
What do Parallel lines on a comparative advantage graph show?
Parallel lines on a PPF show that opportunity cost is the same in both countries. Therefore there can be no gains from trade.
How do you Calculate Comparative Advantage of a product in Tabular form?
Using the same country, divide the other product by the first product.
The country with the lowest number of that product has the lowest opp. cost; meaning is has the CA.
How do you Calculate Comparative Advantage of a product in Diagram form?
The steeper curve represents the country which has CA on the y axis.
The opposite applies to the x axis (unless they’re parallel)
What are the Limitations to the Comparative Advantage Theory?
- CA doesn’t consider the exchange rate
- Countries are able to develop a CA of a good (e.g. Vietnam in the production of coffee- over 30 yrs their market share went from 1% to 20%)
- It can be argued that CA is no longer a relevant concept: Within countries, a wide variety of goods + services are produced, and there is very little specialisation. This is helped by the advancement of technology
What are the Advantages of Specialisation + Trade in an International Concept?
o Greater world output, so there is a gain in economic welfare.
o There could potentially be higher quality, since production focuses on what
people and businesses are best at.
o A greater variety of goods and services could be produced.
o Lower average costs, since the market becomes more competitive.
o There is an increased supply of goods to choose from.
o There is an outward shift in the PPF curve.
o More opportunities for economies of scale
What are the Disadvantages of Specialisation + Trade in an International Concept?
o Less developed countries might use up their non-renewable resources too quickly, so they might run out.
o Countries could become over-dependent on the export of one commodity, such as wheat. If there are poor weather conditions, or the price falls, then the economy would suffer.
o There could be more structural unemployment, since production moves abroad.
o Some countries might become stuck in the production of one good or service, so they cannot develop further.
What is the current Pattern of Trade?
Rich countries are exporting less goods than before
The UK used to send + receive imports and exports of goods + services to the EU. (keep in mind this may have now changed due to Brexit)
What Factors influence patterns of trade?
Comparative Advantage
Trading Blocs
Relative Exchange Rate
Emerging Economies
How does Comparative Advantage influence Patterns of Trade?
There has been a recent growth in the exports of manufactured goods from developing countries to developed countries. This is because developing countries have gained an advantage in the production of manufactured goods, due to their lower labour costs, so production shifted abroad.
The deindustrialisation of countries such as the UK has meant the manufacturing sector has declined. This means that production of manufactured goods has shifted to other countries, such as China, whilst the UK now focuses more on services, such as finance.
This has led to the industrialisation of China and India. Their share of world trade has and the volume of manufactured goods that they export has increased.
However, since China’s population is now ageing, their wage competitiveness has fallen. This is also due to the rise of the middle class in China, who demand higher wages and consume more.
What is meant by Terms of Trade?
The volume of imports a country has to produce, in order to finance one unit of exports
How do you Calculate the Terms of Trade?
Index of Export Prices / Index of Import Prices ( x 100% )
What Factors influence Terms of Trade?
PED Relative Inflation Rates Raw Material Prices Exchange Rates Population Relative Productivity Rates
What does the Terms of Trade Calculation Show?
> 100 : Terms of Trade are Improving
(It shows the exports can buy x% more than it could before)
<100 : Terms of Trade are Worsening
What does it mean if terms of trade are Improving?
Low inflation
Better standard of living (less has to be exported to buy a given quantity of imports)
Deterioration in the current account
Lower AD: low output + high unemployment
What does it mean if terms of trade are Worsening?
A worsening terms of trade indicates that a country has to export more to purchase a given quantity of imports.
High inflation
Worse standard of living
(more has to be exported to buy a given quantity of imports)
Better trade balance
What is a Free Trade Area?
No Internal Trade Barriers: Members are allowed to freely trade with each other.
What is a Customs Union?
No Internal Trade Barriers
Common External Trade Barriers: Members share similar rules with external trading
What is a Common Market?
No Internal Trade Barriers
Common External Trade Barriers
Factor + Asset Mobility: Factors of production (e.g. labour) can move freely between members
What is a Monetary Union?
No Internal Trade Barriers
Common External Trade Barriers
Factor + Asset Mobility
Common Currency (e.g. Euro) They also have similar labour market policies, and some degree of tax harmonisation
What are Trading Blocs?
A group of countries that join together and agree to increase trade between themselves.
What are the Benefits of Regional Trade Agreements (trading blocs)?
- FDI:
An increase in FDI results from trade blocs, creating larger markets, resulting in lower costs to manufacture products - Enhanced Competition:
Trade blocs bring manufacturers in numerous countries closer together, resulting in greater competition. This promotes greater efficiency. - Market Efficiency:
The inc. in consumption experienced with changes in demand combines with a greater amount of products manufactured, to result in an efficient market - Trade Effects: Trade blocs eliminate tariffs, driving the cost of imports down. Consumers make purchases based n the lowest prices, allowing firms with a CA to thrive.
- Economies of Scale: Larger markets created via trading blocs. Therefore, the gains of efficiency + advanced technology can be reaped.
What are the Costs of Regional Trade Agreements (trading blocs)?
- Regionalism vs Multiculturalism:
Trading blocs inherit bias in favour of their participating countries. This means integration only happens regionally, rather than globally. - Competition:
Existing smaller firms are unable to compete with international firms, driving out competition - Market Efficiency:
The inelastic nature of supply for some firms means they are unable to match the competitive levels of other firm and so can’t be as efficient; this gives monopolies an unfair advantage. - Interdependence:
If trade of one country is suddenly disrupted (e.g. due to conflict or natural disaster), this will have severe consequences for the economies of all participating countries
What is Trade Creation and Trade Diversion?
With more trading blocs, trade has been created between members, but diverted from elsewhere.
Trade creation occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer.
Trade diversion occurs when trade shifts to a less efficient producer. Usually, a country might stop importing from a cheaper producer outside a trading bloc to a more expensive one inside the trading bloc.
Moreover, protectionist barriers are often imposed on countries who are not members, so trade is diverted from producers outside the bloc to producers within the trading bloc. The UK trades mainly with the EU, at the expense of former trade links in the Commonwealth.
(Trade Creation is an advantage of trading blocs; Trade Diversion is a disadvantage.)
Who are the World Trade Organisation?
An international organisation that regulates global trade. Their headquarters are in Geneva, Switzerland
There are 164 member states in the world.
According to the WTO, what should ideal trade be?
1) Non-Discriminatory:
They’re not allowed to have free trade policies with one country and strong protectionist measures with another
2) Free from Barriers:
less protectionism; the WTO obviously likes trade, ad so thinks as much should take place as possible
3) Predictable Trade:
Individual countries can foster an economy where investment decisions can take place, jobs are created well + businesses flourish
4) Promoting Fair Competition:
May allow protectionist measures for helping businesses be competitive. This only happens when it’s needed/justified
5) Beneficial for Developing Countries, through Special Provisions:
e. g. the time + flexibility to grow and develop
What are the Functions/Roles of the WTO?
Set + enforce rules on international trade
Resole trade disputes
Provide a forum for negotiating trade liberalisation
To monitor further trade liberalisation
To increase transparency of the decision making process
To help developing countries fully benefit from global trade
Cooperate with other major economic institutions
How do Trading Blocs and the WTO Conflict?
Trade within regional trade agreements has also significantly increased (trade
creation) as a result of their emphasis on free trade.
However, this is at the
expense of trade with non-members (trade diversion) who may be subject to
trade barriers. This is in conflict with the primary aim of the WTO.
What are the Reasons in Favour of Protectionism?
Infant Industry argument
Geriatric/Sunset Industry argument
Ensures employment Protection
Corrects a BoP Deficit on the Current Account
Restricts Imports from countries with less stringent health + safety and environment legislation
Strategic reasons
Raises Tax Revenue
Retaliation
Prevents Dumping
What is the Infant and Geriatric/Sunset Argument?
Industry: Without protection, new small businesses may not be able to compete, as they have yet to establish themselves.
Geriatric: the protection of industries that need time to restructure so they can become competitive again
What is meant by ‘Retaliation’?
Barriers to trade may be imposed by Country X on Country Y, because Country Y has restricted the imports of Country X’s goods
What is meant by ‘‘Dumping’?
This is a type of predatory pricing behaviour, whereby goods are sold for export at less than the average costs of production. It is illegal under WTO rules, and unfair distorts Comparative Advantage
What are the Problems with Protectionism?
- Higher price and less choice for consumers
- Inefficient resource allocation - CA is distorted, leading to lower output + SoL
- Regressive Effect on Income Distribution - he tariffs fall on the products lower income families spend a higher % of their income of
- Product Inefficiencies - firms protected from protection competition have little incentive to reduce production costs
- Trade Wars - one country imposing import controls will lead to retaliatory actions
- Difficult to remove barriers once they’re set up
What are the Methods of Trade Barriers?
Tariffs Quotas Embargoes Rules + Regulations Domestic Subsidies Preferential state Procurement Policies
What are Tariffs?
They are simply taxes on imports
What are Tariffs also known as?
Custom Duties
What are Quotas?
Physical Restrictions on the amount of goods that can be imported
What is meant by Rules + Reguations as a Trade Barrier?
A Complete Ban on the import of a particular good
What is meant by Domestic Subsidies?
Grants given to domestic producers
What is meant by Preferential state Procurement Policies?
Where a government favours local/domestic producers when finalising contracts for state spending
What are the Effects of Tariffs?
Price paid by consumers rises
Imports fall
Domestic output rises
Government tax revenue rises
What does the Tariff diagram look like?
https://11tanihi.files.wordpress.com/2011/01/pic008.gif
the two triangles represent welfare loss
What are the Effects of Quotas?
Price paid by consumer rises Imports fall Domestic output rises Loss of businesses to some importers Revenue to the remaining importers rises (because prices go up)
What does the Quota diagram look like?
https://image.slidesharecdn.com/a2protectionism-130916023547-phpapp02/95/protectionism-25-638.jpg?cb=1379299646
(This is for steel, but it applies for everything)
The rectangle with height P1P2 and length 0-Quota shows extra revenue for remaining importers
0-Q1: Imports before quota
0-Quota: Imports after quota
What are the Effects of Embargoes?
No imports
Domestic Output increases
Prices rise for consumer
What are the Effects of Rules + Regulations on imports?
Increases cost for importers
What are the Effects of Preferential state procurement policies?
Eliminates competition
What are the Evaluation Points surrounding Protectionist methods?
Elasticity of D+S
Amount of the tariff
Ability of domestic firms to Increase Output
Deadweight welfare loss / producer + consumer surplus
Potential retaliation, regressive effects, inefficiencies, etc
What is meant by ‘Balance of Payments’?
A record of all a country’s financial dealings with the
rest of the world over the course of a year.
What does the BoP Structure the look like?
Current account
Capital account
Financial account
International investment position
What does the Current Account consist of?
- Balance of trade in goods, and balance of trade in services (MAINLY)
- Income
- Current Transfers
What is meant by ‘Income’ in the Current Account?
This comprises income earned by domestic citizens who own assets overseas minus income earned by foreign citizens who own assets in this country.
It includes profits, dividends on investments abroad and interest
What is meant by ‘Current Transfers’ in the Current Account?
Money transfers between central governments
(who lend and borrow money from each other)
Grants, such as those that the UK receives as part of the CAP from the EU.
What does the Financial Account consist of?
Direct Investment
Portfolio Investment
Financial Derivatives
Reserve Assets
What is meant by ‘Direct Investment’ in the Financial Account?
Capital provided to or received from an enterprise, by an investor in another country.
What is meant by ‘Portfolio Investment’ in the Financial Account?
Investments in equities and debt securities.
What is meant by ‘Financial Derivatives’ in the Financial Account?
A contract between 2+ parties, whose value is agreed upon financial assets/index/security
What is meant by ‘Reserve Assets’ in the Financial Account?
Financial capital held by monetary authorities to finance trade imbalances
What is the Capital Account?
Transfers of ownership of fixed assets
It is relatively small.
What is the International Investment Position?
The balance sheet of the stock of external assets and liabilities.
What are the causes of a Current Account Deficit?
- relatively low productivity
- relatively high value of the country’s currency
- relatively high rate of inflation
- rapid economic growth resulting in increased imports
- non-price factors such as poor quality and design.
What are the Measures to correct a deficit on the current account?
Expenditure Switching Policies
Expenditure Reducing Polices
Supply Side Policies
What are Expenditure Switching Policies?
Policies to make the Price of Imports Rise, or the price of UK goods to fall
- Protectionist policies- e.g. tariffs, quotas or subsidies to domestic producers
Problem: Illegal under WTO rules - Devaluation/Depreciation of the exchange rate
Problem: You don’t interfere in the exchange rate market, if you have a floating exchange rate
E: Revaluation- causing exports to also fall so that the current account deficit won’t be corrected
What are Expenditure Reducing Policies?
Policies that aim to Reduce the Spending Power of Consumers
- Deflationary Fiscal Policy:
Reducing AD either be decreasing gov. spending or by increasing taxes - Deflationary Monetary Policy:
Increasing interest rates
Problem: Most counties have independent central banks, which control inflation, but not the exchange rate
E: Spending on domestic goods decrease, increasing unemployment and reducing economic growth
How do Supply Side Policies help with Balance of Payments?
Policies designed to Increase Productivity and Competition. These help improve international competitiveness, increasing exports.
Goods are made competitiveness through:
- Increase in Education + Training
- Tax breaks + investment allowances to stimulate purchase of capital equipment
- Tax breaks + investment allowances, to stimulate purchase of capital equipment
- Privatisation, deregulation + contracting out of public services
E: Opportunity Cost
What are the Negative Effects of a Trade deficit on the economy?
Negative Impact on AD
- Fall in real GDP/ output, negative multiplier effect
- Economic slowdown/recession
- Negative output gap
Negative effect on Company Profits + Business Confidence
- Fall in demand - fall in capital investment
- Plant closures/ job losses - cyclical unemployment
- Fall in tax revenues, rise in benefits
- Could worsen North/South divide
What are the Positive Effects of a Trade deficit on the economy?
Higher Standard of Living
Better quality goods
What are the Negative Effects of a Trade surplus on the economy?
Inflationary pressure, because exports/injections are high in relation to imports/leakages
Increase in the value of the £ - fall in international competitiveness
Living standards may fall if the surplus was caused by higher exports, resulting in less goods available for domestic consumers
What are the Positive Effects of a Trade surplus on the economy?
Increase in International Competitiveness
Greater confidence in UK economy
Greater FDI
What is the Exchange Rate?
The rate at which one currency can be exchanged for another.
What is meant by the Nominal Exchange Rate?
The number of units of the domestic currency that can purchase a unit of a given foreign currency
What is meant by the Effective Exchange Rate?
Measures the value of a currency against a basket of other currencies
These currencies refer to the countries they trade the most with
What do exchange rates Depend on?
Supply + Demand
What is a Floating Exchange Rate?
Under floating exchange rates, the exchange rate is determined by supply and demand. There is no government/central bank intervention.
The UK uses this.
What is a Fixed Exchange Rate?
A currency’s value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value (e.g. gold)
The value is determined by the government or central bank
What is a Managed Exchange Rate?
The exchange rate is allowed to float usually within a range, and the central bank intervenes by buying + selling the currency, in order to influence the exchange rate.
Chine + India uses this.
What is Revaluation?
When the exchange rate goes up.
This only occurs in a Fixed exchange rate, where the government/central bank determines this
What is Devaluation?
When the exchange rate goes down.
This only occurs in a Fixed exchange rate, where the government/central bank determines this
What is Appreciation?
When the exchange rate goes up.
This only occurs in a Floating exchange rate, where market forces (supply/demand) determines this
What is Depreciation?
When the exchange rate goes down.
This only occurs in a Floating exchange rate, where market forces (supply/demand) determines this
What Factors influence Exchange Rates?
Relative interest rates (hot money flows)
Relative inflation rates
International trade performance
Government finances (budget deficits/surpluses)
State of the economy
Inflows + Outflows of foreign investment (FDI)
Speculation
Quantitative Reasoning
How can the Exchange Rate be Managed/Influenced by the Central Bank?
Changing Interest Rates:
Raising interest rates will increase the value of the currency
Intervention on the Foreign Exchange Market
Making the demand curve shift right will increase the currency’s value
What effect will a Depreciation of the exchange rate have on the Current Account?
Weak pound - Imports dear + exports cheap - Increase in exports - Current account Improves
What effect will a Depreciation of the exchange rate have on Economic Growth + Employment?
Weak pound - Current account improves - (X-M) is higher - Right shift in AD
What effect will a Depreciation of the exchange rate have on the Inflation Rate?
Weak pound - Current account improves - Right shift in AD - Higher price level - More Inflation
What effect will a Depreciation of the exchange rate have on FDI?
Depreciation - Country is more Attractive for foreign countries to invest (as resources are cheaper) - FDI Increases
What does an Improvement in the Current Account Depend On?
The Marshall-Lerner Condition
The J Curve Effect
What is the Marshall-Lerner Condition?
There will only be an improvement in the current account if the sum of the PEDs for imports + exports is More Than 1.
What is the J-Curve Effect?
In the short run there might be a deterioration in the
current account of the balance of payments because the demand for imports might be price inelastic if firms have stocks or if they are tied into contracts; and the demand for exports might be price inelastic because consumers take time to adjust to the new, lower, prices.
However, in the long run demand for exports and imports is likely to become more price elastic so the significance of the above factors disappears.
What is meant by Convergence Criteria?
Criteria which EU members are required to meet to adopt the euro as their currency.
What is the Convergence Criteria?
- Inflation Rates-
No more than 1.5% points higher than the average of the top 3 best performing members of the EU - Government Finance
The annual gov. deficit to GDP must not exceed 3%
The ratio of gross gov. debt to GDP must not exceed 60% - Exchange Rate
Applicant countries should have joined the exchange-rate mechanism (ERM II), under the European Monetary System for 2 consecutive years, and should not have devalued its currency during the period. - Long-Term Interest Rates
The nominal long-term interest rate must not be more that 2% points higher than the 3 lowest inflation members
What are the Microeconomic Reasons for Britain not using the Euro?
Changeover Costs from joining the Euro:
It will cost money to change the currency for all machines, accounting systems, etc. and will also cause confusion for many
Higher Prices:
Potential loss of consumer welfare if suppliers increase prices
The vast majority of consumers will continue to Buy Locally; making the switch less effective
What are the Macroeconomic Reasons for Britain not using the Euro?
Britain loses Instruments of policy adjustment:
A ‘one size fits all’ monetary policy may not work with the UK
Fiscal Policy:
The EU growth and Fiscal Stability Pact is a weakness of the current system
UK economy has Out-Performed Euro Zone:
The UK has achieved low inflation and sustained growth (macro stability)
Continued high levels of FDI
The UK still benefits from the EU market
The UK tends to be more sensitive to interest rate changes
The UK may join at an inappropriate exchange rate- could worsen the business cycle
What is meant by International Competitiveness?
International Competitiveness refers to the ability of a country to sell its goods/services abroad.
The ability of a nation to sell its goods + services in international markets at an attractive price + quality
What is International Competitiveness Determined by?
It is usually determined by the price and/or quality of the good or service.
What are the Factors that influence International Competitiveness?
- Relative unit labour costs which are heavily dependent on productivity
- Wages and non-wage costs relative to those of competitors
- Rate of inflation relative to competitors
- Regulation relative to that of competitors.
What policies can Firms adopt to improve International Competitiveness?
- Raise Productivity:
Near capital equipment investment
Training for staff - Reduce Costs:
Rationalisation - getting rid of staff
Relocate production abroad
Source cheaper materials from abroad - Improve Quality + Design:
Research + development
Hire experienced designers
What policies can the Government adopt to improve International Competitiveness?
Supply Side Policies:
Tax incentives for firms to increase spending on research + development
Privatisation - encourages competition
Public spending on Infrastructure
Deregulation, and lowering tax for businesses
Reducing unemployment benefits
Increasing flexibility of labour market
Create Macroeconomic Stability
What are some Problems/Issues with the policies that Firms can Adopt? (evaluation)
Costs of Machinery/Training/Redundancy/Relocation
Problems surrounding locating abroad (language, culture barriers, etc)
Cheaper materials = Worse quality
Significance of PED
What are some Problems/Issues with the policies that the Government can Adopt? (evaluation)
Opportunity Cost
Increased budget/fiscal deficit
Time lag
Increased inequality
Privatisation - not always efficient
What are the Benefits of being Internationally Competitive?
Surplus in the Current Account (as demand for exports increase)
Export-led Growth (AD)
Low levels of Unemployment
What are the Problems of being Internationally Uncompetitive?
Reduction in BoP
Increase in Unemployment - quite often in particular industries (manufacturing, services)
Negative Effect on Multiplier (which affects AD)
How is International Competitiveness Measured?
Exchange Rates Productivity Relative unit labour costs Share of exports in world trade Investment (as proportion of GDP) Education + Training (well skilled - good output) Communications + infrastructure Industrial Relations
What are some Price Factors that affect International Competitiveness?
Real exchange rate
Wage costs
Relative labour productivity
Relative inflation rates
What are some Non-Price Factors that affect International Competitiveness?
Quality + Design
Non-Wage costs (e.g. NIC, pensions, health + safety, employment protection, anti-discrimination laws)
Availability, Reliability
Technology
What are the Top 10 Internationally Competitive Economies?
1. Switzerland Singapore USA Netherlands Germany Sweden UK Japan Hong Kong 10. Finland
What are the 2 main Measurements of International Competitiveness?
1) Relative unit labour costs:
The more productive a country becomes, the lower its unit labour costs. This makes the country more internationally competitive.
2) Relative export prices:
This is the ratio of one country’s export prices relative to another country, and it is expressed as an index.
The lower the relative export price, the more competitive the country.
What is meant by Relative Poverty?
Earning a low income compared to other incomes within their economy/society
For the UK, this is earning an income that is 60% of the median income or less.
What is meant by Absolute Poverty?
When a person’s continued daily existence is threatened because they have insufficient resources to meet their basic needs
Earning below the poverty line
What is the Absolute Poverty Line?
If people earn below this line, they’re in Absolute Poverty
In 2008, The World Bank set the poverty line to $1.25 a day
Some economists put it at $2 a day
What is Poverty Measures with?
Human Poverty Index
This consists of HPI-1 and HPI-2
What is the HPI-1?
The HPI-1 is a measure of deprivation in the poorest countries in the world
Consists of 3 elements:
% of people expected to reach the age of 40
% of population who are illiterate
% of children who are illiterate, and % of the population who don’t have access to safe water + healthcare
What is the HPI-2?
A measure of poverty more relevant to developed countries
Consists of 4 elements:
- Probability at birth of not surviving to 60 (x 100)
- Adults lacking functional literacy skills
- Population below relative income poverty line
- Rate of long term unemployment (lasting at least 12 months)
What are the Causes of Relative Poverty in the UK?
- Inequality in Wages + Earnings
- Falling Relative Value of State Benefits
- Higher levels of Structural + Long Term Unemployment
- Regressive Taxes
- Inheritance
How does Inequality in Wages and Earnings cause Relative Poverty in the UK?
- De-industrialisation leaves sector jobs having lower pay
- Those in the Public Sector earn less than those in the Private Sector
- Increase in part time/temporary jobs (which may give low pay)
- Decrease in trade unions- many workers unable to bargain for higher wages
- Increased demand for highly skilled workers
How does the Falling Relative Rate of State Benefits cause Relative Poverty in the UK?
- Pensions and other benefits go in line with the inflation rate
- Wage rates increase faster than inflation rates
How do Higher Levels of Structural and Long Term Unemployment cause relative poverty in the UK?
- Unemployment is the biggest cause of poverty in the UK
- … because people rely on benefits
- 65% of the poor aren’t in work
How do Regressive Taxes cause relative poverty in the UK?
- Regressive Tax: Tax that increase rate, while income decreases
- Tax changes in the 80s and 90s put a higher burden on the poor
- There’s been a shift in taxes from progressive income tax to regressive indirect taxes
- The government has increased VAT and indirect taxes on alcohol + petrol, which take a higher % on those with low incomes
How does Inheritance cause Relative Poverty in the UK?
• This allows wealth inequality to be passed on, and is quite important in the housing market
What are the poverty Statistics for Ethiopia?
Out of 80m people (2008), 35m live under the poverty line (44%)
More than 12m are chronically or periodically food insecure
80% of Ethiopians are dependent on agriculture
In which areas in Ethiopia are poverty Pronounced?
Poverty in Ethiopia is more pronounced in the rural areas as compared to the urban areas.
The situation recently worsened due to sharp increases in the prices of food + fertilisers on world markets- making it harder for poor household in Ethiopia to secure adequate food supplies
What are the Causes of Absolute Poverty in Ethiopia?
Arid conditions (inc. insufficient rainfall) - leads to irregular production of agriculture; as well as periodic famines
Improper strategies to market/advertise
Poor development of technology/transportation
Failure of rural people participating in awareness programs
HIV/AIDS pandemic - 6% of adults have it
What are the General Causes of Relative + Absolute Poverty?
Economic growth/ Economic development
FDI
Policies which result in increased trade
Government tax and benefits policies
Changes in asset prices
What is Income, and what is Wealth?
Income: The amount of money received over a set period of time. (what you receive)
Wealth: The value in money of assets held. (what you own)
Why do people receive Different Incomes?
Some skills are more Highly Demanded than others, so they receive higher wages
Workers in the Public Sector earn more per week than those in the private sector
Average full time earnings also differ considerable between Different Regions (e.g. London vs the North)
Why is Wealth more Unevenly Distributed than Income?
- Wealth often Earns Income
(e. g. shares may increase in value, generating more income)
- Reinvestment - Those earning income from their wealth can invest that income again (e.g. buy more shares), generating even more income
- This makes the wealthy even wealthier; and those with low wealth can’t invest as much - Assets tend to increase in value Quicker than income rising
- Income is taxed, but wealth isn’t
What is the Lorenz Curve?
The Lorenz Curve shows income inequality
x axis - Cumulative % of the population
y axis - Cumulative % of income
A straight upwards line shows perfect equality, and the greater the gap between the Lorenz curve and the perfect equality line, the greater the inequality.
