year 13 stuff Flashcards
what is absolute advantage
when a country can produce a product using fewer factors of production than another country
what is comparative advantage
when a country specialises in a good for which it has the lowest opportunity cost and then it trades with another country
what are the assumptions of comparative advantage
perfect factor mobility(workers can move from one job to another)
always demand for the goods
trading conditions(exchange rate fluctuations)
what are the beneifts of fre trade
allocative efficience- firms become more efficient therofer prices decrease
greater consumer choice - lower prices
improvements in skillset/technology
what is protectionism
government actions and policies that restrict or restrain international trade
what is the purpose of protectionism
to protect local businesses and jobs from foreign competition
what industries are protected by protectionism
infant and sunset industries
what is a tariff
a tax which is imposed onimported goods
what is the purpose of a tariff
increases the price of imported goods for domestic customers
what are the problems with tariffs
retaliation
inequality (regressive efgect)
higher consumer prices can lead to inflation
what does the term hot money mean
money moves in and out of the country which has the highest interest rates
what are the conditions/ theories that have to be met in order for devaluation to be successful
marshall lerner condition
J curve effect
what does the marshall lerner condition state
depreciation of the exchange rate will eventually lead to a net improvement in trade balance as long as the SUM OF PED FOR X AND M >1
what does the j curve show
in the SR it is likely that demand for exports and imports is likely to be inelastic
in the LR consumers will switch to the exported goods(prices are lower)
what is the difference between FDI and portfolio investment
FDI is about acquiring tangible assets
portfolio is about speculative investments
what are ways to reduce the deficit in the current account
deflationary policy
direct controls
devaluation
how does the deflationary policy work
BOE increases interest rates, this reduces the domestic consumption
how do direct controls work
this is a type of expenditure switching by making imports more expensive(tariffs or quotas)
what is the difference between demand side and supply side to reduce the deficit in the balance of payments
supply side policies are more sustainable in the LR
demand side policies are more effective in the SR
what are the effects of a weak pound on X AND M(on another country)
imports cheaper
exports expensive
what are exchange rates
the value of currency in terms on another
what are the factors that determine a currency’s value
high FDI = appreciation = more demad for £
portfolio investment = appreciation
High interest rates = appreciation
what are the 2 types of currency systems
free floating
fixed exchange
how does the free floating work
where the value of the currency depends wholly on market forces of supply and demand
how does the fixed exchange system work
the central bank holds large amounts of currency reserves
sell the domestic currency - increased supply
buy foreign currency
what is a trading bloc
a group of countries that agree to trade with eachother by reducinf barriers and tariffs
what are the advantages of trading blocks
- economies of sale - production costs decrease
- reduced tariffs
what are the disadvantages of trading blocks
inequality - less developed countries benefit less
potential conflicts
dependency(comparative advantage results in dependencies)
what is a customs union
group of countries that agree to remove trade barriers and tariffs between them, whilst adopting a trade policy towards non-member countries
what are the advantages of customs union
Trade Creation
consumers gain - cheaper EU price
what factors determine the level of inequality
education and skills
taxation
inheritance
limited access to affordable housing and healthcare
Uk context with respect to inequality
- large gap between top and average income earners
- regional disparities = more opportunities in the south
- housing affordability
what are the reasons to why poorer countries with huge potential for growth struggle to compete internationally
poor infrastructure
poor quality of human capital (lack of skills)
largescale corruption
what is the importance of the financial sector
facilitating savings
loan structure for small and medium sized businesses
facilitating international transfers of money
how can monetary policy be used to tackle inequality
expansionary policy:
- lowering interest rates which encourages borrowing for investment/expansion and housing
what are the limitations of using expansionary monetary to tackle inequality
may lead to inflation as a result of excess demand
how can fiscal policy be used to tackle inequality
- increased government spending on education and healthcare
- progressive taxation to redistribute wealth
what are the limitations of using fiscal policy to tackle inequality
my lead to a budget deficit and increased borrowing
how can supply side policy be used to tackle inequality
- increased productivity and job creation
- improves wages and opportunities for lower income groups
what are the limitations of using supply side to tackle inequality
the benefits may not immediately reach lower income groups
what are the disadvantages of a customs union (for UK aswell)
- government will lose potntial revenue from tariffs
- trade diversion (loss of welfare),group of countries only buy from one another
- customers lose in UK because EU producers implement tariffs
what are quotas
type of policy that sets a limit of a good that can be imported into the country
what are the 2 limitations of the HDI model
ignores qualitative factors such as quality of education
ignores income distribution
what is managed exchange rate
when the government will start to control the exchange rate once it goes above/ below the limit
what is the UK context in terms of trade deficit / surplus
£28.5 bn (overall deficit)
£38.2 bn (surplus in services)
what domestic policies could be used to improve the balance of payments
improvements in infrastructure
deregulation
privatisation
what government policies could be used to improve the balance of payments
tariffs
subsidies
what could be done to the exchange rate in order to improve the balance of payments
devaluation
what is the name of the term when firm join a trading blovk or a customs union
Economic integration
what could be done in order to improve non-price competition and encourage market stability
introducing supply side policies like :
- subsidies
- lowering corporation tax
IN ORDER TO imprve R and D
