Macro year 2 NOT FINISHED Flashcards
what causes shifts in LRAS
- a increase/decrease in quantity and or quality in FoP
- An increase/decrease in productive efficency in the economy
what causes a shift in SRAS
- a increase/decrease in CoP
what is the main differences between classical and keynesian economics
- Classical likes minimal government, trusts in market self-correction.
- Keynesian prefers government involvement, especially in tough times, to boost demand and tackle unemployment.
what 2 factors does the phillip curve join
what type of relationship do the factors have
- inflation rate % and unemployment
- they have an inverse relationship
what does the phillip curve show us
- there is a conflict between inflation and unemployment
re is
what is meant by stagflation
- high inflation and high unemployment
what is the multiply effect
- process by which a change in the components of AD will lead to a greater change in growth beyond the inital increase of AD until finally settling
what is the equation to find the multipler
- 1/1-MPC
- 1/MPW
MPC refers to marginal propensitry to consume
what actually is meant by MPC (marginal propensity to consume)
- out of each extra pound being earned how much of that is going to be spent on consumption
what actually is meant by MPW (marginal propensity to withdraw)
- out of each extra pound earnt how much of it will be a withdrawal from the economy (savings, exports, taxation)
how do the values of MPC link to the values of the multiplier
- the bigger the values of MPC the bigger the multipler
- the smaller the values the smaller the multiplier
what could cause a decrease in peoples MPC
- an increase in peoples marginal propensity to withdraw
- ^increase in marginal propensity to save,taxation and import
what is the accelerator effect
investment would be likely to increase if rate of GDP growth is increasing
as firms predict an increase in demand and growth in the future and so firms pre-emptively invest
Vice versa if decreasing rate of GDP growth
what makes up the balance of payments
- current account
- financial account
- capital account
- net errors + omissions
what does the capital account, account for
- inheritance tax (international)
- debt forgiveness
- death duties (internationally)
- sales of tangible assets overseas (selling skyscraper)
- sales of intangible assets overseas (such as land)
what does the financial account, account for
- portfolio investment transactions (buying and selling of financial assets)
- FDI
- reserves (of currency or gold)
How can a country finance a current account deficit/surplus
- having a financial account surplus/deficit
explination: USA has large CA deficit, china have large CA surplus, therefore chinae sitting on lots of excess curency, they spend this on financial assets in places like america (financial accout), this results in financial account deficit for china while proping up financial account surplus for america
how could AD be affected by a current account deficit
- could lower AD
^X-M is the biggest component of current account - chances are in have CA deficit gonna have negative trade balance (X-M = negative), which would pull down AD
how can a current account deficit cause a currency crisis and potential economic crisis
- Borrow to cover deficits.
- Accumulate debt (e.g. gov bonds, corporate bonds)
- Investor confidence declines.
- Currency sell-off by investors (causes depreciation)
- people in country with savings, debt (money) move money out (worsening of depreciation)
- exchange rate risks
- Debt servicing becomes challenging.
- Potential for a currency crisis and economic problems.
how could a current account deficit have consequences for the exchange rate
- if a country is selling more of its currency (to import) than is demanded (in exports) by other countries than there will be an increasing of supply of domestic curreny in the market
- ^ this creates downward pressure on value of currency (depreciation)
what could be an evaluative point when talking about how a current account deficit can affect the exchange rate
- in theory as downward pressure put on currency (depreciation) CA deficit could rectifiy itself due to WIDEC and imports falling and then lead to an appreciation
- but could argue that if country is already in CA deficit could be sign of lack of competitiveness
what main type of policies are available to goverments to close a current account deficit
- expenditure reducing policies (policies to reducing spending on imports in economy)
- protectionism
- higher intrest rates
- intervention in forex markets
- contractionary fiscal policy (lower incomes)
- subsidies to domestic firms
what are examples of expenditure reducing policies that can help to close a current account deficit
what are some negatives
- contractionary moentary and fiscal policy (work by reducing AD, reducing incomes and decreasing MPM)
MPM = marginal propensity to import
what are some evaluative points that can be used when talking about contractionary monetary & fiscal policy that aim to help close a current account deficit
- macro obj conflicts
- level of output gap (ig no gap reduce AD will not reduce incomes)
- if con/firm confidence high & I.R rise might not have affect
- if marginal propesnsity to import high policies might not work anyway
- is it really that big an issue (if borrowing is more than collective annual income issue if not dont worry)
what are some examples of expenditure switching policies that aim to close a current account deficit
- protectionism (changes peoples consumption to domestic firms via higher import prices)
- weaker exchange rate (reduce intrest rates, ↑ money supply, sell of currency reserves, WIDEC)
- supply side policies to boost international competitiveness (boost to export rev, cons may also use domestiv firms if more comp)
what are some evaluative points that can be used when talking about protectionism as an expenditure switching policy
- retaliation (trading partners may put worse shit on our exports, export rev will fall more, leads to worsening of CA deficit)
- WTO rules (if break rules maybe fines)
- inflationary (high import prices, ↑ cost push inflation)
- higher prices for consumers
- loss of efficency
what are some evaluative points that can be used when talking about weaker exchange rates for purpose of reducing CA deficit
- marshall-lerner condition (How price elastic of demand for imports and exports)
- inflation (can be cost push and demand pull)
- retaliation & currency wars (essentially protectionist measure, countrys may do something, u dont get benefits)
what are the demand side causes of a current account surplus
- high incomes abroad (↑ importing by them, higher exports by us)
- low incomes domestically (low imports)
- weal exchange rate (WIDEC)
what are the supply side causes of a current account surplus
- low relative inflation
- low unit labour costs
- strong investment
- gains in comparative advantage
- new resource discoveries
what are the consequences of a current account surplus
- ↑(X-M), ↑AD, ↑ growth, ↓ unemployment, ↑ inflation
- appreciation of exchange rate (increased demand for currency)
- financial account deficit, to balance balance of payments (can buy gov bonds, which carries risk)
- if protectionism fuled may cause retaliation and trade wars
- if goods/services being exported may be shortage in domestic markets
what is absolute advantage
occurs when a country can produce a product using fewer factors of production than another nation
what is comparative advantage
states that a country should specalise in the goods/services it can produce at the lowest opp. cost, and then trade with another country
how would you calculate the comparative advantage of a good/service
divide both values by the value of the good your trying to find the opp. cost for
e.g. produce 20 apples and 10 berriers
to find opp.cost of producing apples divide both sides by 20 and you will find out to produce 1 apple they are given up 0.5 berries
what must occur for given countries to exploit there comparative advantage and achieve mutally benefical trade
- suitable rate of exchnage (lies between opp cost of countries)
^only worth trading with another if what u get in return is greater than what u could of made urselves
when can a country consume outside of their PPF curve by using comparative advantage
- by specalising in where they have the comparative advantage and by coming to a suitable rate of exchange
what are some limitations to the theory of comparative advantage
- assumes perfect knowledge: consumers might not know where lowest prices are
- assumes no transport costs: can erode comparative advantage if huge costs
- assumes no economies of scale: country that doesnt have comparative advantage could exploit EoS, distort comparative advantage
- rates of inflation ignored: if high rates erodes comparative advantage benefits
- no import controls: could have tariffs, quotas on imports, comparative advantage distored
- non-price competitiveness
- exchnage rate movement ignored
what are some benefits of free trade
- higher world allocative efficency (comparative advantage)
- increased variety and quantity (both goods and raw materials)
- lower prices ↑ competition, ↑ EoS, ↑ technological transfers
- economic growth (increase export rev and lower import expenditure)
- increase in consumer surplus
what are some arguements for protectionism
- protect infant industries: allow them to develop to compete with multinationals, may only need short term protectionist measures
- protect against dumping: sale of a good below its cost of production
- protect domestic employment
- protect product standards (if goods coming in dont follow the same standards you do)
- to raise gov rev (tarrifs)
- avoid risk of economic over reliance of one sector (allow other industries mature)
what is an embargo
- a government-imposed restriction on the trade of specific goods/services with one or more countries.
- It involves a complete ban on imports or exports
what are some evaluative points that can be used when talking about the arguements for protectionism
- protect infant industries arguement: can allow them room for inefficency
- very hard to prove dumping happening, if not occuring and put protectionism, retaliation
- protect domestic employment: if industry already going into decline may be longing out process
what is dumping and how can it occur
- practice of exporting goods at a price that is below the cost of production
- if country has surplus product may sell it off for cheap overseas
- may also be short term stragtery to gain market share and drive out competers
what actually is a tariff
- a tax/duty imposed by a government on goods traded internationally.
^It can be a percentage of the value of the goods (ad valorem) or a fixed amount per unit (specific)
what are some disadvantages of using tariffs
General arguements against protectionism:
- market distortion (↑price, ↓choice, ↓ consumer surplus)
- production inefficencies (deadweight loss of world efficency)
- retaliation
specific:
- regressive (especially because tariffs are often on necessity items)
what is some evaluation that can be used when talking about tariffs
- the price elasticity of domestic demand and supply (if inelastic not big change, perhaps other policies may be better)
- size of tariff
what is an import quota
- a restriction set by a government on the quantity of a particular good that can be imported within a specified time period
what are the arguements for a import quota
- protect infant industries
- protect against dumping
- protect domestic employment
- protect against exploitative low cost labour
- may improve trade position
what are the arguements for a trade subsidy
- protect infant industry
- protect against dumping
- protect domestic employment
- may improve CA position
what is the world trade organisation
international organisation that regulates world trade
how many states are members of the world trade organisation
- 164 members (117 of which are developing)
- 86% of countries are in world trade organisation
what is ideal trade according to the world trade organisation
- non-discriminatory
- free from barriers (protectionism)
- predictable (easier for investment decesions to take place, business can grow)
- promotion of fair competition (even SR protectionism if it is needed)
- benefical for developing countries through special provisions
what are the roles/functions of the WTO
- set and inforce rules on international trade
- resolve trade disputes (reduce retaliation)
- provide a forum for negotiating trade liberilisation and monitor it
- to help developing countries fully benefit from global trade
- cooperate with other major economic institutions
what is the IMF (international monetary fund)
- works to achieve sustainable growth and prosperity for all of its 190 member countries
- 97% of countries are members
- It does so by supporting economic policies that promote financial stability and monetary cooperation
define international competiveness
the ability of a nation to compete successfully overseas while sustaing improvements in living standards and output
what 3 things can international competivieness be broken down into
- price competitivness
- non-price competitiveness
- ability to attract factors of production (FDI)
what are the 3 fundamental measures of international competitnessess
- unit labour cost (UCL)
- global competitveness index (GCI)
- terms of trade (greater the terms of trade the worse the price competitiveness)
what is the equation for unit labour costs
what kind of things will determine unit labour costs
- total labour cost/output
- productivity (if high lower UCL)
- skills
- high min wages (increase unit labour costs)
what are some factors that determine international competitiveness
- ULCs
- tex regime (corp tax, effects reinvestment, useful for efficency gains, if low can also attract FDI, if income tax low can attract foregin workers)
- innovation
- infrastructure
- regulation
- economic stability (stabiler is it easier to attract FDI and for domestic business to grow)
where is the uk ranked on the global competitiveness index
- 9th out of 140 countries
- in top 6%
lowest corportation tax rate in developed world
as of 2018
why would a goverment want ot improve their international competitiveness
- to rebalance an economy and provide longevity and sustanied growth (if growth led by consumption would work to improve exports to give another avenue for growth)
- to reduce CA def
what are some examples of policies that can be used to increase international competitiveness
- gov spending on transport infrastructure: make business more efficent (easier,quicker, cheaper), attracts FDI
- tax incentives: lower income/corp tax, tax allowances on investment (investment, attracts FDI, increase size of labour force)
- deregulation: lowers CoP, attracts FDI
- gov spending on education: improving skills (curiculum reforms, re-training), apprenticeships (drive down unit labour costs)
basically just SSP’s
what are some evaluative points when it comes to policies to increase international competitiveness
- cost -> opp. cost (costs may have to go up in future to fund, counter productive)
- no guarentee such policies will work
- time lag (education reform especially)
- targeted (policy may be uneffective if targets wrong area)
- relative concept (may be using policies but if another country using policys more wouldnt see benefits)
what is globalisation
process in which national economies have become increasingly intergrated (countries becoming more alike) and inter-dependent (they rely on eachother more)
what are some causes of globalisation
- trade liberalisation
- trading blocs (more and deeper)
- growth of MNCs (greater intergration)
- technological advancement (easier to intergrate)
- mobility of labour and capital (increased intergration and inter reliance)
what are the pros of globalisation
- increased competitiveness: lower prices, innovation, efficency gains (good for firms & consumers)
- free movement of labour and capital: FDI (trading blocs)
benefits of trade:
- high growth
- higher tax revenues for govs,
- in developing countries promotes economic development
- greater employment
- benefits from large EoS (increased market size)
- tech transfer and innovation
what are the cons of globalisation
- growing inequality
- higher structual unemployment (demand deficant unemployment)
- environmental costs: lack of sustainability
- trade imbalances (export led growth is lucrative, but if slows down/shock trade wars may begin to rectify imbalances)
- greater risk of external shocks (if one country has crisis could take down others, even in particular industries)
- less cultural diversity
what percentage of wealth does the top 1% hold
between 55-63% of global wealth
what must the goverment have if they wish to have a fixed exchange rate
the gov or central bank requires large amounts of currency reserves
what is a fixed exchange rate
a value determined by the government compared to other currencies.
what would the goverment/central bank do if the currency has increased in value compared to your fixed exchange rate
- gov/central bank would sell their currency and buy up foreign currencies
- ^to increase the supply of their currency in the market to devalue the currency back down to the desired value
what would the gov/central bank do if the currency has devalue below the value of the fixed exchange rate
- they would need to increase demand for their currency hence revalue the currency
- ^would use foreign currency reserves to buy up their currency in the market (e.g. forex trading)
when would depreciation and devaluation be used, the same with appreciation and revalueation
- devalue and revalue in fixed exchange rates
- appreciaition and depreciation would be used when talking about semi and free floating exchange rates
what is an acronym to remember the effects of a appreciation of exchange rate
-SPICED
- strong, pound, imports,cheap, exports, dear
what are the cons of an appreciation in exchange rate
- lower growth: potential current account deficit due to↓ (X-M)
- higher unemployment in exporting and domestic industries (domestic firms have to compete with cheap imports)
what are some pros of an appreciation in exhange rate
- lower cost push and demand pull inflation
- cheaper imports: higher material living standards
- potential efficency gains for domestic producers (due to higher competition)
what is an acronym to remeber the effects of a depreciation in the exchange rate
- WIDEC
- weak, imports dear, exports cheap
what are the pros of a depreciation in exchange rate
- increased employment in exporting and domestic industries (for domestic imports dearer so consumer may switch to domestic)
- increase in growth, but could decrease again due to shift left of SRAS as CoP increase
what are the cons of a deprication in exchange rate
- higher cost push and demand pull inflation: demand pull due to increase in AD, ↑ (X-M)
- could negatively impact growth due to SRAS shiftling left due to higher CoP, but AD shifts right to increase it
what are some evaluative points that can be used when talking about appreciations and depreciations in exchange rates
- the extent to which the exchange rate has changed
- price elasticity of demand for exports and imports
- depends on whether their is restrictions on trade (protectionism)