all-1716139366 Flashcards
(182 cards)
1
Q
outline measures to control transnational companies
A
-requirment that they use local fop (labour + local suppliers)
regulkation of transfer pricing
-refers to pricing polciies adopted by groups of fimrs - each member firm
manipulates price charges on intra-grouo trades as a means of lowing the amount
of global corporate tax they pay - this should be blocked by govs
2
Q
define external shock
A
unpredictable event such as significant price change for key commodities like
oil
3
Q
significance of a fiscal deficit (national debt )
A
INCREASE INTEREST RATES
-demand for funds rises relative to their supply, price of borrowing is intrest
so intrest increases
RATE OF INFLATION
-if gov decides to print money rather than borrow to finance their esxpenditurew
when tax revanue isnt enough then inflation occours
CREDIT RATING
-countries recive credit ratinsg form private investment companies
-best is AAA worst is D
-bad credit rates means that in future the government would recive worse rates
of interest when borrowing
4
Q
outline non-government organisations that support economic devlopment across the
globe
A
WORLD BANK
-set up in 1944 to promote devlopment
-provides low-interest loans, interest free credit and grants to developing
cpuntries for firms, education and healthcare
-supports development of infrastructure
international monetray fund (IMF)
-each member country has quota of finacial resources thay have to make avlible
to imf - these resouces are then used as loans to poor countries
-fights poverty and improves living standards
-provides support and advice to developing countries that dont know how to
maintain stability
NON-GOVERNMENT ORGANISATION (NGO)
-private organisations like charity e.g. water aid
5
Q
what is the role of the international monetary fund
A
international monetray fund (IMF)
-each member country has quota of finacial resources thay have to make avlible
to imf - these resouces are then used as loans to poor countries
-fights poverty and improves living standards
-provides support and advice to developing countries that dont know how to
maintain stability
6
Q
outline role of world bank
A
WORLD BANK
-set up in 1944 to promote devlopment
-provides low-interest loans, interest free credit and grants to developing
cpuntries for firms, education and healthcare
-supports development of infrastructure
7
Q
outline what is meant by the lewis model and how that can foster growth /
development for a nation
A
developing nation if agriculture focused typically
model assumes that there is excess labour in this sector - the same output could
be achived w less workers - hence there is no oppourtunity cost to move these
workers to industry (manufactering)
eval -
not that easy to transfer job - needs high investment in training + education
industry may end out being automated and not actually ctreate many new jobs
agriculture is seasonal and - demand is high during harvest hence the
presumptoin of excess labour nay not be true at all times
8
Q
outline interventionist strategies to promote growth and development
A
INTERVENTIONIST - where gov seeks to support economy directly
Improve human capital / infrsatructure
-boost efficency
protestcionism
-protects domestic industries
buffer-stock schemes -
governments maintain stockpiles of commodities to stabalise price
joint venture w mnc
-directly encourage fdi by allowing firms to operate in a nation via a
partnership - this could higher wages lower unemployment and cause inflow of
efficent workers
9
Q
outline martet based strategies to influence growth and devlopment
A
MARKET BASED = promoting market forces to boost economy
trade liberalisation
-increase access to foreign market influencing growth
promoting fdi
removal of gov subsidies
-subsidies may encourage inefficency + have oppoutunity cost for government
microfinancing scheme
-provides small loans and financial service to low-income individuals -
developing countries have weak fincnacial sector - improving it supports
entrapaneurship - developing countries have savings gap
10
Q
outline confilcts between macroeconomimc objectives
A
encouraging ECON GROWTH by raising ad - creates INFLATIONARY PRESSURE + worsens
CURRENT ACCT defificit
REDUCING INFLATION using contractionary fiscal policy - could lead to RECCESION
and CYCLICAL UNEMPLOYMENT
LOWERING UNEMPLOYMENT via supply side reform (lowering welfare) - leads to
higher inequality
LOWERING UNEMPLOYMENT via supply side policy of buildimg infrastrcuture to get
people to work - leads to higher pollution
lowering CURRENT ACCT DEFICIT with protectionism - leads to possible
UNEMPLOYMENT in export industries as result of retaliation
11
Q
drawbacks of supply side policies
A
may not address the issue of low consumer / producer confidence during reccesion
time lag
can lead to inequality (benifits cut to incentivise work)
can lead to exploitation (deregulation of industries may enable firms to exploit
workers)
12
Q
supply side policies that aim to promote competition
A
privitisation
deregulation (controls such as saftey requirments inctrease barriers to entry)
competition policy (reduce power of monopolies)
13
Q
define unemployment trap
A
benifits to working are outweighted by unemployment benifits
14
Q
provide real world example where the government used fiscal policy
A
2008 financial crisis
started w subprime morgage lending which was offered to people w low credit
scores
to spread risk morgage was packaged up by banks and sold to other financial
institutions
when repayments werent made financial crisis started
uk:
2010-cut vat from 17.5%-15
qe introduced to encourage lending by banks
public money used to bail out banks
gob increased tax to reduce budget deficit
15
Q
impact of economic growth on future living standards
A
leads to development of industries through improvements in technology /
infrastructure / capital stock which all leads to better goods/services and
better living standards
leads to POLLUTION
leads to INEQUALITIES
16
Q
outline what a positive and negitive output gap is
A
negitive output gap
when actual output falls below trend output during reccesion due to fall in AD
chracteristics:
- underutilised resources
- high unemployment
- low confidence
- downward pressure on inflation
positive output gap
when actual output exceeds trend output during en economic boom
for a period of time an economy can produce beyond productive potential as fop
are overused
characteristics:
- over-utilised resouces
- upward pressure on inflation
- low rates of unemployment
- high confidence
17
Q
provide examples and define injections and withdrawls
A
injections - inflows of money into economy that do not come from households
e.g.:
-exports (money from foreign country is entering)
-investment
-government spending
withdrawls - outflows of money from the economy (leakage) and can come from
firms and households e.g:
-imports(money goes to other economies)
-savings (adds to wealth but detracts from circular flow)
-taxes
18
Q
factors influecning long run as
A
technological advances
changes in relative productivity due to innovation (shift from assembly line to
automated assembly line)
changes in education - increase quality of labour
changes in gov regulation - deregulation can allow for higher quantity of the
fop
demographic changes - more population = more productive capacity
19
Q
what factors influence as in short run
A
changes to cost of raw materials
change in cost to labour
changes in tax rates
changes in exchange rates (importing raw materials)
R L T X
really lame teen x
20
Q
WHAT FACTORS HAVE AN INFLUENCE ON NET TRADE
A
REAL INCOME
-more money = more buying imports
EXCHANGE RATE
widec / spiced
STATE OF THE WORLD
decline in economic growth in foreign country = they cop less exports
DEGREE OF PROTECTIONISM
NON-PRICE FACTORS
21
Q
WHAT FACTORS INFLUENCE GOVERNMENT SPENDING
A
BUISSNESS CYCLE
During recessions, governments might increase spending to try and stimulate the
economy.
FISCAL POLICY
might use expansionary fiscal policy during periods of economic decline
22
Q
outline the factors that influence investment
A
1) rate of econ growth
-if its a healthy rate business are likely to invest in new capital to meet
demand
2)confidence
3)animal spirit - Keynes
keynes voined term animal spirit to describe the emotional factors that
influence investment decisions
4)intrest rates
5)access to credit
23
Q
what factors influence someone liklihood to consume
A
consumer confidence
intrest rate
24
Q
outline types of unemployment
A
- Structural Unemployment: Occurs when there is a mismatch between the skills
of the workforce and the requirements of available jobs. - Frictional Unemployment: Temporary unemployment when individuals are between
jobs or entering the workforce. - Seasonal Unemployment: Linked to seasonal variations in demand, e.g., tourism
or agriculture. - (Cyclical) Unemployment: Arises from a lack of aggregate demand during
economic downturns. - Real Wage Inflexibility: When wages are too high, leading to job cuts or an
unwillingness to hire.
25
outline measures of unemployment
claiment count - based on number of people claiming unemplopyed benfits such as
JSA
uk labour force survey
26
outline the effects of inflation on consumers, firms, government and workers
1) consumer
* erodes purchasing power of money
* reduced real income
2) firms
* rising production costs
* possible passing on of cost to consumers
3)gov
* increase the cost of gov debt diverting funds from other parts of economy
4)workers
* reduced realncome
* labour unions would negoiate for more pay
27
outline what the rpi is
includes more products than cpi
28
limitations of using the cpi to calculate inflation
ignores quality changes - overestimation in price increase as it ignores that
object has gone up in fundemental value
substitution bias - assumes constant consumption patterns wheras in reality
consujmers purchasing behaviour changes as price changes
29
formula to calculate inflation using cpi
(Current CPI - Previous CPI) / Previous CPI] × 100
30
limitations of using GDP to compare living standards
doesnt acct for INCOME INEQUALITY
excludes non-market activities like informal economies / black market
ignores quality of life factors such as healthcare / education quality
31
what is measured by GNI
gross national income
measures total income earned by a countrys residents + buissnesses domestically
+ abroad
broader than gdp as it accts for overseas investment and remitences
32
what is the laffer curve
laffer curve infers that increasing tax rate increases gov revanue until it
reachers the OPTIMAL TAX RATE after which tax is so high that it discourages
economic activity
33
what is the significance of differing levels of public expenditure
PRODUCTITIVTY AND GROWTH
-enhances human capital
-long term econ growth
LIVING STANDARDS
-improve lving standards
CROWDING OUT
excessive gov spending can lead to crowding out where increased gov borrowing
increases intrest rate in economy to point that prohibits privatre sector
investment
LEVELS OF TAX
-higher spending requires higher tax which lowers disposable income which may
lower spending
EQUALITY
can reduce income inequality
34
what is the difference between capital expenditure, current expenditure and
transfer payments
capital expenditure - gov spending on long-term investments and assets that are
expected to provide benifit e.g. infrastructure projects
current expenditure - day to day gov spending on recurring items e.g. salaries +
operational costs
transfer payments - gov payments made to individuals or groups without any
expectation of a good / service in returm e.g. welfare spending
35
what is the role of the central bank
1)implementing monetary policy
2)banker to the government
* manages gov bank acct and facilitates payments
* oversee the issuance and redemption of gov bonds
3)banker to banks
* central bank serves as lender of last resort to financial institutions
* provide emrgancy funding
4)role of regulation in the banking industry
* set and enforce risk managment standards to prevent excessive risk-taking by
banks
36
examples of financial market failures
ASYMETRIC INFORMATION -
-leads to adverse selection (when individuals with hidden info abt their risk
like poor credit history take out hella loans - leads to higher deault rates)
EXTERNALITIES
-negative - financial agencies may engage in risky practices like excessive
lending (this could effect entire eocnomy like 3008 financial crisi)
MORAL HAZRADS
-when one party takes risks because they believe they wont take the full
consequences of their action
SPECULATION AND MARKET BUBBLES
-speculation is buying of asets with the expevctation of an appreciation in
value
-bubbles occour when asset price rises significantly above fundemengtakl value
due to speculation - bubbles often burst causing market to crash
MARKET RIGGING
-manipulation of markets to gain unfair advantages e.g. insider trading (trading
based off of non-public info) , market manipulation (pump + dump schemes)
37
outline strategies to influence growth and development
MARKET BASED
trade liberalisation
-increase access to foreign market influencing growth
promoting fdi
removal of gov subsidies
microfinancing scheme
-provides small loans and financial service to low-income individuals
INTERVENTIONIST
Improve human capital / infrastructure
protestcionism
buffer-stock schemes -
governments maintain stockpiles of commodities to stabalise price
OTHER STRATEGIES
industrialisation - lewis model
development of tourism industry
aid
debt relief
38
outline non-economic factors that can influence development
war - loss of human / physical capital + lower confidence + disruption of supply
chain
disease - e.g. uganda is still heavily impacted by hiv + malaria
corruption - gov policies may be for personal gain = gov failure
geography - affects agriculture industry
poor government
polictical instability
39
outline the impact of various economic factors on different countries
primary product dependency
-some countries rely on export of primary materials
-vaunrable to price fluctuation
volatility of commodity prices
-commodity dependant economies face instability
savings gap (harrod-domar model):
-high levels of extreme poverty makes it almost impossible to generate enough
savings to provide the finance for investment projects - model states that
economic growth depends on the amount of capital investment and the level of
producticity of that capital
foriegn currency gap:
-situation where countries expenditure in foreign currency (via imports /
servicing foregin debt) exceeds its foreign currency earnings from exports
-leads to trade deficit, currency depreciation and economic instability
capital flight
-refers to situatrion in which investors move assets out of a country due to
economic instability or unfavourable conditions
-leads to financial crisies as recources are depleated
demographic factors
40
evaluate the usefullness of hdi
pro
holistic
simplicity
allows for global comparisons
shows policy makers where country is lacking
con
limited indicators - ignores dimensions of development such as enviormental
sustainability, gender equality and income distribution
this could be rectified by using a diff measure than hdi - gini coefficent for
income inequality or gii (gender inequality index)
weighing issues - the 3 criteria are equally weighed yet this doesnt refelct the
countries priorities
41
causes of income / wealth inequality between countries
globalisation - uneven benfifits of globalisation such as outsourcing and
offshoring can widen income disparities
historical factors - if country has history of colonialism / trade imbalances /
unequal acces to rescources will leave lasting
geographical factors - wars and political instibility (disincentivises FDI)
42
outline measures of income inequality
1) LORENZ CURVE - visual indicator
2) GINI COEFFICENT - numerical indicator
gini coefficent = section a/ section a + b
43
outline measures of international competitiveness
relative unit labour cost = avg wage of country / productivity of country
* compare the costs of labour between countries
* lower number = good
relative export prices
* vompares price of countries exports to another
* lower number = good
44
impact of changes in exchange rates
1) change to current account
* marshall leraner condition - a depreciation will improve trade balance if ped
for exports + ped for imports > 1
* j curve effect - in short run this wwill worsen balance as people struggle to
adapt instantly
2) economic growth and employment
* depreciation = widec = more exports sold = more employment + growth
3) rate of inflation
* depreciation = widec = firms that import raw materials see higher cost which
is passed onto consumers
4)FDI
* weaker currency = more attractive for FDI because foriegn firms would need to
use that currency to pay for land labour capital
45
what is the difference between revaluation of currency and appreciation of
currency
* Revaluation: A revaluation is an increase in the official exchange rate of a
currency set by the government or central bank. It is a deliberate policy
move to strengthen the currency's value.
* Appreciation: Appreciation refers to a natural increase in the value of a
currency due to market forces, such as increased demand for the currency in
the foreign exchange market.
46
outline what is meant by a managed exchange rate system
* A managed exchange rate system is a hybrid approach where authorities
occasionally intervene to influence the exchange rate.
47
what is the significance of a trade imbalance on the balance of payment
this occours when some countries run persistant surplus or deficits
mercantillism - notion that the wealth of a nation was based on how much it
could export in excess of its imports
if you run a current acct deficit you must run a surplus on the financial
account,
however this means overseas investors have a large claim on your countries
assets
48
impact of protectionism
consumer
pro - domestic producers now have ability to gain more revanue which could be
now spent on research and devlopment = better products
con - higher price on imports
producers
pro - sheild domestic producers
con - over-reliancecan lead to inefficency due to lack of competition
government
pro - gov revanue from tariffs
con - may cause bad relations w other govs
living standrads
pro - protect jobs
con - lowers affordability
equality
pro -
con - exagerate income inequality if it benifits specific groups
49
consequences of trade agreements / trading blocs
con
trade diversion - lower cost goods from nonmember countries are substituted w
higher cost goods from mebers
inefficent producers in bloc are protected
retaliation of non members - may form their own trade bloc
pro
trade protection - members producers are protected from non members
trade creation - high cost domestic goods replaced by imported goods of member
countires
50
what fafctors affect patterns of trade
1) comparative advantage -
2) emerging economies - these countries often become major exporters of
manufactered goods
3) growth of trading bloc / bilateral trading agreement - members enjoy reduced
barriers and reduced tarrifs
4) change in relative exchange rates - spiced + widec
51
consequences of specialisation and trade in a international context
pro
higher efficeny + Producticity
higher allocative efficeny - countries can allocat rescources into products they
have comprative advantage in
EOS - specilisation lowers cost of production
international relations - specialisation leads to international trade which is
swag bcs trade = lower chance of killling each other at war
con
DEPENDANCY - specialisation = narrow range of goods so they would have to import
the rest this could b bad if they import neccessities as they are vaunrable to
price fluctuations or supply disruptions
JOB DISPLACEMENT - specialisation leads to this for the industries in which a
country realises it does not have comparative advantage in producing
INCOME INEQUALITY - profits from trade is likely to not be distributed equally
52
define eurobond market
a debt that is denominated in a currency which is foriegn to the country the
debt was issued in
this came about in the city of ldn when ppl saw that china and saudi sat on lots
of USD (this is becasue oil must be sold in usd) and these poeple wanted their
fdi so they was like hold on i can sell my own bonds that are denominated in usd
this lead to city pf london being finacnical capital -arguably of the world
53
outline what is meany by repo
repos - lend money (£100) in exchange for security - collateralised loan
* the next day the borrower will pay back (£110) and the security will be
returned to the lender
54
what is the role of financial markets
where buyers and sellers can trade financial assets
-to facilitate savings - banks + credit uniojs provides safe + convient service
-to lend to businesses and individuals - banks act as intermediaries between
lenders and borrowers
-to provide forward contracts for currency or commodities
55
what is crowding out
when gov decides to spend money by borrowing it shifts d curve for loanable
funds to the right this increases market price (market intrest) rate from i1 to
i2 - this increase in intrest rate will likely translate to loans in general
which will hault growth as it makes it more expensive for firms to borrow and
lowers AD as it lowers i spending
56
are improvemnts in terms of trade always good for a nation
theory assumes that quantity levels of exports remain the same - as a result of
that assumption it believes an improvement means a nation has the ability to
import a larger amount of the basket of imports - this theory only holds if an
improvement in tot tranlates into higher export revanues
e.g.
relative inflation causes tot improvments
BUT the elastcicty of the nations exports must be inelastic in order to cause
higher levels of revanue
57
what factors affect the terms of trade
sr
change in demand/ supply for exports and imports (e.g.taste/fashion)
relative inflation rate(inflate price of exports yet reduce competitivness of
nations exports)
exchange rate movements (spiced/widec)
lr
prebisch-singer hypothesis - incomes (if pattern in income increase tot for
developing nations is bad bcs they export primary commodities which dont rise as
quickly as the imports they get from developed nations which is manufactured
goods )
productivity
technology
both of these decrease cost and price pf exports which deteriorates tot but it
makes exports more competitive
58
what is the formula for terms of trade
weighted average of export prices/ weighted average of import prices x 100
59
benifit of monetary union trade agreement
pro: non fluctuating exchange rate for small nations - makes it more likely they
will recive trade
reduced cost from currency conversion - money saved can be used for investment
or consumption
con:loss of monetary policy autonomy -problem if yu have unique economic
poistion which is not helped by monetray union currenyt monatary policy
no potential for altering exchange rate to boost trade performance in exports
60
outline what trade diversion is
movement from a low cost foriegn producer to a high cost procuder within the
custom union
61
define trade creation
movement from high cost domestic producer to a low cost producer inside the
custom union
hypothetical:
uk is out of eu
france wants to import good from uk where they have comparative advantage but
due to the tarrifs from the custom union of the eu this would be less efficent
BUT i fuk joins eu
tarrifs are abolished between them
this contracts france domestic supply and expands french domestic demand as they
can now freely trade with the more efficent uk suppliers who hold the
comparative advantage
as a result of uk joinning ue there is a movement from high cost domestic
producer to low cost producer inside the custom union CREATING TRADE
62
define bilateral/multilateral trade agreements
agreement to reduce tarrifs and quotas on trade between the countries that agree
to it
63
define a trading bloc + provide examples
group of countries that join together and agree to increase trade ebtween
themseleves
6 diff types of trading blocks / economic intergration:
1) preferential trading area - countries join to reduce quotas/ tarifs on
certain goods / services
2) free trade area - eliminate all types of barriers for exlusivley all members
within the agreement yet countries can freely choose how they trade w outside
countries e.g. nafta (agreement between mexico usa and canada)
3)custom union - is a free trade area but w out freedom of trade for countries
outside of union as any trade w outside countries must involve a common external
barrier such as tarrifs which would be put on all non-member nations e.g. EU
4)common market - allows for free movement of capital, labour or any buisness
type shit e.g. EU
5)economic monetary union - countries adopt a universal central bank and same
currency and therfore same monetary policy e.g.eurozone
6)full economic intergration - harmonize all policies and all power to almost
one body - e.g. UK governing england and wales and scotland and ni
64
define economic intergration
procces wherby countries coordinate to reduce trade barriers and to harmonise
monetary monetary and fiscal policy
6 diff types of trading blocks / economic intergration:
1) preferential trading area - countries join to reduce quotas/ tarifs on
certain goods / services
2) free trade area - eliminate all types of barriers for exlusivley all members
within the agreement yet countries can freely choose how they trade w outside
countries e.g. nafta (agreement between mexico usa and canada)
3)custom union - is a free trade area but w out freedom of trade for countries
outside of union as any trade w outside countries must involve a common external
barrier such as tarrifs which would be put on all non-member nations e.g. EU
4)common market - allows for free movement of capital, labour or any buisness
type shit e.g. EU
5)economic monetary union - countries adopt a universal central bank and same
currency and therfore same monetary policy e.g.eurozone
6)full economic intergration - harmonize all policies and all power to almost
one body - e.g. UK governing england and wales and scotland and ni
65
fixed vs floating exchange rate
floating :
1) lowers need for reserves
2)freedom for domestic monetary policy (some fixed systems manipulate intrest
rates to keep exchange rate fixed)
3)can help correct current account deficit
4)less chance for currency to be over/undervalued as rate is
BUT
-it could be volitile as it is left open to forces of demand and supply - this
reduces incentive from foriegn investors
fixed:
1)more stability / certainty - makes trade easier and investment more
incentivised
2)reduction in cost of trade - to protect agasinst unstable floating exchange
rates firms may purchase in the future exchange market as they predict that in
future the currency of the country they are tyrading with may appreciate- this
whole procces is v costly and there is no need for this in fixed exchange rate
econmomy
3)disicpline in domestic producers (exporting industries know they cant rely on
a fall in exchange rate to become competitive in the global market to they focus
on R&D)
but-
-large levels of reserves needed
-if intrest rate is used to maintain a fixed exchange rate altough a achange to
intrest would effect the exchange rate it may also have other harmful efefcts to
economy
66
what is the big max index
currency is exchanged and then compared to the price of a big mac in the USA
67
what does purchasing power parity ppp show
ppp shows purchasing power of a currency and it refelects the basket of goods
and services one could buy at a certain wage which reflects standards of living
hypothetical situation:
uk basket = £1,000 us basket = $1,600
floating exchange rate (nominal exchange rate) = £1:$1.60
in the situation of inflation in USA which rises value of basket to $1,700 we
would say that the pound is now UNDERVALUED against dollar as the pound cannot
buy the same amount of goods and services in the usa
this means the real exchange rate is actually £1:$1.70
IN THEORY this should self adjust as americans see that the dollar can go
further in uk so they buy uk goods and services as they are relitivley cheaper
this increases supply of $ and increase of demand for £ this causes APPRECIATION
of pount to £1:$1.70
68
outline the marshal leraner condition + j curve effect
in theory widec caused by depreciation should help recitfy current acct deficit
currency deprectaion will only correct a current account deficit if PED for
exports + PED for imports > 1 if this is not the case current acct would worsen
in the short run ped for both imports and exports will be inelsatic as
consumers/ firms take time to adjust to new exchange rate and forigen consumers/
firms take time to notice lower prices in ones country. this is known as j curve
effect
69
how can a floating exchange rate fix current account deficit
-as country demand imports they are increasing the supply of their currency as
it is exchanged for imports
-shifts supply right which causes a decrease from p1 to p2
-this is known as depreciation
-WIDEC occours as depreciation occours
-widec causes imports to fall which corrects currenct account deficit
EVAL - this is only in theory but in reality speculation gets in the way of
supply and demand forces when determinig exchange rate
70
policies to improve international competitiveness
1) gov spending on infrastructure (supply side policy) - infrastrcuture has the
ability to attract FDI - improves effeicencies of buisnesses this lowers cost of
production which may be passed down to the consumers making them more price
competitive
eval - high cost which has high oppourunity cost
2)tax incentives (lower corp tax or higher tax allowence so more money can be
reinvested to increase efficeny which lowers cost which lower prices which makes
it more competitive)
eval- no guarentee firms would use this money to invest
3)deregulation (taking away unnecesary laws which increase cost top buuinsess
which lowers cost which lowers price )
4)gov spedning on education (supply side policy) - e.g. spenidng on
apprecticeship scheme so ppl can get more efficent at skilled labour
eval - high cost which has high oppourunity cost
-time lag (curricu;lum reform would take yeras to work as the public would have
to go through the whole schl system)
71
factors that determine international competitivness
international competiviness is determined by a nations price competiivness,
non-price competitiveness and ability to attract FDI (ability to attract factors
of production from abroad)
1)unit labour cost
2)labour skills
3)labour flexibility (ease of changing working arranmnets)
4)tax regime (corp tax being low attracts foriegn firms to nation income tax
being low attracts workers from abroad + domestic non-workers to leave welfare)
5)infraructure (incentivises FDI)
6)innovation (non price competitiveness)
7)regulation
72
what are measures of a countries competitiveness
1)unit labour cost - total labour cost / output
(dtermines price competitiveness)(this is affected by skill, productivity and
regulations)
2)global competitivness index
3)terms of trade (index of export prices / index of import prices x 100) (lower
number = higher price competiivness as it shows export prices have fallen)
73
what causes a current acct deficit
demand side:
1)strong domestic growth
2)reccesion overseaes
3)strong exchange rate
supply side: all about rising cost of exports
1)low investment
2)low producticity
3)high relative inflation
4)high labour cost
5)depletion of rescources
74
how does balance of payment balance out
usa = current account deficit
china = current acct surplus
countries like china are sitting on alot of money from ca surplus so they use
this and invest in countries with a ca deficit like USA this may be done by
buying us gov bonds or us firm shares
this causes potitve inflows for the USA financial account and outflow from
chinas financial account
usa = financial account surplus
china = financial account deficit
75
what is the role of wto
international organisation that regulates world trade
-164 member states
according to WTO trade shouold be
non-distrciminitory (cant have tarifs for one country not another)
free from barriers
predictable
promoting fair competition (sometimes tariffs are needed to protect domestic
industry)
benificial for developing countries
1)sets and enforces these rules (could be done via fines)
2)resolve trade disputes (act as mediator to stop tit for tat protectionism)
3)provide a form for negotiationg trade liberalisation (done in headquaters in
geneva to create meetings between countries where diplomats can discuss trade)
4)monitor free trade liberalisations(check is countries are sticking to free
trade agreemnet)
5)increase transparency of decision making proccess (countries have ability to
ask wto questions and challenge deciosns)
6)help developing countries benifit from free trade
76
benifits of free trade
-greaqter efficeny in world market and improvemnt in allocation of world
rescources (caused by comparative advantage)
-access to wider variety of goods
-lower prices for consumers that increases consumer surplus (due to competition
or higher ability to gain EOS)
-econmoic growth for countries with comparative advantage
77
limitations of comparative advantage
1) perfect knowlege - assumes that we know where the lowest prices are
2)no transport cost - distorts CA (huge transport costs may exist like if tryna
cop from uk to australia)
3)no economies of scale - (fails to account for economies of scale )
4)rates of inflation are ignored - (comparative advantage may be eroded if
inflation exists)
5)no import controls - (tarrifs could erode price and cost advantage)
6)non-price competitiveness ignored (e.g. durability )
78
what is the accelerator effect
focus more on firm spenidng than consumer like multiplyer does
changes in investment can be directly linked to changes in the rate of GDP
growth
when rate of gdp growth increases firms will be more willing to invest because
firms are hopefull of future rates of growth hence if rates of gdp growth
decreases firms will holdback on investment
79
what does the philipps curve show
SHORT RUN:useful to show the conflict between employment and inflation
SHORT RUN:useful to depict demand pull inflation
this also has the ability to show staglfation - if sras shifts srpc (short run
philips curve) shifts in the opposite direction
LONG RUN - has the ability to show how economy self - heals (economy will always
return to natural rate of unemployment and at NAIRU non accelerating inflation
rate of unemployment which is point at emplyment where inflation is stable )
in the case of a boom ad shifts right causing a movement up the srpc (a-b)
over time workers realise they can bargain for higher wages shifting sras left
which causes srpc to shift right (srpc reacts in opposite direction of sras)
this crates a new equilibrium (c) back at NRU / NAIRU
80
diefferences between the keysian and classical model for as/ad
keysesian disagreed w classical as he thinks wages dont become variable in long
run
81
outline assumptions of CLASSICAL ecconomists AS/AD model
+explain how within this model the economy will be able to self-heal to full
level of employment in the case of reccesion or overheating
assumption:
1) sras = cost of production
2) lras = quantity / quality of output
3) sr = wages are fixed (due to trade union, laws, unemployment benifits so high
if wages go low ppl j quit)
4)lr = wages are variable (after a while workers will realise they have the
bargaining power/ will realise they neeed to lower their wage expectations)
in the case of RECCESION (AD shifts left)
-new equilibriuem with lower output (yfe - y2) and deflation (p1-p2) causing
unemployment
-firms may not accept this new output level as they are not willing to reduce
work force due to amount of money spent on training
-firms must lower cost of production to shift sras right to create new
equilibrium back at yfe
-they cant cut wages bcs its the short run (due to trade union, laws,
unemployment benifits so high if wages go low ppl j quit)
-overt time wages become variable bcs w persistant unempoyment ppl lower their
wage expectations
-this lowers cost shifting sras with the side effects of lower demand pull and
cost push inflation
82
policies to rectify a current acct deficit
1)[if it was caused by high AD]
contractionary monetary / fiscal policy
reduces AD
reduces level of spending in economy = less spending on imports
BUT - conflict of growth decrease and unemployment decrease (some govs may say
these objectives are more important)
2)[caused by low import price/ high export price]
protection measures (artifically rise imporrt price via tax or quotas
restricting amount allowed or lower export price via subsidy)
BUT - 1- retaliation may occour from another gov
2-import inflation firms who rely on imports will suffer
3-domestic firms may become lazy
3)[caused by a strong currency]
weaken currency by telling central bank to reduce intrest rate OR sell currency
in forex market which increases supply and decreases value
this allows WIDEC to work
BUT - import inflation which copuld effect domestic firms who use it to produce
and lowers choice for consumers
4) supply side policies to increase productive capacity thus puts downward
pressurfe on prices - this will make exports more competitive
BUT -
expensive
time lag
depends on perfect information
* all of these cause conflict of objectives apart from supply side policies
* current acct deficit may be allowed to occour (if value is small) bcs of the
unwillingness to contradict other objective
83
how can boosts in trade foster economic devlopment
1-exploit comparative advantage - if a country has acces to natural recources
-boosts exports = boosts ad = economic growth = development
2-consumers benifit from lower prices
-higher standard of living
3-more choice
-todaro states freedom of choice is devlpment
4-greater political relations from trade agreements
-this may leasd to the lowering of other barriers to trade
5-EOS benfiits - lower cots bcs market is bigger = higher profits = higher tax
rev = higher welfare spending
84
how long does boe say a change in intrest rate takes to feed through the
transmission system
18 months - 2 years (this is known as time lag)
85
what does hdi measure
No back content
86
economists definitions of economic devlopment
sen
-procces of improving people well-being
-e.g. reduce poverty , higher standrads of living
todaro
-life sustaining goods like foood water and shelter must be provided for all
-access to education for standards of living
-freedom to make economic and social choices
87
consequences of current acct deficit
1) lower ad
reduction in growth
increase in unemployment
eval - depends on size of deficit as peerfecnt of gdp (if its small will barley
have effect)
2)when current acct is in deficit it must be balanced by financial acct surplus
-selling bonds e.t.c = debt
-more debt = lower confidence on ability of a country to pay back debt
-foreign invedstors pull out
-public fear that economy will defult on debt
-public sell their currency due to thus fear- CURRENCY CRISIS as deprectation
causes more ppl to selll their currency which becomes a cycle
3)exchange rate decrease
-if a country imports too much it is essentially selling more of its currency
-this increases supply of currency
-think about WIDEC
-insinuates that depreciation in exchange rate could fix current acct deficit
-BUT we can assume that if a country got into this problem in the first place
they probably lack competitiveness in their exports so it wont fix current acct
deficit
88
what evaluative points could you use in economic growth essay
is growth...
-sustainable growth
-inclusive growth
89
drawbacks of economic growth
1) inflation
* higher demand pull inflation will lower living standards
2)income inequality
* if groth if from one dominate sector high incomes will be contained to that
sector
* if growth comes from capital intensive production rather than labour
intensive production than profits only go to capital owners
* if gov had no reditribution of wealth policy some will continue to live in
relative / absolute poverty despite growth existing
3) enviormental costs
* deforestation from increase pal oil productiopn in indonesia
* air pollution
* negative externalities in production that cause a welfare lost
4)current acct deficit
* when income rise people import more
* this widens current acct deficit
90
benifits to economic growth
1) higher disposable income
possibly due to
* more ppl getting into work in first place
* firms increase profit is leads to increase wages
2)higher employment
possibly due to
* more demand leads to more need for workers - derived demand
3) higher profits for firms
-firms can invest in capital continuing profits overtime - possibly triggering
excelerator effect
4)fiscal dividend for gov
(increase in tax revanue)
possibly due to
* vat rises from increased consump
* tariff rev rises from more spending on imports
* income tax rises from higher disposable income
* corporate tax increase
91
define shocks
things that occour that no-one can forsee
demand shocks:
facrors that reduce ad e.g.
-sudden increase in intrest rate
-sudden cut to gov spending
-su
supply shocks:
factors that reduce SRAS / LRAS e.g.
* sudden increase in price of raw materials
* sudden increase in wages / corp tax
these shocks cause fluctuations to the ECONOMIC CYCLE hencve why the growth
curve is wavy not straight
92
key characteristics of stages of economic cycle
BOOM - when growth is faster than trend growth
* high profits
* low unemployment
* high consumer confidence
* high buissness confidence
* high imports
* demand pull inflation
RECESION
* high unemployment
* declining consumer + business confidence
* firms de-stock goods and discount prices
93
define reccesion
2 succesive quaters of negative growth
94
what is the difference between actual growth and potential growth
actual growth - SHORT RUN GROWTH
* an increase in AD that uses up spare capacity of economy
this is caused by:
1) lower intrest rates [↑c ↑ i ↑ (x-m)]
2)lower income / corp tax [↑c↑i]
3)higher consumer / buissness confidence [↑c↑i]
4)higher government spending [g]
5) weaker exchange rate [(x-m)]
potential growth-
long run expansion in productive potential of economy
95
factors that cause potential economic growth
this is achived through the improvements of the quality / quantity / efficency
of one of the FOP
* improve labour force education
* allow for migration
* improvment in tech
* more investment into machinery
* discovering of more natural rescources
* incentive enterprise via tax breaks
96
Define economic growth
an increase in REAL GDP in an economy in a year
casued by an increase in AD or an increase in LRAS
signifies expansion of economies productive capacity
97
what are adam smiths criteria of good tax
1) eoconomical - cheap and easy to collect
2)equitable - fair and based on taxpayers ability to pay
3)convenient - it should be easy for taxpayers to pay
4)certain - taxpayer should know the size anf timing of tax
5)efficent - tax should improve economic incentives(encourage work discourage
consumption)
6)flexible - easily adjusted to economic circumstances
98
define globalisation
Globalisation is a process by which economies and cultures have become more
inter-connected through global networks of trade that allow the movement of
goods, services, labour and capital
global trade is driven by trade agreements that areratified by the world trade
organisation
99
describe the relationship between interest rate and bond price
yeild refers to long term interest rate
bond prices and interest rate have an inverse relationship
this is because the fomula for yield (long-term interest) is coupon/ market
price x 100
so if bond price increases a larger amount is divided away from the interest
rate
100
define yeild
and provide formula
long term rate of interest earnt
it is expresssed as a percentage of current the bond market price
coupon/ market price x 100
101
define maturity date
refers to date at which the borrower will repay the lender
102
what is the coupon for a government bond
the annual interest paid on a bond
103
what is a government bond
debt based investment where the government would pay back a agreed upon interest
rate - this is done to raise funds for new projects
104
what is the foreign exchange market
thgis is where diff currencies are brought and sold
this could be conducted in eithe rthe spot market or the forward market
spot market - immediate axchange of foreign currency
forward market - exchange scheduled for some time in the future - exists to
promote speculation
105
what is the money market
this is where the buyiong and selling of assets that have a maturity date of 1
year or less occours
this provides short term finance to governments and firms
* this includes isuusuing of shres or corporate bonds or gov bonds
inter-bank lending occours in this part of financial market too
106
what is the capital market
part of the financial market where financial assets that have a maturity date of
over a year.
debt capital (payed via intrest) or equity capital (payed by dividends) can be
gained
primary capital market - where brand new bonds are issued e.g. via debt mangment
office in the uk
secondary capital market - new bonds / new shares can then be sold and brought
again
107
define broad money
this includes all cash in circulation + all other less liquid assets (non-cash
financial asstets that can be converted to cash) + (all assets with maturity
date of 5 years or less)
108
define narrow money
the basic amount of notes and coins and operational deposits/ reserve balances
at the bank of england.
aprox equal to amnt of cash in circulation
109
what are the features of money
portable
dividable
scare
acceptable
secure (hard to fake)
durable
110
what are the functions of money
a medium of exchange
a store of wealth and value - cant deteriate over time such as fruit
a measure of value/unit of account - indicates quality
a standard for differed payment - ppl who dont have money right now can borrow
money from those who do which they would pay back at later date
111
what is the role of the financial market
* to facilitate savings
* to lend to business or individual
* to facilitate exchange of goods and services
* to provide forward markets in currencies and commodities
* to provide a market for equities
112
list and define injections and leakages
injections
* investment
* export of goods and services
* gov spending
leakage
* saving
* imports
* taxation
113
what are the 4 componenets of cfi
gov
firms
households
external sector (rest of the world)
114
what does the cfi look like
economic model that explains the relationship between NATIONAL OUTPUT , NATIONAL
INCOME and NATIONAL EXPENDITURE
the 3 diff methods of measuring the level of economic activity using the cfi:
* national out put (o)
* national income (y)
* national expenditure (e)
NATIONAL OUTPUT = total value of the goods and services the economy produces
NATIONAL INCOME = the money paid to households by firms to use their factors of
production
NATIONAL EXPENDITURE = money spent by households on goods and services
115
drawbacks of fiscal policy
* gov may lack perfect information on what the current state of the economy is
actually like
* time lags - to increase spending it could take several months for a
government to filter through a decision
* free market economits belive that the free market is most efficent hence gov
spending would be wasted on inefficent projects
* may negativley effect budget deficit
116
define multiplier effect
this term describes what happens due to an increase in injections that itself
cause a bigger final increase in real GDP
multiplyer = 1/1-mpc
e.g.
if gov injects 100m and mpc = o.8
multiplyer = 5 and total final increase in gdp is 500m
117
define discretionary fiscal stabilisers
name for all deliberate attempts by government to stabilise economy
e.g. boom in ecomoy leads to gov increasing taxes to reduce inflation
118
define automatic fiscal stabilisers
if the economy is growing ppl will auto pay more tax (VAT + income) and the gov
will auto spend less on unemplymkent benifits
+vice versa
119
define fine tuning
the act of maintaining steady economic growth via fiscal policy
120
define fiscal stance
this refers to the stance chosen by the government either being contractionary
or expansioary
121
what is contractionary fiscal policy
this involves decreasing AD
(AD=C+I+G+X-M)
to acgive this gov would cut spending (G)
and increase taxes which would reduce consumerism (C)
this would tend to improve the governments budget deficit
122
what is expansionary fiscal policy
this involves increasing AD
(AD=C+I+G+X-M)
this is achived by governemnt increasing spending (G)
and cutting tax which increases consumerism (C)
This tends to worsen the governments budget deficit and the government will
increase borrowing
123
benifits of fiscal policy
-stimulate economic growth
-keep inflation stable
-stabalise economic growth avoiding booms nd busts
124
what is the forumla for aggregate demand
AD = C + I + G + X - M
Consumer spending
investment spending
governemt spedning
exports - imports
125
Define fiscal policy
the use of GOV SPENDING and REVANUE collection to influence the economy
this could include changes in
* tax
* gov budget
126
weaknesses of contracionary monetary policy
potential shock to economy
could worsen current acct situation
lower investment
127
define quantitative easing
a proccess by which liquidity in the economy is increased when the central bank
purchases assets from the commercial banks
this is done when intrest rate manipulation dont work because the banks dont
even have enough finance to issue out loans or bcs consumer confidence was so
low - both of these occoured in 2009 reccesion when dropping intrest rate to
0.5% failed
128
what is a bond
bonds are basicaly IOU'S that allow firms or government to boorrow money from
investors. when you buy a bond youre lending moeny to issuer in exchange
forregular interest payments in future
yield is effectivley interest rates on a bond
inverse relationship between price of bond and amount of yield
129
Describe step by step of quantitative easing
used when traditional approaches (cutting interest) to expansionary monetary
policy have failed
1) central bank creates money electronically
2)use this money to buy gov bonds and other assets from comercial banks
3)increase in demand for these bonds leads to an increase in their price
4)the higher the bond price the lower the yield on a bond(there is an inverse
relationship between bond prices and yield) - this leads to lower intrest rate
bcs yield = long term intrest rate
5)commerical banks recive cash from these purchases increasing their liquidity -
this in turn encourages them to lend out to customers - this would help
stimulate investments for firms
130
weaknesses of expansionary monetary policy
liquidity trap
inflation
widens current account deficit
131
define liquidity trap
occours during times of very low interest rates where consumers and investors
hoard cash rather than spedning or investing it preventing economic growth
132
how does expansioary monetary policy effect LRAS
BOE cuts base rate
↓
interest rate on buissness loans is decreased
↓
borrowing becomes cheaper hence increase in borrowing LEADING TO INCREASE IN
INVESTMENT
↓
investment can increase quantity/quality of capital and improve prodcutive
efficency
↓
rightward shift in LRAS
133
describe the contractionary monetary policy transmission mechanism
BOE increases base rate
this leads to:
INCREASED COST TO BORROW = decrease in consumption (of expensive goods) +
decrease in investment for firms
INCREASE RETURN ON SAVINGS = less consumption
STRENGTHENS EXCHANGE RATE = spiced
overall:
AD decreases
unemployment increases - because labour is derived from demand
134
Describe the expansionary monetary policy transmission mechanism
BOE decreases the banks base rate
leading to:
REDUCED COST OF BORROWING - increase in consumption (of expensive goods) +
increse in investment for firms
REDUCED RETURN ON SAVINGS - more incentive to spend
WEAKENS EXCHANGE RATE- widec
overall - AD increases
unemployment decreases
135
what is the role of the MPC
Monetary policy comitee
to set interest rates in order to achive their taregt inflation of 2%
136
define and provide outcomes of
expansioary monetary policy
increase MONEY SUPPLY
decrease INTEREST RATE
shifts AD right
BOE would implement this to:
* increase inflation
* increase growth
* reduce unemployment
137
define and provide outcomes of
contractionary monetary policy
increase INTEREST RATE
decreases MONEY SUPPLY
shifts AD left
BOE would implement this to:
* reduced inflation
* reduce excess debt + promote saving
* reduce current acct deficit
138
how does the BOE prevent cost-push inflation using MONETARY POLICY
Cost-push inflation occurs when the supply of a good or service changes, but the
demand for it stays the same.
if AD does this the BOE would increase INTEREST RATES
and decrease money supply (contactionary)
139
define monetary policy
demand side policy
use of INTEREST RATES and MONEY SUPPLY to influence ECONOMIC GROWTH and
INFLATION
140
Benifits of Supply Side policies
supply side policies lead to supply side improvements via increased labour
mobility due to training
[shifting LRAS further left]
structural unemployment decreases - increased labour mobility due to training
reduced income tax create incentive to work. workforce increases. this increases
overall productive capacity of economy
voluntary unemployment decrease - higher incentive to work
reduced cost-push inflation- lowers cosat of production -r reduces inflationary
preasures
141
define supply side improvements
supply side changes originate from the private sector without the help of the
government
142
examples and definiton of
interventionist supply side policies
gov intervention to overcome MARKET FAILURE
e.g.
higher gov spending on :
* transport
* education (think labour market failure)
* infrastructure
143
examples and definition of
free-market based supply side policies
policies to increase competitiveness and free-market efficeny
e.g.
privitisation
deregulation
lower income tax rates
reduce trade union power
reduce welfare benifit
lower corp tax (firms have more to reinvest)
144
define supply side policies
supply side policies involve government intervention to ikmpkrove economic
incentives and the operation of markets to ultimatley increase LRAS
interventionist - designed to correct market failure
market based - removes factors that get in the way of the market growing
succesfully e.g. influencing most possible people to work
145
what is a buffer stock
reduces fluxuation in price
It involves the creation of a stockpile, or buffer stock, of the commodity
during times of high supply, which can be used to regulate the market during
periods of low supply
146
macroeconomic objectives
economic growth
* in sr measured in %change in GDP
* in lr measured in potential econ growth driven by imporvemnts in productivity
(shift in lras)
price stability
* measured in CPI
full employment
* sum total of structural cyclical seasonal and frictional employment
* 4% unemployment
external stability
* reduce current acct deficit (unsustainable for a country to import more than
they export)[uk this is sustainable due to fdi from strong services industry
that cause financial acct surplus]
* stable exchange rate (appreciation and depreciation affects imports and
exports)
* dont be in debt to foriegn counties
INCOME EQUALITY
* measured in gini coefficent
PROTECTION OF ENVIORMENT
BALANCE OF PAYMENTS
147
base rate definition
rate at which banks borrow from boe
148
define real wage unemployment
when trade unions or minimum wage has achived wage higher than the labour market
value
149
policies to reduce inflation
(cost push)
1) reduce VAT
(this would cut firms costs)
eval- gov is unlikely to do this as they would loose revanue
2)subsidy to firms
(this would cut firms cost)
150
POLICIES TO REDUCE INFLATION
demand pull inflation
DEMAND PULL-
contractionary monetary policy(increase intrest rate)
[decreases consumer and investment spending]
eval- this may slow growth as lower investment
contractionary fiscal policy(cut in gov spending )
[decreases gov spendinh]
151
inlfation definition
persistant increase of prices in an economy in a year
152
define rising inflation
when inflation is rising at a higher rate from year2-year3 than it did from
year1-year2
153
benifits to inflation
1) workers can bargain for higher wages
2)reduce real value of debt
154
negative affects of inflation
1) less purchasing power
2) erosion of savings (when intrest rate is lower than inflation rate)
3)lower competativeness in forign markets (export competativeness) [WIDEC]?
155
what pushes SRAS to shift to the left which in turn causes COST PUSH INFLATION
1) increase in raw material prices
2) increase in wages
3) increase in buissnes tax
4)depreciation in exhange rate [WIDEC bcs if imports cost more there would be
higher costs for firms who import materials]
sras shifts left when there is an increase in cost of production to firms in an
economy
156
what causes cost pull inflation
SRAS shifts left
sras shifts left due to increase of cost of production
they therfore pass on these costs onto consumers
157
what pushes AD to thr right which in turn causes DEMAND PULL INFLATION
AD = C + i + G (X-M)
AD = Consumer spending + Investment spending + Gov spending + (net exports)
1) decrease in intrest rate (C+I)
2)decrease income tax (c+i)
3)increase gove spenmding(g)
4)depreciation of exchange rate [WIDEC](x-m)
158
cause of demand pull inflation
AD shift to right
this puts greater prerssure on existing FOP this makes them more scarce
increasing the price
(wage will go up (cost of labour) and price of capital)
this increases cost for firms
firms pass this increase in cost onto consumers
159
what happens when GBP depreciates
widec
Weak pound Import Dear Export Cheap
AD shifts right (net export is determinant of AD)
SRAS shifts left (firms who import materials )
1- employment increase in export industries
160
affects of apprectiation in value of GBP
SPICED
Strong Pound Import Cheap Exports Dear
as a result of cheaper import and less exports
SRAS shift right
AD shifts left
1 - lower growth (current account deficit)
2- higher unemployment in export industrty
3- cheaper imports (higher standard of living)
4- domestic firms may become more efficent (as a competative response to their
increase in foreign competition)
161
financial account
sheet that measures
-portfolio investment
* bonds
* shares
* derivitives
-foreign direct incestment
* when foriegn firms invest
-reserves
* either in currency or gold
162
capital account
measures
1)international debt forgiveness
2)inheretence tax that must be payed internationaly
3)sales of tangeiable assets abroad (machinary)
4)sales of nontangable assets (copyrights)
163
current account
macroeconomic objective is to balance trade (no big surplus or deficit)
BOP is a gig account that measures inflows and outflows of money from a country
within the BOP we have 3 accounts (current, capital + financial)
all these accounts measure the flow of the amount of money entering and leaving
a country
the current account is what we look at for measuring TRADE
current account measures international trade in:
1) trade in goods
2) trade in services
3)income (if you work abroad and bring income back its a positive)
4)transfers (government paying fees to be part of EU is negative)
if you measure the total value of all 4 parts you would have your current
account (deficit or surplus)
164
factors that affect exchange rate
(supply and demand forces)
(floating exchange rate)
demand : - factors that cause shifts in demand for currency
* rise in foreign income (leads to buying more of a countries exports)
* relative intrest rate (if uk has high intrest foriegners will think its a
good place t store their money so they put pounds in uk banks)
* inflows of FDI (if fid occours in uk the forigns firms would have to make
purchases such as on wages for workers using pounds hence they would of had
to sell their own currency to buy pounds)
* speculation (if speculators anticipate a rise in value they will buy that
currency so they can make a profit)
* increase in international competitiveness ( make exports more competitive)
supply : - factors that cause shift in supply of currency
* increase in domestic incomes - imports of goods and services
* outflows of FDI
* Speculation
* decrease in relative intrest rate
165
managed exchange rate
mainly determined by the forces of supply and demand yet on occasion the
government may intervene to inlfuence its exchange rate
166
fixed exchaneg rates
system where the government ties it exchange rate to the price of another
currency
imagine country a has a fixed exchange rate to country b (e.g. 1$ fixed to
1.50£)
a must hold lots of currency from both a and b
when equilibrium is not at fixed price country a would use their reserve to
manipulate the excahnge rate by buying one of the currencies using the other
countries may choose to change their fixed value this is known as de-valueing or
re-valueing NOT DEPRECTAION/APPRECTAION
167
floating exchange rate
exchange rate that is determined by the forces of supply and demand
168
what would the BOE do if sterling falls
sell opposing currency and buy sterling
increase intrest rate
169
what is a speculator
sophisticated investors or traders who purchase assets for short periods of
time and employ strategies in order to profit from changes in its price.
170
policies to influence ditributiojn of wealth / poverty
taxation - proggressive tax + inheretence tax
transfer payments - unemployment benifits JSA
provision of goods and services (education and healthcare )
legislation (national minimum wage)
171
affects of poverty
-less fair society
-without a decent standard of living people ...
* commit crime
* create less safe enviorment
* create social tension
* feel reduced happiness
as people make more income they turn in into wealth by investment which in turn
makes them more money making the rich richer
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causes of poverty
age - marganilised as age increased as less productive
low wages/unwaged
173
4 soucres of income
wages
rent
profit
intrest
174
define relative poverty
occours when individuals or houeholds are poor in comparison ot rest of
population
175
define absolute poverty
means that indidividuals or households are deprived of basic human needs
176
reasons for protectionism (barrier that restricts free trade)
(tarrifs)
infant industries - young firms are unlikely to be able to compete with MNCs
prevent dumping - sale of good under its cost of production - the countries that
recive the dumping would be cooked as domestic firms cant compete
protect domestic jobs
protect against unfair low cost abroad labour - (protect domestic economy
because of unfair competition)
prevent negative externalities - cigs
balance of payments - may help balance of payment deficit on curent account
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DEFINE COMPRATIVE ADVANTAGE
absolute advantage - when country can produce using less fop than another
comparative - when a acountry can produce at lower oppourunity cost
DAVID RICARDO -statses its possible for a country to not have an absolute
advantage inm anything but through specilisation could gain from international
trade if they had lower oppourtunity cost
comparative advantage is therfore where a country can produce a good at a lower
oppourtunity cost tghan that of another
178
DEFINE ABSOLUTE ADVANTAGE
situation where a country can produce a good or service using fewer rescources
than that of another country
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cost of trade
over -specilisation - (if demand falls for specilised product economoy is
****ed)
structural unemployment - (over specilisation can lead to structural
unepmloyment that may be dense n particular regions)
infant industries - (new firms would struggle to compete w MNC'S creating local
problems and limited employment oppoutunities)
Dumping - (countries w significant absolute advantage may shot their surplus for
v cheap in other places driving foreign producers out of buisiness)
Enviormental impact - (global transport = bad)
180
consequences of globalisation
pros + con
pro
* lower prices - (more competition puts downward pressure on prices - greater
consumer surplus + more choice)
* improved allocation of resources
* free trade (benfits of growth and govs get better tax revanue + greater
employment in economy )
* bigger oppourunity for eos as market got bigger companies have ability to
explot this size
* benfifit of ease of movement of labour or buisness(fdi)
con
* inequality
* enviormental impact
* structural unemployment
* movement of labour
* damage to cultures
* domestic buinsess fails to compete - leads to structural unemployment -
probl;em for developing countries that lack a strong welfare system
181
causes of glabalisation
* greater labour mobility
* improvements in transport
* growth of MNC
* more globalised financial systems (easier to move capital)
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benifits of trade
* increased overall global output (as result of comparative advantage)
* greater competition
* employment oppourtunities
* encouragment of specialisation leading to greater efficency(specialisation is
required to be in international trade competativly)
* improved quality of goods and services
