Full Theme 4 Flashcards
1
Q
Identify characteristics of Globalisation
A
- Greater trade of goods and services between nations - Higher levels of labour migration - Development of global brands that serve both high and low class consumers - Nations joining trading blocs
2
Q
Factors contributing to globalisation in the last 50 years.
A
- Lower costs of transportation, containerisation and bulk buying. - Technological change, lead to faster transfer of information - Reduction in protectionism
3
Q
What are the benefits of Globalisation?
A
- Trade enhances division of labour, therefore countries can specialise - Better relations with other countries encourages consumers and producers to feel the benefits of ECONOMIES OF SCALE - Competitive markets reduce monopolies forming - Helped poorer countries achieve economic growth
4
Q
What are the drawbacks of Globalisation?
A
- Rising Inequality, growing rural urban divide - Rising Inflation, strong demand for commodities causes rising inflation, putting the poorest at risk. - Threats to the environment. - Greater unemployment in advanced countries - Loss of diversity
5
Q
What is an Absolute advantage?
A
Absolute advantage is achieved when one producer is able to produce a competitive product using fewer resources, or the same resources in less time.
6
Q
What is a Comparative Advantage?
A
refers to an economy’s ability to produce goods and services at a lower opportunity cost than that of trade partners.
7
Q
Advantages of Specialisation (division) of labour.
A
- Higher productivity and efficiency – e.g. rising output per person hour. - Lower unit costs leading to higher profits. - Encourages investment in specific capital – economies of scale.
8
Q
Disadvantages of Specialisation.
A
- Greater cost of training workers. - Quality may suffer if workers become bored by the lack of variety in their job. - More expensive workers, because they are highly skilled.
9
Q
What are the factors influencing the patterns of trade between countries.
A
- Protectionism - Exchange rates, appreciated exchange rate domestically means domestic exports find it harder to compete in international markets - Inflation, countries with high inflation may find it harder to keep costs low
10
Q
What are the advantages of having a comparative advantage?
A
gives a company the ability to sell goods and services at a lower price than its competitors
11
Q
Impact of emerging economies on trading patterns.
A
Economies such as India and China produce high quality goods at low prices because they have large amounts of labour
12
Q
Impact of the growth of trading blocs on trading patterns.
A
Will lead to greater foreign direct investment, which can create new jobs in other countries. Eliminate tariffs which drive down costs
13
Q
Impact of Bilateral Trade agreements on Trade patterns.
A
Easier to negotiate than multilateral trade agreements, since it only involves two countries. This means it can be implemented faster, reaping benefits quicker
14
Q
What are Bilateral Trade Agreements?
A
Negotiating favourable trading terms between two countries
15
Q
How to calculate the terms of trade?
A
Exports DIVIDED by Imports Times the answer by 100
16
Q
What are the factors influencing a countries terms of trade?
A
- Exchange Rates : fall in the exchange rate should reduce the terms of trade. This is because a decline in the exchange rate will make exports cheaper. - Competitiveness of firms : Export prices will be affected by the cost of raw materials and productivity.
17
Q
What happens to export and import prices when there is an improvement in the terms of trade?
A
- Imports more cheaper - Exports are more expensive Improved living standards
18
Q
What happens to export and import prices when there is an worsening of the terms of trade?
A
- Exports cheaper - Imports more expensive Fall in living standards
19
Q
What are regional trade agreements?
A
Are treaties among two or more governments that offer favourable trade between themselves than they do from goods imported from outside the region
20
Q
What are bilateral trade agreements?
A
Trading agreement between only two countries
21
Q
Define Free Trade Area.
A
where there are no import tariffs or quotas on products from one country entering another. And set their own tariffs for imports from non-member countries.
22
Q
Define Customs Unions.
A
Is where countries decide not to put tariffs on each other’s goods and agree to put in common external tariffs on goods from countries outside the union.
23
Q
What is the main difference between Free Trade Areas and Customs Unions?
A
Setting common external tariffs with Customs Union
24
Q
Define a Common Market.
A
The same as a Customs Union - Is where countries decide not to put tariffs on each other’s goods and agree to put in common external tariffs on goods from countries outside the union.
25
Define Monetary Unions.
Is an agreement between two or more countries creating a single currency area.
26
What is the Criteria to join the Eurozone?
- Inflation cannot be 1.5% higher than the 3 best performing economies - Government deficit cannot be 3% higher than GDP
27
What are the benefits of regional trade agreements?
- Quality and Variety of goods - Boost economic growth
28
What are the costs of Regional Trade Agreements?
- Inefficient producers in the bloc are protected - Retaliation, may lead to trade wars
29
Identify possible conflicts between regional trade agreements and the WTO?
The WTO wants global free trade whilst regional trade agreements put up protectionist measure to those who are not members of the bloc
30
Reasons for restrictions of free trade.
- To protect domestic jobs from cheap labour abroad - To improve a trade deficit, make imports more expensive so reduce the demand for them - Extra taxation revenue for the government
31
What is a tariff?
a tax or duty to be paid on an import
32
What is a quota?
A limit on the number of imports allowed into a country
33
What is a Subsidy to Domestic Producers?
Is a payments to producer by the government attempting to lower the price of product and increase the quantity available, overall increasing international competitiveness
34
Define Non Tariff Barriers.
is a way to restrict trade using trade barriers in a form other than a tariff. E.G - Import bans, tightening quality restrictions
35
What are the benefits of protectionism?
- Protect new industries from being pushed out the market by cheaper industries abroad, Eg, president trump put tariffs on steel imports to protect the US steel industry - Raise revenue for the government
36
What are the costs of protectionism?
- Protectionism leads to retaliation and therefore higher import prices and higher consumer prices - Higher prices could lead to lower overall demand and job losses - Protectionism can cause inefficient firms to stay in business.
37
Identify the measures of International Competitiveness.
- Relative unit labour costs - Relative export prices
38
What is International Competitiveness?
Measures the relative cost and value of a countries exports
39
What are the factors influencing international competitiveness?
- Relative Inflation Rates - Exchange Rates - Labour Productivity
40
Why does Relative Inflation Rates affect International Competitiveness?
- Inflation erodes international competitiveness : - During inflationary periods people have a lower purchasing power because their money is worth less. - So demand drops causing a follow on drop in supply
41
Evaluate the affect of inflation on International Competitiveness.
- Lower inflation may be offset by an appreciation in the currency - Therefore gains by lower inflation are offset by a stronger currency
42
Why does Exchange Rates affect International Competitiveness?
- A depreciated exchange rate causes domestic exports to be more internationally competitive. - E.G - From 2008 to 2009 the pound fell by 30%
43
Why does Labour Productivity affect International Competitiveness?
- Improved infrastructure makes it cheaper to transport goods - How skilled the workforce is
44
What are the benefits of Improving International Competitiveness?
- Exports are cheaper leading to higher demand for exports. Export-led growth has been a significant factor in Chinese economic growth. - Higher exports will help increase aggregate demand and economic growth - Improved competitiveness will help improve a country’s current account deficit. - Create jobs in the export sector - Help to reduce inflation in the economy.
45
Define Absolute Poverty.
is a condition where household income is below a necessary level to maintain basic living standards
46
Define Relative Poverty.
A condition where household income is a certain percentage below median incomes.
47
How to measure Absolute Poverty?
food, shelter, housing
48
How to measure Relative Poverty?
Measuring incomes based upon the average income
49
Does Economic Growth cause Absolute Poverty to change?
No
50
Does Economic Growth cause Relative Poverty to change?
Yes!
51
What is the different between Wealth and Income Inequality?
- Income inequality - The degree to which income is distributed unequally in an economy or population - Wealth Inequality - refers to the unequal distribution of assets in a group of people.
52
What is the Gini Coefficient?
Measure of income inequality that condenses the entire income distribution for a country into a single number between 0 and 1
53
Interpret the Gini Coefficient value.
the higher the number, the greater the degree of income inequality.
54
What is the Gini Coefficient value for the UK?
0.34
55
What is the Lorenz curve?
is a way of showing the distribution of income (or wealth) within an economy.
56
Show the Lorenz Curve?
The line of inequality is 45 degrees.
The lines mean that the poorest 20% hold 5 % of the whole income in the economy.
57
What are some of the causes of Wealth and Income Inequality within and between countries?
Education
Skills and Training
Unemployment
Type of Job
Inheritance
58
How might economic growth affect inequality?
- High increases in pay of people in top-paying jobs
- Increasing wealth including rising property prices
- Growing gaps between urban and rural areas
59
Define Capitalism.
is a society with minimal government intervention and resources are distributed according to the outcome of free markets.
60
What is the link between Capitalism and Inequality?
- Profit Motive : if individuals can see the rewards of taking risks then inequality occurs
- Work Incentive : difference in wages means that workers are incentivised to learn new skills, and move up into higher paying jobs. Or successful workers are payed more generously based on their performance
- Monopoly Power : a firm may charge consumers unfair prices,
- Monopsony Power : these firms can get away with paying workers very low wages
61
What are the three different dimensions of the Human Development Index (HDI)?
Education
Health
Living Standards
62
What is a Low HDI score?
From 0 to 0.5
63
What is a medium HDI score?
0.5 to 0.8
64
What is a High HDI score?
0.8 to 1
65
How are the three dimensions used to calculate the HDI?
Value is created based upon the progress of the countries improving these three dimensions
66
What is the HDI of the UK?
0.909
67
What is the HDI of Norway?
0.949
Norway has the best HDI in all the world
68
Explain the Advantages of using HDI to compare levels of development between countries.
- Doesn’t rank countries based on their income alone
- HDI values are accepted worldwide so easy comparisons can be made
69
Disadvantages of using the HDI index.
- Doesn’t take into account reign regional disparities, for example, North South divide in the UK
- Reflects long term changes and not short term ones
- Can depend on other factors like threat of war, and access to mobile phones
70
What are some other indicators of development?
- GDP
- Birth and Death rates
- Infant mortality rate
- Literacy rates
71
Give an example of a country that has huge Primary Product Dependancy?
Angola, 97% oil it exports
72
What is Primary Product Dependancy?
Is when countries rely on specialising in and exporting low value products.
73
What are the drawbacks of Primary Product Dependancy?
Prices of these goods can be volatile, when prices fall and economy will see a sharp drop in export income and worsens Balance of Payments, which could lead to finance problems for governments.
74
What is the Harrod-Domar model?
It is an economic growth model that stresses the importance of savings and investment as key determinants of growth
75
Show the Harrod-Domar model.
76
What is a Foreign Currency Gap?
- Happens when currency outflows persistently exceed currency inflows.
- A country is running a persistent current account deficit on their balance of payments.
77
What are the consequences of a Foreign Currency Gap?
Country doesn’t have enough foreign currency to pay for essential imports, which can severely effect short run economic growth
78
What is Capital Flight?
Is when assets or money rapidly flow out of a country, due to a serious economic event.
79
What are the consequences of Capital Flight on an Economy?
- Reduces economic growth and the power of the economy
- Reduces the power of the government due to reductions in tax revenues
- Multiplier effect as other people begin to take their money out.
80
What impact can demographic changes have on the economy?
- Change productivity, causing slower growth rates
- Consumption and Investment can be impacted
- Influence long run unemployment rates
81
What impact can a high national debt have on the economy?
- Reduced government spending, slowing the rate of economic growth
- Crowding Out, means that people will put their money into government bonds and instead won’t spend or invest.
- Less Fiscal Flexibility
82
What impact does credit availability have on the economy?
- Causes greater spending within the economy
- Leads to economic growth
83
How does Infrastructure impact the economy?
Fuels economic growth by...
- Reducing costs of production
- Making it easier to transport goods and services and for people to get to work
- Creating indirect positive Externalities
84
How does education impact the economy?
Directly affects the economy, because better worker education improves their human capital, improving productivity and output of the economy.
85
How does the Absence of Property rights affect the economy?
- Banks need a system with clear legal property rights in order to give out mortgages.
- If it is difficult to prove ownership of assets this assets might not work
86
What are some Non-Economic factors that impact the economy?
- Culture
- Religion
- Tradition
- Government (corruption)
87
What are the Market Orientated strategies for influencing growth and development?
- Trade Liberalisation
- Promotion of FDI
- Removal of government subsidies
- Floating exchange rate systems
- Microfinance schemes
- Privatisation
88
How does Trade Liberalisation lead to economy growth?
- Makes a country more attractive for FDI
- Makes economy more efficient because they can specialise in producing products that they have a low opportunity cost in
- Makes an economy more cost efficient because they can benefit from economies of scale
89
How does the promotion of FDI lead to economic growth?
It increase AD because more jobs are created and therefore causes economic growth
90
How does the Removal of Government Subsidies improve economic growth?
Will mean that only the most efficient producers can produce goods, forcing firms to lower their costs and be more competitive
91
How does a Floating Exchange Rate impact Economic Growth?
Easier for authorities to manipulate the exchange rate to peruse goals such as full employment, stable growth and price stability
92
How do Microfinance schemes impact economic growth?
Brings those out of extreme poverty and keeps them out of extreme poverty
93
What are Microfinance Schemes?
Is when financial services are provided to low and poor income clients so as to help increase their income.
94
How does Privatisation affect Economic Growth?
Privatisation improves productivity, employment levels and exports
95
What are some Interventionist strategies to improve Economic Growth?
- Development of Human Capital
- Protectionism
- Managed exchange rates
- Infrastructure development
- Promoting Joint Ventures with global companies
- Buffer stock schemes
96
How does Development of Human Capital lead to economic growth?
- This means labour is more attractive to firms so more are employed and earning and income
- Additionally the capital is more efficient
97
How does Protectionism lead to economic growth?
Keeps domestic industries alive therefore more people are earning incomes, keeping AD high
98
How do Managed Exchange Rates lead to Economic Growth?
By managing an exchange rate and keeping it low the price of domestic exports for foreign buyer is cheaper, which leads to export led economic growth.
99
How does Infrastructure Improvements lead to economic growth?
- Improves the efficiency and productivity of the economy as road work more efficiently
- Keeps workers healthy so they can work longer and more productively
100
How does Promoting Joint Ventures with Global Companies impact economic growth?
Companies can gain expertise from each other
101
How do Buffer Stock Schemes improve the market?
- Buffer stock schemes stabilise the market price, by buying when supply is plentiful and selling when supply is low.
- Creating a fixed if you will value for the volatile commodities
102
Show the Lewis Model.
103
What does the Lewis Model State?
- States there is lots of labour working on land, and diminishing marginal returns means that for every extra worker there are fewer tasks for the workers to do.
- Urban workers tend to produce more output than agricultural workers
- Therefore the higher wages tempts rural workers to migrate to the city, which leads to companies expanding and increasing rural to urban migration.
104
How does the Development of Tourism improve countries?
- Creates jobs and employment opportunities
- It stimulates trade and entrepreneurship
- Improves regional development especially in isolated areas.
105
How does the development of primary industries affect a country?
- Gain export revenue, which has enriched countries to enable them to invest in the public sector
- Employment opportunities are created, however could lead to monopolies
106
How does Fair Trade affect a countries economy?
- Allows farmers to get paid a fair minimum price so they can become income secure, and less vulnerable to poverty
- Supports better farming, and investment into expansion for farms
107
How does Aid affect a Countries Economy?
- Well directed and targeted aid can enhance a country's growth potential but the effects may not be seen for many years, eg, building power stations etc.
- Stabilises post conflict areas
108
What is debt relief?
lifting the burden of debt from the poorest countries.
109
How does Debt Relief effect countries economies?
- Frees developing countries from their debt service payments
- Can then spend the money they save on contributing to tackle poverty
110
What does the IMF do?
- Overseas the international monetary system, and provides macroeconomic and financial advice to countries
- Mainly helps out LEDC’s and MEDC’s with macroeconomic advice, such as design structural and financial policies
- Provides LOANS to countries that are having trouble meeting their international payments, this helps countries relaunch and stabilise growth
111
What are the Roles of NGO’s?
- They exist in order to promote improvements in areas such as the environment, human rights and working rights etc.
- They promote citizen participation and help communicate citizen needs to the government
112
What is the role of the World Bank?
- Provides grants and low interest loans
- Offers policy advice and technical assistance to developing countries
- Co-ordinates projects with governments
113
What is the role of the Financial Markets?
- To facilitate saving
- To lend to businesses and individuals
- To facilitate the exchange of goods and services
- To provide forward markets in currencies and commodities
- Provide a market for equities
114
Market Failure in the Financial System - Asymmetric Information
- This type of market failure exists when one individual or party has much more information than another individual or party, and uses that advantage to exploit the other party.
- For example, a borrower has a better idea than the bank of their ability to pay off the debt
115
Market Failure in the Financial System - Externalities
- A negative externality exists when a market transaction has a negative consequence for a 3rd party and vice versa for positive externalities.
- Banks could work together to main a high interest rate
116
Market Failure in the Financial System - Moral Hazard
- Moral hazard exists in a market where an individual or organisation takes many more risks than they should do because they know that they are either covered by insurance, or that the government will protect them from any damage incurred as a result of those risks.
- Therefore the burden of a banks risk taking falls on the tax payer
117
Market Failure in the Financial System - Speculation and Market Bubbles
- A bubble exists when the price of something is driven well above what it should be, usually due to the behaviour of consumers.
- For example, the price of houses means there could be an increase in demand for mortgages.
118
Market Failure in the Financial System - Rigging Markets
- This is basically collusion, where there is a small number of firms in a market, and they work together to increase profits and exploit consumers
- Larger banks don’t have to work hard enough to win and retain customers and it is difficult for new smaller providers to attract customers
- E.G - The EU fined banks €1 billion for market rigging in 2019
119
What are the Key Functions of CENTRAL banks?
- Issuing and Printing Money, is airing too much can lead to inflation and prevent fraudulent money being made
- Lender of Last Resort to Commercial banks, can lend to banks with liquidity issues and maintain confidence in the banking system.
- Lender of last resort to the government
- Role in regulation of the banking industry
- Implementation of monetary policy
120
What are the Components of the balance of payments?
- Current Account
- Capital Account
- Financial Account
121
What is the Current Account made up of?
- Balance of trade in goods
- Balance of trade in services
- Net Primary Income (Interest, profits, dividends)
- Net Secondary Income (EU Payments, military and overseas aid)
122
Identify causes of Deficits on the Current Account?
- Overvalued exchange rate ( imports become cheaper, and therefore there will be a higher quantity of imports. Exports become less competitive)
- Economic Growth (If there is an increase in national income, people will tend to have more disposable income to consume goods. If domestic producers cannot meet the domestic demand, consumers will have to import goods from abroad)
- Decline in the competitiveness of the export sector (cause a decline in the export sector due to the UK not being able to maintain a competitive advantage of emerging economies)
- Higher Inflation ( If UK inflation rises faster than our main competitors then it will make UK exports less competitive and imports more competitive. )
123
What is a Current Account Deficit?
Occurs when the value of imports is greater than the value of exports.
124
What are the Policies to reduce a Current Account Deficit?
- Devaluation of Exchange Rates
- Protectionism
- Supply side policies to improve the competitiveness of domestic industry and exports.
- Deflationary Fiscal Policy
125
Policies to Remove the Current Account Deficit - Devaluation of Exchange Rates
Involves reducing the value of the currency against others
* Do this by lowering interest rates
* If there is a devaluation of the currency, price imported goods increases, therefore, quantity demanded of imports falls.
* Exports will become cheaper, so there will be an increase in exports.
* We must assume demand is price elastic, a devaluation will lead to an improvement in the current account in the BoP.
126
Policies to Remove the Current Account Deficit - Evaluate the Devaluation of a Exchange Rate.
- The UK is a naturally importing country, so will this actually cause imported inflation, leading to cost push inflation
- J Curve (shows the time lags between a falling currency and an improved trade balance)
- Marshall Lerner Condition (States that the sum of the price elasticity of demand for imports and export is greater than 1 then a devaluation of the exchange rates will have the desired effect)
127
Policies to Remove the Current Account Deficit - Protectionism
- Represents any attempt to impose restrictions on trade in goods and services
- these measures would have the impact of reducing imports and therefore improve the current account.
128
Policies to Remove the Current Account Deficit - Evaluate Protectionism.
- Naturally an importing country
- Retaliation other countries placing tariffs on our exports – so exports could decrease.
- Protected by tariffs – domestic industries may become uncompetitive because there is less incentive to cut costs.
129
Policies to Remove the Current Account Deficit - Deflationary Fiscal Policy
- the government could increase income tax.
- This would reduce consumer discretionary income and reduce spending on imports.
- Adv - It would not have an adverse effect on the exchange rates. Higher income tax would also improve government finances.
130
Policies to Remove the Current Account Deficit - Evaluate Deflationary Fiscal Policy.
Policy will conflict with other macroeconomic objectives – with lower aggregate demand (AD), it is likely to fall causing higher unemployment.
131
Policies to Remove the Current Account Deficit - Supply Side Policies
Works against cost push inflation which increases supply and lowers price.
Improves the competitiveness of the economy and helps make exports more attractive.
E.G - Privatisation, Deregulation which lowers price and makes exports more attractive
132
Policies to Remove the Current Account Deficit - Evaluate Supply Side Policies
- May take a considerable amount of time to have an affect
- Contradict with other policies
- Conflicts with Debt
133
Does a Deficit on the BoP matter?
- Is unsustainable, it will burden countries in the long-term because of high interest payments
- Risk of Capital Flight, will reduce confidence with foreign investors, so investors may take their money out of their investments causing a drop in the value of a currency. Decline in living standards and lower confidence for investment
134
Reasons why a Current Account Deficit ain’t so bad.
- May be just a phase of inward investment, which will create jobs and investment, which creates growth and improves a countries ability to pay back its debts
- With a floating exchange rates they should auto correct themselves
- Might indicate a strong economy, which is growing rapidly.
135
Define Exchange Rate.
Value of one currency to against another
136
Explain Floating Exchange Rates.
When the value of the currency is determined by market forces – supply and demand for currency
137
Explain Fixed Exchange Rates.
where the government seeks to keep the value of a currency at a certain level compared to other currencies.
138
When the value of the £ increase it...
APPRECIATES
139
When the value of the £ decreases it...
DEPRECIATES
140
What is a Spot Exchange Rate?
The rate for a currency at today’s markets price
141
What is a Forward Exchange Rate?
Involves the delivery of a currency at a specific time in the future at an agreed rate
142
What is a Bi-lateral Exchange Rate?
The rate at which one currency can be traded against another
143
What are the Factors Influencing Exchange Rates?
- Interest Rates
- Economic Growth
- Inflation
- Confidence in the Economy
- Current Account Deficit/Surplus
144
Factors Influencing Exchange Rates - Interest Rates
higher interest rates encourage hot money flows and demand for currency. This causes an appreciation.
145
Factors Influencing Exchange Rates - Economic Growth
higher economic growth will cause an appreciation in the currency, because markets expect higher interest rates – when growth is rapid.
146
Factors Influencing Exchange Rates - Inflation
Higher inflation makes exports less competitive and reduces demand for currency. This causes a depreciation.
147
Factors Influencing Exchange Rates - Current Account Deficit / Surplus
A large current account deficit is more likely to cause a depreciation because more money is leaving the economy to buy imports.
148
What will be the effects of an Appreciation in the Exchange Rate?
- UK exports become more expensive abroad
- Imports into the UK are cheaper
- Reduce Inflation
- Reduces Economic Growth, because lower demand for exports
- Worsening Current Account Deficit, imports are cheaper so greater demand for them, and exports are more expensive - SPICED
149
What are the effects of a Devaluation/Depreciation?
- UK exports become more competitive, increasing demand
- Imports become more expensive, leading to lower demand for imports.
- A depreciation will tend to increase economic growth but also cause inflation.
150
What are the advantages of a Fixed Exchange Rate?
- Avoids currency fluctuations
- Encourages firms to invest because firms know the rates
- Incentive to keep inflation low, devaluation leads to investment which makes higher inflation
151
Disadvantages of Fixed Exchange Rates?
- Conflict with other macroeconomic objectives (Most effective way to increase the value is to raise interest rates, which caused lower AD and Lower Economic Growth)
- Less Flexibility (Difficult to respond to temporary economic shocks)
152
Explain a manager Floating Exchange Rate.
Is when the central bank may choose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives
153
What is a Revaluation of a Currency?
rise of the value of the currency
154
What is an Appreciation of a Currency?
is an increase in the value of one currency in relation to another currency.
155
What is a Devaluation of a Currency?
occurs when a country makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate.
156
What is a Depreciation of a Currency?
is when there is a fall in the value of a currency in a floating exchange rate.
157
What is the difference between an Appreciation and a Revaluation?
Appreciation - occurs in a Floating Exchange Rate
Revaluation - Occurs in a Fixed Exchange Rate
158
How does the government manage a Fixed Exchange rate?
Changes in Monetary Policy Interest Rates, which causes changes in hot money flows
Direct buying and selling in the currency market
159
Explain a competitive devaluation/depreciation and its consequences.
occurs when countries seek to reduce the value of their exchange rate to make their exports cheaper and gain a competitive advantage in world trade over other countries.
160
What could a Competitive Devaluation/Depreciation lead to?
A Currency War, because other countries will devalue their currencies to maintain their own competitive advantage
161
Define Capital Expenditure.
funds used by a company to acquire or upgrade physical assets such as property
162
Define Current Expenditure
is expenditure on goods and services consumed within the current year.
163
Define Transfer Payments
is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return.
164
Identify reasons for the changing size and composition of public expenditure in a global context.
Lower Gov Spending - Causes a fall in economic growth and AD of that country which could negatively effect UK exports
165
How does government spending affect Productivity?
- Government spending can reduce the amount of labour in the economy, which leads to reduced productivity.
- However, can improve productivity because those coming out of education are more efficient
166
What is Crowding In?
Is when government spending leads to an expansion of economic activity which in turn incentivises private sector firms to revise their own levels of capital investment and employment.
167
Evaluate Crowding Out.
- Chance of 100% crowding out is remote
- Government spending can provide a strong multiplier effect that generates extra tax revenue
168
What is Cooperation tax levels in the UK?
19%
169
What is the level of Cooperation Tax in Ireland?
14%
170
What is the Total Tax Revenue in the UK?
£792 billion
171
How does Government spending affect Taxation?
Greater government spending causes a long run consequence on the level of taxation
172
How does Government Spending affect Equality?
Government spending improves inequality because there are more transfer payments.
173
What is a Progressive Tax?
When the marginal rate of tax rises as income rises, ie, as people earn more, the rate of tax on each additional pound goes up.
174
What are Proportional Tax?
The Marginal Rate of tax is constant leading to a constant average rate of tax
175
What is a Regressive Tax?
The rate of tax falls as income rises, ie, people who pay for tobacco on higher incomes effects them less than people on lower incomes.
176
What is a Direct Tax?
Levied on individuals and companies
177
What is an Indirect Tax?
Levied on goods and service
178
What is the Laffer Curve?
Shows the relationship between economic activity and the rate of taxation, it suggests there is an optimum tax rate which maximises total tax revenues.
179
Show the Laffer Curve and what does it Infer?
180
Evaluate the Laffer Curve.
- Increasing taxes can widen the inequality gap
- Cuts in direct and indirect taxes increase real disposable income and therefore lead to higher consumer spending and AD
181
What is the impact of tax on other macroeconomic variables?
- Lower economic growth because of lower AD
- Debt is improved
- BoP is improved because of lower AD people spend less on imports, imports are more expensive because of VAT
- Lower inflation because of less spending
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What is the link between taxation and income distribution?
Greater taxation the greater the income distribution
183
Explain the link between taxation and income distribution.
- Those earning the most are most heavily taxed
- Those on lower income are not taxed as much
- Increase in VAT leads to unfair distribution
184
How can taxes affect real output?
Tax cuts could raise output because less cooperation tax means that firms can invest more back into the business
185
How can taxation affect the price level?
- Higher taxation lowers inflation
- Lower taxation increase inflation
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How does taxation affect FDI?
Lower cooperation tax means that there is greater FDI because foreign firms want to locate themselves in that country to exploit lower taxes
187
What are Automatic Stabilisers in the economy?
offset fluctuations in economic activity without direct intervention by policymakers.
188
What is meant by Discretionary Fiscal Policy?
are deliberate changes in taxation and Govt spending
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What is the difference between automatic stabilisers and Discretionary Fiscal Policy?
Automatic Stabilisers kick in automatically whereas discretionary Fiscal Policy is implemented only if the government chooses to do so!
190
Define Fiscal Deficit.
is a shortfall in a government's income compared with its spending.
191
Define National Debt
is the total quantity of money borrowed by the Government
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What is a Cyclical Fiscal Balance?
Is when the size of the fiscal deficit is influenced by the state of the economy
- Boom (tax receipts are high and spending by the government is low)
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What is a Structural Deficit?
Is government spending on infrastructure which has no link to the health of the economy.
194
What are the causes of a Fiscal Deficit?
- Recessions causing rising unemployment
- Decrease in consumer spending and profits leading to less tax revenue
- Use of fiscal stimulus by a government to lift AD (getting out of a recession)
- Increase in interest rates on debt leading to a rise in debt costs
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What are the problems with sustained government debt?
- Greater austerity for future generations
- Debt matures, greater spending to cover interest
- Lower FDI
- Crowding Out the private sector
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How can Fiscal Policy be used to remove a Debt?
Contractionary Fiscal Policy is used to pay off debt
- Because the government can decrease its spending, raise taxes
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How can Monetary Policy be used to remove a Debt?
- By lowering interest rates the government can stimulate spending because it is cheaper to borrow money.
- The borrowers spend the money on goods and services which stimulates more demand and creates jobs and tax revenues.
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How can Exchange Rate Policy be used to remove a debt?
- Lowering interest rates causes a depreciation in the £,
- makes exports cheaper to foreign buyers
- means there are greater quantities of exports.
- Which creates more jobs, profits for firms etc
- Which can all be taxed
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How can supply side policies be used to remove a debt?
- Supply side policies can improve the competitiveness of the economy and help make exports more attractive. Creating more jobs and profits which can all be taxed.
- These policies also aim to put more people into work which means the government spends less in the form of welfare payments and instead earns taxation revenue.
200
How can Fiscal Policy be used to reduce Inequality?
The government can use a progressive tax and benefits system
- This takes proportionately more tax from those on higher levels of income, and redistributes welfare benefits to those on lower incomes.
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How can Monetary Policy be used to reduce Inequality?
Lower interest rates encourage firms to expand their infrastructure and therefore create more jobs for people to work in.
202
How can Supply Side Policies affect inequality?
- Lead to more jab opportunities for employees which means more people are earning an income
- Encourages those on benefits to start working
203
How do Interest Rates affect the Money Supply?
- When there are lower interest rates there is a rise in the money supply because borrowing becomes more expensive
- When there are higher interest rates the money supply lowers because people are more encouraged to spend
204
What is International Competitiveness?
measures the relative cost and value of a countries exports.
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What are the Factors affecting International Competitiveness?
- Inflation
- Exchange Rates
- Supply Side Policies
- Regulations
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Factors affecting International Competitiveness - Inflation
- High inflation leads to the prices of exports rising, making them less internationally competitive on foreign markets
- Low inflation makes products more competitive relative to other countries inflation rates
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Factors affecting International Competitiveness - Evaluate Inflation
- Gains from low inflation may be offset by an appreciation in the currency because the exports do become more expensive to foreign buyers due to an appreciating currency
208
Factors affecting International Competitiveness - Exchange Rates
- Appreciation in the exchange rate makes exports to foreign buyers more competitive.
- SPICED - Strong, Pound, Imports, Cheap, Exports, Dear
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Factors affecting International Competitiveness - Evaluate Exchange Rates
- Even though a depreciation may improve the competitiveness of exports, it will increase the price of imports
- So firms who import their raw materials will see a rise in their costs, imported inflation
- Country may experience a depreciation because it is uncompetitive and its goods are less in demand.
210
Factors affecting International Competitiveness - Supply Side Policies
Skills, education, infrastructure in the economy and Industrial Relations affects labour productivity in an economy.
211
Explain the use and impact of macroeconomic policies to respond to economic shocks.
- Monetary Policy (to increase or reduce inflation or boost economic growth)
- Fiscal Policy (higher government borrowing to finance higher government spending)
- Devaluation (reduce the value of the currency to boost exports)
- Supply-side policies
212
Identify measures to control global companies operations - Regulation of Transfer Pricing.
This is were countries close loopholes in the taxation system so that firms pay the cooperation tax they earned in that country.
213
What are the problems facing policy makers when applying policies?
- Inaccurate information
- Risks and uncertainties
- Inability to control external shocks
