global economy (paper 2) Flashcards

Question

what are the disadvantages to trade agreements?

Answer 1

1. Trade diversion may occur – countries re-allocate production to countries within their trade agreement, yet the other country they were trading with beforehand (who is not in this trade agreement) may had been more economically efficient. Thus, trade transfers from a country with a lower opportunity cost to a country with a higher opportunity cost for the sake of this agreement. 2. Structural unemployment may occur in your own country due to shifting sectors to abroad 3. annoys the WTO

Answer 2

Trade liberalisation – promoting free trade and removing barriers.

Answer 3

1. Implements trade agreements – the WTO negotiates and does the research behind trade agreements that t then gets states to sign. For example, the GATT (general agreement on tariffs and trade), which managed to remove barriers by excepting common standards. 2. Resolves trade disputes – The WTO has an impartial panel for countries to bring their trade grievances to. This helps to avoid trade wars by providing an impartial body that can give its verdict. If a country will not comply with their verdict, they can authorise the other country to also use anti-competitive practices against them in retaliation. This acts as a deterrent to ignoring the WTO. They also monitor trade policies and makes sure each member state complies with their policies. It also conducts regular trade policy reviews of member states to identify where trade liberalisation could be better/further achieved. 3. Providing technical assistance – The WTO provides assistance to developing countries to open themselves up to free trade through capacity building and technical assistance. This includes advising them on how to build their infrastructure, etc.

Answer 4

The WTO has an anti-discrimination policy. All countries should be treated equally in the possibility of trade. However regional trade agreements go against this in two main ways: 1) special treatment regarding tariffs - countries in a trade agreement will reduce tariffs for each other to make trade easier for themselves. However, this places member states at an advantage during trade against the rest of the world as their cost of production are now cheaper. 2) "rules of origin" - this help to determine the “nationality” of an imported / exported good, to see whether it qualifies for reduced tariffs or not.

Answer 5

To protect infant industries – to protect new firms that have just entered the industry that would not be able to compete currently due to the mass of global competition. Once they are well established, protectionism is removed. To protect sunset industries – These are firms at the end of their life cycle in an industry – they are due to shut down in the foreseeable future. However, the Gov. may protect them in the meantime from international competition to ensure their closure is not abrupt and limits the economic damage on workers and providers. Strategic industries – some industries are essential in order for the economy to operate most effectively. Therefore, the Government may protect a current industry (like energy, defence, etc) incase relations with another country broke down who previously supplied such good. For example, British steel is a Strategic industry. Protect employment – when firms outsource to other countries for production (as it is cheaper) this will make cyclical unemployment occur in the country of origin. The Government may instead subsidies such industry, so it does not have to go abroad, and thus saves workers their jobs. Avoid possibility of being harmed by any external shock - if a country becomes too reliant on another country for a vital resource (like oil, etc) then when something goes wrong in that country (like war, natural disaster) your country will also be effected

Answer 6

Tariff – is a tax on imports. Domestic producers must pay the tariff when they import the good into the country, this raises their cost of production. Firms will pass on this increased cost onto consumers by raising their prices. These higher prices allow some domestic firms to increase their output (law of supply). *draw the diagram* *Probably be easier to refer to your book, but here is the analysis anyway* The consumer surplus was originally ABC. Since the tariff, it has contradicted to ADE. The producer surplus was originally CHG. Since the tariff, it has now expanded to EFG. There is welfare loss at the two smaller triangles. The Box behind FD is the tax the government gains from the tariff. ^Quantity demanded contracts from Q2 to Q4 ^the quantity supplied increases from Q1 to Q3 ^The new level of imports has reduced from Q1 – Q2 to now Q3 - Q4

Answer 7

Quota – is a physical limit on imports. Domestic firms benefit as the demand for these good remain in the economy, and they can now be the ones to supply them, this may also increase the level of employment within the economy. *draw diagram* Evaluation: imports are usually the cheaper alternative for a producer within the domestic market. As cheaper imports are now limited, this will raise their market price, causing a shortage of that good within the country. If this imported good is one British firms will struggle to make themselves as a response to the quota, the quota will hinder economic growth. ^Equally, there isn't any direct tax revenue from an import quota in comparison to a tariff.

Answer 8

Subsidies to domestic producers - A subsidy will lower the cost of production for domestic firms. This means they can increase output and pass on their lower cost to customers by decreasing their prices. This makes their goods more competitive during trade, enabling for demand to shift to them, rather than abroad. *draw subsidy diagram*

Answer 9

Non – tariff barriers – Are less obvious barriers to trade. Examples can include: Health and safety regulations – the EU put a new health and safety regulation on the amount of aflotoxins that could be present in nuts imported in. Aflotoxin levels are naturally higher in the southern hemisphere due to their climate, thus this effectively blocked imports for nuts from the southern hemisphere. Product specification – Canada specified that all jam imported needed to be in a certain size container. Many countries do not usually use the specific sized jar stated, and therefore this protected Canadas domestic jam industry as they do use that size of jar. Environmental regulations – In 2021 the EU and the USA put in new regulations to limit the amount of imports of “dirty steel” - this was steel that uses coal power stations, which are prevalent in China. This essentially banned imports of steel from China in a more discrete way.

Answer 10

DEPENDS ON PED!!!!!!! domestic firms: - larger consumer base - more revenue from a shift of demand onto them rather than foreign firms -greater stability - can plan for investment However, -may rely on imported raw materials -off-shoring their production may had been cheaper - may promote domestic monopolies, thus limiting competition consumers: -cheaper prices -> more purchasing power with their money -locally sourced -> maybe of higher quality / more fresh (if in regards to agriculture) However, -less variety -may raise prices if firms now have to import raw materials at a higher price

Answer 11

Exchange rate – the value of one currency in terms of another.

Answer 12

1. floating – exchange rate is determined by supply and demand in the foreign exchange market. Governments / central banks do not directly interfere with the rate, allowing it to fluctuate freely. 2. fixed – The Government / central bank sets a specific exchange rate that they fix through artificial means – like selling their currency reserves or imposing legislation. 3. managed – Has elements of both a free floating and fixed exchange rate. The currency may fluctuate according to market forces within a specific band. for example, Chinas exchange rate is able to fluctuate by 2%. authorities occasionally intervene the fix the exchange rate.

Answer 13

Revaluation – an increase in the exchange rate due to government intervention. It is a direct policy. Appreciation – an increase in the exchange rate due to market forces.

Answer 14

Devaluation – a fall in the exchange rate due to government intervention. It is a direct policy. Depreciation – a fall in the exchange rate due to market forces.

Answer 15

1. Relative interest rates – this influences the flow of hot money (money that flows between countries to earn higher interest) between countries. If the Uk increases its interest rates, then the rewards for saving in the Uk are higher, so a flow of hot money will occur – which are foreigners demanding more £ to make a profit. 2. Net trade – If Uk exports are very competitive, then more will demand the £ in order to buy our exports. This will appreciate the currency. If the Uk is importing a lot into the country, then we’re having to sell our £ in order to buy foreign currencies and this will depreciate the £ due to a larger supply of it out on the market. ^Equally Net investment like FDI will also influence the value of your currency. **WPIDEC - weaker pound imports dearer, exports cheaper 3. Speculation – Traders buy a currency expecting it to go up in value soon. They will then sell the currency once it is higher to make a profit. This can drive short-term fluctuations depending on how confident traders are in the future of a currency.

Answer 16

Changing interest rates – if the central bank wants to appreciate the value of the £, it will raise interest rates to attract hot money into the country. Hot money is where more people demand the £ in order to make a profit through interest. Buying and selling currency in the foreign market – The Central Bank can change the demand and supply of its currency through its currency reserves. These reserves are made up of both their own currency but also other foreign currencies. If they want to depreciate the £, they will sell their own currency and buy others. However, if they want to appreciate the £ they will buy more £ using their foreign currency reserves. Improve the competitiveness of your countries exports - for example the government could subsidises domestic firms in order to supply more at a cheaper price, this will increase the demand for our exports and thus increase the demand for the £. The more demand there is for the £ the more it will appreciate.

Answer 17

The J-curve shows how an initial depreciation of your currency will actually worsen your current account before it improves it, due to a difference in elasticities in the short-run and long-run. *draw diagram* ^In the short-run, demand elsewhere is inelastic for many different reasons: time lag for consumers to notice the change, companies already in a contract with other firms, etc. Therefore the current account will become worse as your currency is worth less, yet you are still importing lots and not exporting much - so your currency cant buy you as much imports as it once was able to, costing you more. However in the long-run, firms are able to respond to the change in the exchange rate and start demanding your exports as it is cheaper for them. Therefore the current account will improve as more foreign firms will start to demand the Uk's exports, so more firms will need to buy the £ in order to buy the export.

Answer 18

Marshall Lerner condition - states the conditions that must be met for a depreciation of your currency to actually improve the current account. The equation: PED of imports + PED of exports > 1 ^If added together they are both larger than 1, then your current account will improve. However if it's not larger than 1, then the depreciation of your currency will actually worsen your current account.

Answer 19

Economic growth / employment – Net exports are a component of AD. Therefore, a depreciation (that results in an increase in exports) will lead to economic growth. Unemployment is therefore likely to fall as more labour is a derived demand and thus more workers are needed to produce the increase in goods demanded. Whereas an appreciation may have the opposite effect. Inflation – in the currency depreciates, cost-push inflation is likely to occur as the price of imported raw materials has now increased. Net exports are also a component of AD and therefore if a deprecation occurs this may result in an increase in exports which will lead to an increase in AD – possibly leading to demand pull inflation. An appreciation will have the opposite effect. FDI (foreign direct investment) flows – depreciation of a currency makes it cheaper for a foreign company to invest in the country and therefore FDI will increase. This is because the money invested is worth more when the currency has depreciated. An appreciation will have the opposite effect.

Answer 20

International competitiveness – how well a country's good competes in the international market. Competitiveness can change overtime.

Answer 21

1. Relative Unit labour costs – the total wages in an economy divided by the total output. This will show much labour needs to be paid in order to create 1 unit of good. You can then compare this figure with another countries. If the Uks labour cost is lower than Frances, then it is more competitive in the global market. 2. Relative export prices – this is the ratio of one country's export prices relative to another. Lower relative export prices indicate greater competitiveness as it means that country produces at a lower price in the international market. ^Relative productivity rates influences this

Answer 22

Relative rate of inflation – inflation rises the price of goods / services in a country. If inflation increases in a country, then other people who were buying their exports now have to pay higher prices for them, this worsens competition as now your exports are not as competitive. Relative productivity – a rise in output per worker relative to other countries will lower your production per unit costs and thus increase competitiveness from your lower prices. Relative amounts of investment - if your country has a lot of investment, then more output can be produced at a more sustainable rate in the long-run. This will maintain confidence in the market.

Answer 23

Export led growth – (x-m) is a component of AD, and therefore an increase in exports creates more AD in the economy, leading to more economic growth. Unemployment decreases – economic growth leads to an increase in employment as labour is a derived demand. Standards of living improves – as incomes rise when economic growth occurs, households gain more purchasing power and therefore can access a wider range of goods / services that they couldn't once afford.

Answer 24

1. Trade deficits – uncompetitive countries may have to import more than they export, worsening their trade balance. 2. Unemployment – uncompetitive industries may shed jobs as firms offshore elsewhere.

Answer 25

Absolute poverty – individuals cannot afford the basic goods needed to live a life worth living. These necessities include: shelter, food, water, etc. In 2022, the World Bank described absolute poverty as anyone living on less than $1.90 a day. This type of poverty is more prevalent in developing nations. Relative poverty – where household income is a certain percentage below the median average household income in the country. The Uk defines relative poverty as a household living with less than 60% of the median house's income. In 2022, 22% of the Uk was in relative poverty. This type of poverty is more prevalent in developed nations.

Answer 26

1. Economic growth – there is a strong correlation between economic growth and falling absolute poverty rates. This is because economic growth generally leads to higher household income. 2. generosity of the welfare system - if the welfare system is fairly generous in a country, then when people lose their jobs or come into hardship, this wont automatically mean that they will become homeless, etc. The welfare system may support families to get back on their feet and make sure they can still afford basic necessities like food, shelter, etc. ^This protects the most vulnerable people in society – for example, pensioners, the unemployed, children, etc. 3. The business cycle - this is the natural fluctuations of an economy into boom and recession - it represents an on going fluctuation in GDP. ^During the recessionary stage of the business cycle, unemployment will be higher and confidence will be low in the market, and less tax revenue collected. it is at this time, absolute poverty within your country is likely to be at its highest.

Answer 27

1. legislation - like the minimum wage. An introduction of the minimum wage will lift many out of relative poverty as now they are guaranteed a higher wage, and will be able to afford more goods with their money. 1 in 9 workers in the Uk receive the minimum wage. 2. education / apprenticeships / job creation schemes - better quality education will provide better job prospects for future generations, this will lead to higher paying jobs and lift them out of relative poverty. Equally, job creation schemes (like supply-side policies) will provide families with a more stable income that they will be able to use to pay their bills. 2. Unemployment – increased labour market flexibility has led to an increase in 0-hour contracts and part time jobs – these are unreliable in the long-term scheme of things. This can affect workers when there are times of no guaranteed work. A short number of hours worked can lead to individuals falling behind in debt repayments or rent, which worsens their issue.

Answer 28

Wealth inequality – the difference in the amount of assets owned by households. Income inequality – the difference in the income households generate. Income can be in the forms of: rent, wages, interest and profit.

Answer 29

1. Lorenz Curve 2. The Gini Coefficent

Answer 30

The Lorenz curve – is a graph that shows the unequal distribution of income. The curve separates up the population by their income. *draw the diagram* ^ in this Lorenz curve, the poorest 20% have 5% of the total income in the economy. The poorest 90% have 55% of the total income in the economy – this therefore means (by reduction) that the richest 10% have 45% of the total income. The line of complete equality is not the goal, as this is socialism – this would remove incentives to work as everyone is paid the same amount. However, the goal for the Uk government is to move the Lorenz curve closer to the line of equality than what it is currently at. What is regarded as an acceptable level of income equality is a normative decision that the government must make themselves. ^shift in the Lorenz curve closer to the line of quality. this now means that the poorest 20% of society now make up 9% of the total income.

Answer 31

The Lorenz cure can be used to calculate the Gini Coefficient. This measures the level of income inequality – the closer the value to 1, the worse the distribution of income is. A value of 0 represents absolute equality (socialism) & 1 represents absolute inequality. The Uks Gini coefficient in 2022 was 0.35. ^A represents the area between the line of complete equality and the Uks Lorenz curve. It can be calculated with this calculation: Gini Coefficent = A divided by A + B

Answer 32

Difference in style of governance - a heavily interventionist government focused on Keynesian economics will be more willing to intervene to tackle wealth and income inequality than a neo-classical laissez-faire government would be. Neo-classical economist may see wealth / income disparities as necessary in order to encourage individuals to work hard and innovate. ^Relative generosity of your welfare system ^Difference in education ^Difference in healthcare These factors will all effect individuals ability to take part in the economy. Different population sizes – a larger population will mean more tax revenue, and therefore more re-distribution from the government. Presence of trade unions – countries with strong trade union membership tend to have higher levels of income. If trade unions are not present, the exploitation of workers becomes easier – and therefore resulting in lower wages. -corruption / war

Answer 33

Income inequality will change as a country goes through the stages of economic development / industrialisation. As industrialisation is in its early stages, income inequality becomes worse – as some workers change their jobs to more efficient areas, while others stay put – this worsens the gap between the two. However, there will reach a point where the government will be able to intervene from their higher levels of tax revenue generated from this industrialisation. This process is known as the Kuznets curve.

Answer 34

Under capitalism inequality is inevitable. Due to its meritocracy nature, workers with more complex skills receive higher wages. Workers with little skills receive smaller wages. Individuals with higher income will be able to buy more assets, as so on. This disparity ensures there will always be a gap between incomes in the economy. This inevitability within capitalism is considered an incentive to work harder / become more productive in your production – as this will raise your income. Therefore, capitalism needs checks and balances to limit the full extent of income inequality due to happen – calling for government intervention.

Answer 35

The Human development index – contains 3 factors to measure development and compare living standards between countries. It looks at multiple factors and therefore doesn't focus on just the economy when considering a country's development. The index ranks countries on a score from 0-1. The closer to 1 your country is, the higher amount of economic development you have. 1. Life expectancy – is designed to consider the overall health of a state. 2. Literacy rates – calculated through the average mean years of schooling. 3. GNI per capita – an economic measurement to capture the standard of living in a country.

Answer 36

Includes measurements from 3 of the most important factors that determine someone's life: health, education and money. It is widely recognised as a good measurement and therefore meaningful comparisons can be drawn between different countries.

Answer 37

The HDI only looks at quantitative variables, not qualitative. There are other factors we'd regard as important for a country's development that cannot be measured in such way. For example: -freedom of speech / freedom of expression - feeling of safety -political freedom -happiness levels Through the HDI alone, countries like Russia can seem very developed on face value (HDI of 0.82) , yet we know Russia to lack some qualitative aspects of development - like freedom of the media.

Answer 38

The “inequality adjusted” HDI index (IHDI) - created to deal with the lack of information the HDI provided on inequality in a country. The IHDI will be equal to the HDI when there is pure equality, but falls below the HDI as inequality emerges. It therefore represents the loss in potential development for individuals in a country.

Answer 39

1. The proportion of the population with access to clean water 2. The proportion of the population with access to the internet 3. Literacy rates 4. Employment rates

Answer 40

Economic growth measures a change in real GDP (output in the economy). Whereas development in an economy looks at a wider range of variables. development focuses on both qualitative and quantitive development within the economy.

Answer 41

Economic growth has a positive relation to development in a country. The economy needs to grow in order for development to occur. Therefore, economic growth is a necessary condition for development, yet not always sufficient. in most cases, economic growth must occur for development to be funded.

Answer 42

primary product dependency volatility of commodity prices savings gap: Harrod-Domar model foreign currency gap capital flight demographic factors debt access to credit and banking infrastructure education/skills absence of property rights

Answer 43

Primary product dependency – some countries heavily rely on the export of a single good to contribute towards their overall GDP. if this good is inelastically demanded, with little associated substitutes, then the country's GDP will grow as they have the ability to raise their prices, and encourage both FDI and domestic investment due to the supernormal profit being generated. For example, Saudi Arabia oil industry. This will help boost real income in the country, and tax revenue that can be used by the government to fund pension schemes, hospitals, etc – all contributing towards the quality of life within the country. Yet its important to bare in mind that oil is a hard commodity that can be stored and is non-perishable. whereas soft commodities may see more volatility to their prices, as usually have more substitutes and must be sold and consumed within a given time frame - giving buyers more bargaining power. If your primary product is elastically demanded, then you wont be able to raise price as much and make a huge supernormal profit. The good is more likely to be vulnerable to price fluctuations and changes in consumer preferences abroad. For example, the demand for carrots. if you raise the price of carrots, people will just shift demand onto broccoli. ^This will all have a negative impact on vital infrastructure, etc in the economy – possibly setting development back.

Answer 44

Volatility of commodity prices – Due to the inelastic nature of the demand of commodity goods (as they are essential items needed for living) and the inelastic supply of commodities (as crops take time to grow, there is a time lag – or oil cannot simply be extracted as soon as price changes), small changes in demand can lead to great effects on the price. If you are a country who exports a lot of commodities to other countries (like Bolivia, whose main export was 60% commodities) a small rise in demand for said good, will lead to a great increase in GDP for that country. This money can be pumped back into the economy to develop its country. ^yet if you mainly export soft commodities, then your income is more exposed to fluctuations. For example: weather conditions, substitutes abroad, etc.

Answer 45

The savings gap is a major constraint on growth and development within developing countries. In developing countries, there are high rates of absolute poverty, and low wages due to minimal legislation. Countries with little income have little disposable income to save, as the lower your income, the stronger your MPC is. Yet as there's not a lot of money being deposited at the banks, the banks only have a limited amount of money that they can now give out in forms of loans. This creates a viscous cycle as now the banks cannot fund investment projects that could've been used to boost income - acting as an injection into the circular flow of income. ^This limits access to credit, creating a financial barrier to entry into a new market. Therefore, increased saving will lead to the bank being able to increase the amount of loans they give out. This increase in access to credit will foster innovation, and such firms will eventually pay interest to the banks too. Infrastructure may improve, attracting more FDI. Human capital may advance due to more training programmes, etc.

Answer 46

Foreign currency gap - the currency gap is where currency outflows are constantly higher than currency inflows. This usually occurs when a country is reliant on buying imports, yet isn't that competitive with their exports - so they're constantly having to sell their currency to buy their imports, yet also not getting a lot of demand abroad for their currency due to their uncompetitive exports. This means their terms of trade will be awful and unsustainable. The central banks maybe forced to use their exchange reserves to continue buying vital imports – creating instability. Or they even may have to take out a loan from the IMF in order for mass poverty to not occur. This again is unsustainable as it doesn't address the root of the problem and such loan will have to be paid back in a different currency to their own. Could combat the foreign exchange currency gap by: Making your exports more competitive on the global market. This can occur through either investing in infrastructure, training, schooling, etc. The more productively efficient and specialised the country becomes, the higher the demand for their exports due to the increasingly lower price. This will improve their terms of trade, and thus the currency gap. Appreciate your currency - as you import a lot of you're goods, you may want to appreciate your currency, which enables you to buy more goods with your currency - it gives your money more purchasing power. This doesn't solve the root of the problem yet it des mean that not as many sacrifices will have to be made in terms of what you import now.

Answer 47

Capital flight - when foreign investors withdraw their profit or capital from a country and invest it elsewhere instead. This is due to speculation / fear that it will no longer be profitable in the foreseeable future if it remained in the country it is currently in. This can be prompted by: 1)New Government - capital flight took place after Liz Truss' mini budget 2) War / economic sanctions - capital flight took place in Russia after they invaded Ukraine. Much of previous Russian investment was moved to the London property market instead - as this was viewed more stable. capital flight depletes a country's available resources and worsens their access to credit. This usually prompts a domino effect where other investors will follow and also withdraw their capital / profit from the country. Capital flight may result in: ^job losses for locals ^less tax revenue ^less production

Answer 48

Demographic factors: population growth, age, workforce skills, etc. A dependency ratio refers to the amount of people dependent (like children, pensioners) to the total working age population. Many developing countries have high dependency ratios, due to: ageing population, brain drain of younger skill full workers, the nature of which population growth occurs. ^if the population is growing and schools, healthcare, etc are able to keep up with this population growth, then more will enter employment, and there will be more money circulating the circular flow of income - AD will rise, and a multiplier effect will occur - as one persons spending is another’s income. ^Yet if the population is growing, and infrastructure and services and unable to keep up, then the dependency ratio will worsen - as there’s less services to help people enter employment, etc. ^age: China - one child policy.

Answer 49

financial institutions enable individual firms to borrow money which can be used for investment and generate growth. Limited access to credit and banking services can hinder investment, entrepreneurship, and economic growth.

Answer 50

good infrastructure reduces business costs and attracts foreign direct investment. Developing countries have such poor infrastructure that it makes it difficult to generate economic activity, as its hard to specialise due to poor links between the industries. This is one of the reasons why China has invested so heavily in infrastructure projects in Asia and Africa to unlock economic potential. Poor infrastructure means firms have a relatively inelastic PES as they will always have a time lag in their ability to move their good between its different stages of production. poor infrastructure also means that firms cannot benefit from specialisation / division of labour as much as they would've been able to, had they been able to transport their goods easier to these different companies who specialise. Equally may create market failure in the labour market - geographical immobility of labour.

Answer 51

Education / skills – Higher education and apprenticeships means a better quality of human capital, which will in turn increase productivity and enable specialisation to occur, resulting in higher output and thus higher incomes. A higher income can be used to fund a better quality of life.

Answer 52

Absence of property rights –In many countries, property is the main household asset which can be used to secure loans or to generate a secondary form of income. Weak properties rights can therefore deter investment, as individuals and investors have a lack of security over their assets.

Answer 53

Geography - Geographic location and climate conditions can impact agriculture, trade, and vulnerability to natural disasters. it is harder for landlocked countries to generate economic growth. Often transportation & administration costs are higher than those with access to ports, which increases the costs of production & decreases international competitiveness. Government / Corruption – often money intended for investment is sent elsewhere by corrupt politicians, resulting in a lower level of investment. Corruption can also lead to some groups gaining more funding than others due to bribery or lobbyists of officials (like TNCs) resulting in projects that aren't as effective as the ones that would've prevailed if the market wasn't rigged and remained competitive. War – conflict destroys infrastructure, disrupts supply chains and often reduces the post war supply of labour. Conflict shifts the production possibility curve inwards. This may also worsen morale within the country and lead to social conflict within their own borders. Human Rights - Political stability and the rule of law are essential for attracting investment and fostering economic growth. A respect for human rights can contribute towards social cohesion which contribute to economic stability and social progress. Respect for human rights and freedoms is therefore closely tied to social progress and economic development.

Answer 54

1. trade liberalisation 2. promotion of FDI 3. removal of Gov. subsidies 4. floating exchange rate 5. microfinance schemes 6. privatisation

Answer 55

Trade liberalisation - removal of barriers to international trade, like removing tariffs, protectionist policies, etc. Trade liberalisation will allows for individual countries to specialise in an area of production that fits their geographics better. For example, Taiwan is the main producer of chips needed for mobile phones. They are able to specialise in this industry as their natural resources allow them to do so. As a result, electronics make up 50% of their exports. They are able to experience these due to the natural resources they possess.

Answer 56

FDI (foreign direct investment) - involves foreign companies investing in another countries economy, typically through establishing a business there are buying assets. This would bring in more capital, technology and expertise into the country, thus resulting in a boost of production - increasing output, and productivity due to their previous experience in the field. FDI will also create jobs for locals, contributing towards the national flow of income.

Answer 57

Removing or reducing government subsidies can lead to a more efficient allocation of resources in the economy. This will increase competition in the economy, leading to greater productivity as firms must stay competitive to survive. It may result in more companies opening up in the market because there isn't a massive government funded company present anymore - there presence in the market would put private investors off as they cannot compete with the large amount of funding and capital the government would have in comparison to them. This would result in more employment and greater profit.

Answer 58

A floating exchange rate system allows a currency's value to fluctuate based on market forces. If your currency appreciates then this will be good for countries who import a lot of goods as now they can afford more goods with their money.

Answer 59

micro finance schemes - small loans given to low income earners or businesses. An extremely successful policy in places like Bangladesh, as it helps to break the poverty cycle. it empowers individuals and supports new or struggling businesses to promote new ideas / etc.

Answer 60

privatisation - where state owned companies are sold to private firms for competition. May increase competition leading to an increase in output, employment & incomes.

Answer 61

- development of human capital - protectionism - managed exchange rates - infrastructure development - promoting joint ventures with global companies - buffer stock schemes

Answer 62

Investment in education, training, and healthcare to enhance the skills and well-being of the workforce. This would raise the quality and quantity of output in the economy. it will also boost household income, and create a multiplier effect in the country. This will help to improve innovation and reduce poverty and inequality.

Answer 63

Protectionist policies include tariffs, quotas, and trade barriers designed to protect domestic industries. This will protect domestic industries from foreign competition, and thus better protect domestic jobs and the national flow of income, as less withdrawals.

Answer 64

Investment in transportation, communication, and public facilities. This reduces the cost for businesses due to the external economies of scale now created. This will attract more FDI and private investment into the country, if trade can become an easier process. This will have positive effects on employment and household income - leading to their associated multiplier effects. An accelerator effect will also occur - where an expected rise in AD will lead to an even bigger rise in investment.

Answer 65

joint venture - a contractual agreement between a number of firms to combine their resources and expertise to achieve a particular goal. This will allow domestic firms to get access to a wider variety and range of resources and human capital / ideas. Some countries (e.g. India) block foreign ownership of firms (FDI). Joint ventures (JV's) are a way that firms can get around that. JV's can increase trade, output, employment & incomes

Answer 66

Buffer stock - occurs when the government (or companies) buy up reserve stocks when supply is in a surplus, to then be sold at a later date when there is little supply in the economy - this ensures price stability. Price stability ensures income stability. Equally, it will protect consumers and farmers.

Answer 67

o industrialisation: the Lewis model o development of tourism o development of primary industries o Fairtrade schemes o aid o debt relief

Answer 68

The Lewis Model - describes an economy by having two sectors: agriculture and industrial. The Lewis model argues that productivity and incomes are higher in the industrialised sector, and therefore a country should slowly move towards increasing this sector of the economy. A process where surplus labour from the agricultural sector moves to the industrial sector, driving economic growth. ^This theory assumes that industrial sectors are very labour intensive and therefore would hire more - in reality it is more capital intensive.

Answer 69

Rising global income has increased the demand for tourist attractions. By developing your tourist attractions, this will attract more foreign visitors to visit the country, and spend at the: hotel ,on food, restaurants, activities, etc. This will generate foreign exchange reserves and more demand for your currency. it will also create employment opportunities. ^However, this makes a country very vulnerable to a changing global market - you will now be more exposed to external shocks or a shift in legislation abroad. For example: many brits visit sain for their holidays however since leaving the EU, it is expected this will fall - hurting the Spanish tourism trade.

Answer 70

Focusing on the growth of primary sectors like agriculture and mining. For example, specialising in copper and become known for it globally. Developing these primary product industries is very profitable due to their comparative advantage.

Answer 71

Financial assistance provided by developed countries to support economic development in poorer nations. This allows for money to be pumped into the countries infrastructure, medical service, etc - if the aid is enforced properly. ^Critics argue that aid breeds dependency, corruption & disincentivises individual responsibility

Answer 72

This involves forgiving or reducing the debt of developing countries to reduce their financial burden. Many developing nations have borrowed significant sums of money in the past which have to be repaid (with interest) over a long period of time. The opportunity cost of these repayments is significant & often includes -Loss of infrastructure development -inability to create a welfare system -Investment in human capital/education More recently there has been significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so that they can focus on building their economies

Answer 73

The financial market is the trade of financial assets – such as stocks, bonds, currencies, etc.

Answer 74

1. Facilitate saving – storing money for future use is essential for firms (or even households). This also provides a pool of money that financial institutions can now lend from – one person's saving is another person's borrowing. 2. Lend to businesses / individuals – access to credit is a key way to facilitate economic growth. Being able to borrow money speeds up consumption or investment, as it allows firms / individuals to pay something off over an extended period of time. 3. Facilitate the exchange of goods / services – each purchase of a good / service requires the move of money between two parties. Financial markets provide multiple ways for this exchange to be made – for example, credit cards, etc. 4. They provide forward markets – a forward market is one that is achieved through hedging -agreeing a price now for a transaction in the future. This provides price stability for an investment (or consumption) and enables investors to make a profit by speculating on future prices. 5. Provide a market for equities – an equity is the value of a share. Financial markets facilitate long-term investment by providing platforms that connect buyers and sellers – for example, the stock market.

Answer 75

o asymmetric information o externalities o moral hazard o speculation and market bubbles o market rigging

Answer 76

Asymmetric information – many financial products are complex and difficult to fully understand. This was one of the main reasons for the 2008 financial crisis – where banks were selling off bundle packages which included “toxic assets” - mortgage loans made to people unlikely to pay it back. Individual banks did not know to what extent other banks were affected by these toxic assets and held back from lending to each other as a result. This made credit scarce and more expensive. Mortgage sellers also often understand the effect of a change in interest much more than the people they are lending the money to. This can lead to market failure as consumers /investors struggle to make an informed, rational decision that would maximise their utility, if they have only half the information needed present.

Answer 77

The financial sector is a huge proportion of GDP, especially for countries like England who specialise in finance. Therefore when the financial sector is doing bad, the rest of the country will be doing badly - representing this negative externality of production. Banks may become more risk-adverse, and limit the amount of credit they're willing to lend, this will have a knock on effect on investment, and thus employment. A recession may begin to occur, and the government may need to step in - all representing the effects on 3rd parties when the financial sector makes a decision. Equally, when investors speculate on property prices, this will raise the price, making it harder for first time buyers to get onto the property ladder (negative externality) however may trigger a positive wealth effect amongst people who already own property (positive externality).

Answer 78

Moral hazard – moral hazard is where there is a larger incentive to take a risk because they know someone else will face the consequences. For example, to ensure economic stability, there is a tacit agreement between the government and banks that they will step in to save the bank from going bankrupt, as this would have a large effect on society that the government will want to prevent. This is especially when bad when we consider how bankers are paid. During good years, where the bank makes a profit, they will receive huge bonuses. However, in bad years, even if the bank lost money, they would still receive a huge salary. Therefore, they may as well take the risk – as either way they are on good money. This can be known as the “too big to fail” problem – bankers know that the bank is too much of an integral institute for the government to just let it fail. However, the government has started to combat the issue of moral hazard by stating they would no longer bail out an investment bank if they went bust, but they would still bail out a commercial bank. As it is investment banks who try to make the riskier loans, this should remove the majority of moral hazard present in the market as they will now have to weigh up the benefits and losses more carefully.

Answer 79

Market bubbles / speculation – a market bubble is where the price of an asset rises due to speculation that it will rise in the future. More investors therefore demand it as they think they will receive a profit in the future. This inflated price therefore well exceeds the true intrinsic value of the good. Once belief sets in that the asset has reached its peak value, investors will try to quickly sell, causing the bubble to pop – and the price to fall. S the bubble bursts there is a fall in confidence and AD is reduced in the economy – usually due to a negative wealth effect occurring. For example, there was a housing bubble in the USA that is partly to blame for the 2008 financial crisis. Mortgages were made to people who were unlikely to pay them back – NINJAs. People with no income, no job and no assets. Banks then packaged these loans alongside other loans and sold them off to other banks. Many were bought by financial institutions that did not realise just how poor the credit worthiness of the original mortgage borrower had been, and to what extent their bundle was exposed to this poor loan. However, the government can prevent the full impact of a market bubble burst on integral assets – like housing. For example, the government may introduce a maximum price on rent. This will protect renters from the market bubble stripping them of their money.

Answer 80

Market rigging – illegally controlling the financial market for personal benefit. For example, this took place over the exchange rate in US and UK banks in 2014. Rigging works if traders get confidential information about their client's activity that is about to take place and could change the value of a currency. The traders can then place their own orders / sales in order to profit from the movement in the exchange rate. Tight knit groups of bankers colluded in 2014 and shared information on their clients so they could all generate a profit. However, the FCA (Financial conduct authority) enforces regulation to stop such event taking place. The bankers colluding in 2014 meant the banks they were working for were fined £2.6 billion for rigging the exchange rate.

Answer 81

The central bank plays a vital role in maintaining stability in the financial market. 1. Create monetary policy – the bank of England can influence AD in the economy by influencing the money supply. The Bank of England has a monetary policy committee (MPC) who meet 8 times a year to set policy. Their policies involve: interest rates and quantitive easing. The Bank of England therefore has its own goals on inflation to keep it at 2%, and their own goals to keep the interest rate to 2%. Any change to the base rate of interest will have a ripple effect in the economy. Equally the government may want to increase demand by increasing the monetary supply – they can do this through quantitive easing. 2. Banker to the government – the government sets the annual budget but it is the central bank who manages the tax and spending. 3. Banker to other banks – as a method of last resort. The interest rate for commercial banks to lend from the bank of England is purposely kept a little higher than the market rate to make sure it is a method of last resort. Commerical banks are able to borrow from the bank of England if they run into short-term liquidity issues. Without this help, they may go bankrupt, leading to a ripple effect of instability in the market, and a potential loss of savings for many households. 4. Regulating the banking industry – commercial banks must be regulated due to the high levels of asymmetric information present in such a complicated field, regulation is therefore necessary to protect consumers. The main example of their regulation is they require a "reserve ratio” - the central bank requires that all commercial banks holdback a certain ratio of the money deposited to them. This will better protect banks from going bankrupt as they will always have a sum of money to fall back on.

Answer 82

Capital expenditure – spending (investment) on public infrastructure or capital equipment. For example: HS2, building new schools, etc. Current expenditure – include your daily payments needed to run the public sector / spending on things you need now to provide public services. For example: wages for teachers, buying medicine for the NHS, etc. Transfer payments – payments made by the government in which no corresponding good / service is received. For example: maternity leave, pensions, etc.

Answer 83

1. Changing incomes – countries with low incomes have low tax revenue and therefore cannot fund as much public expenditure. As income in an economy increases, so will a governments tax revenue. Citizens will demand more public service in return for their higher taxes. 2. Differences in age within your population – many developed countries have a low birth rate, which means an ageing population. Therefore, more government spending will be needed in terms of pensions, etc. This may also occur in developed countries due to life expectancy improving in recent years, as a result of better medicine and nutrition. 3. Economic crisis's - In response to economic crises or changing economic conditions, governments may increase spending to stimulate growth or reduce spending to control deficits. 4. change in ideology of a government 5. change in business cycle - Keynesian economics

Answer 84

Productivity and growth – higher public spending in the economy may negatively impact productivity in the economy (namely productive efficiency) as there is no longer the profit incentive present to cut cost in order to be more competitive, as there is no competition in the public sector. This presents the issue of moral hazard within these industries financed by the government – they can produce at an inefficient level as they know the government will bail them out / continuing paying. However, Higher levels of public expenditure on investments like education, healthcare, and infrastructure can enhance human capital and physical capital, thus contributing to productivity and long-term economic growth. The profit incentive in the private sector doesn't always seem to be the most efficient option either – there are many cases where a private firm has taken over a publicly owned firm and become less efficient. For example: railway in the Uk.

Answer 85

Living standards – an increased spending on facilitates like schooling, swimming pools, gyms, etc will improve living standards as now more of the population can access such facilities. Membership is often free or heavily subsidised. Increased spending on education will also improve living standards in the long-run due to better job prospects. However, although this may lead to an increase in living standards for this specific generation, larger public expending will contribute towards the government budget deficit, which in turn contributes towards the national debt. The government has to pay interest on the national debt each year, and therefore may have to introduce austerity measures further down the line for future generations in order to reduce this debt.

Answer 86

Crowding out – excessive government spending can lead to crowding out. This will only occur if the spending is financed through loans from the bank of England (which is the majority of the case – as the government rarely makes a budget surplus). An increase in government borrowing will raise the interest rate on all other loans, thus making it more expensive for private firms to take out their own loans. This can be deemed government failure, as it fails to raise AD in the economy – higher government spending just replaces private spending, rather than also raising it. However, crowding maybe unlikely, as an increase in government spending will have a large multiplier effect, which in turn causes a higher level of real GDP.

Answer 87

Levels of taxation - The level of public expenditure is often linked to taxation policies. Higher public expenditure may require higher taxes, which can impact disposable income and economic incentives.

Answer 88

Equality - Public expenditure can reduce income inequality by providing social support to disadvantaged groups and funding education and healthcare accessible to all citizens.

Answer 89

Progressive tax – As income rises, a larger percentage of tax is paid. Therefore, the marginal rate is higher than the average rate. For example: income tax – where the top earners in the Uk by 45%. Regressive tax – As income rises, a smaller percentage of your income is paid in tax. Therefore, the average rate is larger than the marginal rate. This applies for any indirect tax that doesn't take into account your income. For example: VAT. Proportional tax – the percentage of income paid in tax is constant. Bolivia uses this system, and the tax rate is 13% for all income brackets.

Answer 90

Incentive to work – the higher the tax rate, the lower incentive there is to work. This is because the harder you work, the less you get for it, as the tax rate is so high. Tax revenue – the Laffer curve illustrates the relationship between increasing tax rates and tax revenue. As tax increasers, revenue will initially also increase. However, a point will be met where tax is too high and now people are disincentivised to work, as they're not keeping much of their income anymore. This will result in a gradual decrease in tax revenue over time. More people will be tax avoiding or moving their income elsewhere. If the tax rate is 100% no one will be willing to work, and if its 0% no revenue can be collected at all. *diagram* ^ As you can see, B and C both collect the same amount of tax revenue, yet at a completely different percentage. Therefore, if the government can figure out where the Laffer curve is, they may tax the lower rate, as they know they know they’re getting the same amount of revenue, and they’ll be more popular. However, the ideal position, is to tax the top peak of the Laffer curve, where revenue is at its highest. However, it is very hard to know the shape and size of the Laffer curve. Furthermore, some economists skepticize over whether the Laffer curve really exists.

Answer 91

Income distribution – taxation can be used as a tool for income distribution. This will help tackle inequality in the country, yet also relative poverty rates. This would be achieved through a progressive tax rate, as then more tax will be collected from higher pay bracket earners, which can be passed back onto lower pay bracket earners. However, sometimes the benefits of progressive taxes are reduced by other regressive taxes present in the economy. Therefore, the full benefit of a progressive tax cannot be fully enjoyed.

Answer 92

Real output and employment – taxation is a form of withdrawal from the circular flow of income. As the tax rate increases, more is withdrawn. This will likely have a negative multiplier effect, as people have less disposable income, and will be more cautious/aware of their spending habits / patterns. As labour is a derived demand, less AD in the economy will result in less workers being needed – causing unemployment. However, this outcome can be changed through high government spending. As the government now has more tax revenue, they have more money to finance projects in the economy. For example: supply-side policies that would need manual labour to hire, like builders, architects, etc. They also may use this higher tax revenue to hirer more people to work in the public sector – like more teachers, nurses, etc.

Answer 93

The price level (inflation) - Indirect taxes, such as sales taxes, can influence the price level by increasing the cost of goods and services. This can lead to higher consumer prices.

Answer 94

The trade balance – An increase in taxation will take more of peoples disposable incomes away. This is likely to reduce the demand for imports, as typically higher earners demand more imports as they are after as wider variety. This may consequently improve the trade balance (exports – imports).

Answer 95

FDI flows (foreign direct investment) - Tax policies can influence FDI flows. Countries with low corporation tax may attract more foreign direct investment from businesses and investors. For example: Ireland has a low tax rate at only 12.5% - this has attracted many big firms to set their headquarters in Ireland. For example: google and Facebook. However, it is said that many factors must be taken into account when deciding where to invest in. Ireland does have attractive corporation tax rates, yet they are also an English-speaking country with good education and public infrastructure – this will add to the appeal of investing in Ireland, not just the rate of tax.

Answer 96

Automatic stabilisers – These are automatic fiscal changes as the economy moves along the business cycle. For example: an automatic fall in tax revenue during a recession. This doesn't require any intervention from the government it just happens automatically. Automatic stabilisers help to moderate the peak and trough of the business cycle. For example, moderating a boom – as rapid economic growth occurs, tax revenue will rise from higher incomes present, this means government spending will fall, and the Gov budget will improve. This should also help tackle inflation as its moderating the price level. ^The full benefit of an automatic stabiliser depends on if the stabiliser is able to operate freely or not. The impact depends on the relative generosity of the welfare system – if the government has put a cap on the amount of welfare payments, then the automatic stabiliser cannot operate to its full potential during a recession.

Answer 97

Discretionary fiscal policy – when the government decides off their own imperative to introduce a fiscal policy.

Answer 98

A fiscal deficit occurs when the level of government spending is greater than the government tax revenue in any given year. The national debt is the accumulation of all previous deficits. The deficit in one year adds to the national debt from previous years

Answer 99

cyclical deficits - occurs due to the stages of the economic cycle, a deficit occurs when the economy is in the recessionary stage of the cycle. Government receives less tax revenue due to incomes falling and spending decreasing - poverty rates and unemployment is rising which will call the need for more government spending. structural deficit - This is a deficit which is due to an imbalance in the revenue and expenditure of the government, so it exists at every point in the business cycle. These deficits may be caused by a widespread tax avoidance culture, or poor governance.

Answer 100

1. state of the economy / business cycle - Governments are likely to spend more during recessions. This is to try and stimulate the economy. Spending might be increased on welfare payments, since more people will be unemployed and on low incomes. Moreover, tax revenues from income tax and VAT will be lower, since people will be earning and spending less. 2. political changes - If political priorities change then the size of the fiscal deficit can change e.g. after the UK Government has spent billions in rescuing the economy after the Global Financial Crisis of 2008 they prioritised austerity with the focus of eliminating the deficit. 3. unexpected events - Many unforeseen events occur each year which require government support e.g. The Russian war on Ukraine started in February 2022 & by June 2022 the UK Government had spent £2.8 bn. in providing assistance (it is worth noting that much of this went to the UK military industry to pay for weapons which were donated to the Ukraine. This increased UK GDP).

Answer 101

Austerity measures - The Government must pay interest on the national debt, and therefore if it becomes too large, they may need to introduce austerity measures in the economy in order to combat its huge expense. ^ today's borrowing has to be paid back from tax revenue received from future generations. The greater the debt, the greater the burden on the next generation of tax payers.

Answer 102

1. fiscal policies 2. monetary policies 3. supply-side policies 4. exchange rate policies

global economy (paper 2) Flashcards

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