Macro Flashcards
(289 cards)
1
Q
income
A
look at what is learnt
2
Q
income measures
A
the flow of money a person or economy receives each year.
3
Q
assets
A
things you own
4
Q
wealth
A
the sum or stock of all your assets added up
5
Q
over time income can
A
turn into wealth, by buying assets
6
Q
step 1 in circular flow of income
A
Firms buy factors of production, like labour and land, from households. And in return, they pay households factor incomes, like wages and rent.
7
Q
step 2 in circular flow of income
A
Households spend the factor incomes on goods and services produced by firms
8
Q
income must =
A
expenditure = output
9
Q
Explain why national income equals national expenditure which equals national output.
A
The total spending (national expenditure) from households across the economy must come from the total income (national income) they earn. Households spend (national expenditure) on the total output (national output) of goods and services produced by firms in the economy.
10
Q
National output is equal to national incomes. So, if national output is rising then
A
national incomes must also be rising.
11
Q
real GDP is
A
a statistic that measures national output, it measures all the stuff really being produced in an economy
12
Q
examples of leakages/withdrawals from the circular flow
A
savings SIT
taxation
imports
13
Q
examples of injections to the circular flow
A
gov spending GIX
exports
investment
14
Q
leakages > injections
A
economy will shrink because money is leaving the circular flow - real GDP decreased
15
Q
injections > leakages
A
economy will grow, because money is entering the circular flow - real GDP increase
16
Q
leakages = injections
A
real GDP stays the same
17
Q
aggregate demand
A
demand for all goods in an economy added up
18
Q
components of AD
A
C + I + G + (X-M)
19
Q
on average percentages of each
A
C - 60%
I - 14%
G - 25%
X-M - 1%
20
Q
gross investment
A
Gross refers to the total amount (in this case, the total amount of the original investment).
21
Q
net investment
A
the value of investment after depreciation
Net refers to the total minus any deductions (in this case, the amount of depreciation).
22
Q
equation for net investment
A
Net Investment = Gross Investment - Depreciation
23
Q
When the price level increases,
A
real GDP decreases.
24
Q
when price level goes down it causes an
A
extension in AD, increase in real GDP
25
When the price level increases
there is a contraction in AD, real GDP decreases
26
what happens to consumption if disposable income falls?
Consumption is likely to decrease as disposable incomes have fallen and so people have less money to spend.
27
what will happen to the government if incomes decrease?
receive less money in income tax, value added tax and corporation tax
28
if C,I,G decrease then
AD will decrease, shift inwards to the left
29
incomes decrease then
AD shifts left
30
incomes increase then
consumption increase so AD shifts right
31
if C,I,G increase then
AD will increase, shift outwards to the right
32
AD decreases
left shift
33
AD increases
right shift
34
disposable income
the amount left over after paying your taxes
35
multiplier effect
is where an initial increase in injections leads to a larger increase in aggregate demand.
36
multiplier ratio
total change in real GDP ÷ initial injection
37
What is the UK’s multiplier ratio, as estimated by the Bank of England in 2016?
1.375
38
Downward Multiplier effect
An initial increase in withdrawals leads to a larger decrease in aggregate demand.
as the multiplier occurs and the injections are multiplied the withdrawals will also be multiplier shrinking the economy - shifting AD inwards
39
downward multiplier effect will mean that
firms make fewer sales
they will have to downsize and lay off workers
government revenue will decrease as firms cut back on workers as there is less taxation through income and spending. Income will decrease reducing spending further, reducing consumption and shifting AD further to the left
40
Benefits
a payment to unemployed or low income workers and they are shown as an increase in consumption
41
an increase in benefits will mean that
the government has less money available to spend on other projects
g to shift inwards
42
impacts on AD of an increase in benefits
investment - increase
consumption - increase
gov spending - decrease
43
intrest rates
The return on your savings
| extra money you will get from saving
44
when you are borrowing money an interest rate is
The percentage of your borrowing which you pay to the bank
45
increase in interest rates will mean that
saving will increase
| borrowing decrease
46
intrest rates increase, what effect will be had on consumers
save more - spend less consumption decreases
borrow less
and have less disposable income due to having today a higher rate on their borrowed money decreasing AD
47
increase in investment will have what effect on AD
AD will fall, shift left
48
intrest rates decrease, what effect will be had on consumers
increase in disposable income as they have to pay less return on their borrowing which means they will spend more
49
intrest rates decrease, what effect will be had on firms
cost of borrowing decreases so encouraged from investing
50
decrease in interest rates affect aggregate demand
Investment increases, Consumption increases, Aggregate Demand increases
51
what did brexit do to consumer confidence
reduced, people left less confidence about the UK future
52
consumer confidence = low
shift to the left
| as ppl save more and spend less
53
consumer confidence = high
shift to the right
| as ppl spend more and save less
54
what does increased confidence do to investment
increased investment - shidt outwards
55
what does decreased confidence do to investment
decrease - AD SHIFT inwards
56
the animal spirits are high investor confidence is
high meaning investment increases and therefore AD shifts right
57
what is the likely effect of an increased in house prices
wealth of household will increase
= called positive wealth effect
ppl will consume more as they feel wealthier = increase in consumption will increase AD shifting AD right
58
what is the likely effect of a decrease in house prices
Wealth Decreases, Negative Wealth Effect, Consumption Decreases, Aggregate Demand Decreases
59
what is the wealth effect in america
6% - house prices increase spending also increases
60
the wealth effect in europe is
amprox. 0%
61
An increase in the state pension will cause saving to ___. This will ___ consumption and ___ aggregate demand.
decrease, increase, increase
62
savings ratio is
what % of disposable income consumers will save
63
saving ratio formula is
savings / disposable income x100
64
working out savings using the savings ratio formula
saving ratio x disposable income
65
high savings ratio
consumers save more
reducing consumption
AD shifts inwards
66
low savings ratio
consumers save less
increasing consumption
AD shifts outwards
67
national wellbeing
measures how satisfied people are in their lives. it is a measure which incorporates things like income, health, environment and education
68
GDP
is the value of all the goods and services produced in a country over a specified period of time
69
economic growth
is simply the increase in the number of goods and services produced in an economy
70
PPP
purchasing power parity is used to compare the living standards between countries
£10 can buy you more in India than it can in the UK
71
what do we measure using GDP
national output
| all the stuff really being produced
72
what is nominal GDP measured using
prices
73
what is real GDP measured using
adding up the quantity
74
Economic growth can be defined as
an increase in real GDP
75
what does evidence suggest about the relationship between income and happiness?
positive
76
what is real GDP
adjusted for inflation
77
what is total GDP
total number of goods and services produced in an economy in a given time period
78
what is GDP per capita
GDP per person
79
value of GDP
monetary worth
80
volume of GDP
quantity of goods and services produced
81
what are limitations of GDP when comparing living standards
benefits fo EG may accuse only for a small proportion of the population
high GDP does not necessarily mean people are happier
82
measures of national income
GDP
GNP
GNI
83
what is GNP
value of goods and services produced by the citizens of a country both domestically and abroad
84
what is GNI
incomes of citizens of a country earned domestically and abroad
85
what is the Easterlin paradox
As income increases, happiness increases up to a point as people are able to afford important items like food and a home. However, the marginal happiness from each extra unit of income falls as people spend money on things they don’t need and which bring less happiness.
86
inflation
increases prices
87
deflation
fall in prices
88
disinflation
falling rate of increase
89
causes of inflation
demand pull
most push
growth in money supply
90
demand pull inflation is
demand pulls prices with it
91
cost push inflation is
high costs of production push prices up
92
growth in money supply
increases demand for goods
93
measures of inflation
CPI
| RPI
94
CPI
uses prices of a 'basket' of everyday goods that are compared over time
95
RPI
includes housing costs and uses arithmetic mean, which is why it gives a higher estimate of inflation
96
effects of inflation
creates uncertainty, consumers may be unwilling to spend - AD falls
loss of interventional competitiveness - exports fall
savings are now worthless
people on fixed incomes will see PPP decline
menu costs - firms need to update prices
shoe leather costs - consumers will have to spend more time and energy trying to find cheaper products
97
limitations fo CPI
prices could change due to changes in quality
temporary shocks can exaggerate inflation figures
a typical 'basket' of goods could be different for different groups of consumers
price rise for certain goods may induce a prise in demand for its substitutes, which is not entirely captured by CPI §
98
inflation target is
2% however following Brexit vote it has surged to 2.52%
99
bofP
is a record of all the transactions between one economy and its trading partners
100
components of BodP
current account
| capital and financial acccount
101
current account =
trade in goods and services + income transfers + current transfers
102
income transfers =
inflow and outflow of remittances to home countries
103
current transfers =
inflow and outflow of loans or grants
104
current account surplus
inflow > outflows
105
current account deficit
inflow < outflows
106
unemployment
is when someone is out of work and is looking for work
| people that are not looking for work are not classed as unemployed
107
underemployment
is when a worker is not working to his/her potential also includes people working part time
108
causes unemployment
```
structural
frictional
seasonal
cyclical
real-wage inflexibility
```
109
structural
when workers do not have the right skills employers want
110
frictional
when workers are moving between jobs
111
seasonal
when demand for a good or service is low at certain times of the year eg.tourism
112
cyclical
when workers lose jobs due to slowdown in growth eg.in a recession
113
real-wage inflexibility
when supply of labour does not adjust to a fall in demand for labour. wages tend to remain high, causing unemployment
114
effects of unemployment
high rates of unemployment reduce AD - low growth
adversely affects people's psychological wellbeing
government loses in tax revenues and need s to spend more on welfare
115
measures of unemployment
claimant count
| uk labour force survey
116
claimant count
tells us how many people claimed jobseeker allowance in a given period of time
117
ILO measure is
based on a survey of nearly 40,000 households and measures unemployment based on certain criteria - eg.people need to be unemployed for at least a month
118
AD refers to
the total demand for all the goods and services produced in an economy
119
AD=
C + I + G + (X-M)
120
if intrest rates are high
C will fall
121
consumer conference
also determines the level of consumption. if the economy is doing well and confidence levels are high about future, consumers are likely to increase consumption and rise versa
122
wealth effects
if price of a persons assets (eg.house) goes up the person is more likely to increase spending this is related to the consumer confidence idea
123
disposable income
is income that is left after all taxes have been deducted. this determines the level of consumption.
124
marginal propensity to consume
establishes how much extra is consumed following a rise in disposable income. this tends to be higher for low-income families
125
AD curve is slowing downwards because
real balance effect - as prices rise, fewer people are able to buy goods and services
international competitiveness - if domestic prices are higher, exports appear more expensive, while imports appear less expensive, so net exports fall, reducing AD
interest rate - higher interest rates reduce investments and consumption therefore reducing AD
126
fiscal policy
is about making changes to government spending or taxation
| a government can adopt either a contractionary or expansionary fiscal policy
127
contractionary fiscal policy is
about increased taxation an lower spending
128
expansionary policy is
about lowering taxation and increasing spending
129
goevrnemnet seeping forms about .
25% of AD
130
government spending depends on
the trade cycle
131
when the economy is doing poorly,
unemployment rises. so the gov has to spend more on welfare while the tax revenue declines - opposite happens during an economic boom
132
investment is
spendi g by firms on technolog, infrastucture
133
investment forms about
15% of AD
134
gross domestic investment
refers to the total investment made in a period of time
135
net investment
gross investment - depreciation of assets
136
influences in investment
- as the economy grows more jobs are created an incomes rise. so meet the increased demand, firms increase investment
- business confidence - how owners feel about the prospects of investing, bases on economic conditions
- high demand for exports requires more investment to meet high demands
- if interest rates are high, investment will bye low because the cost of borrowing would be high
- if credit is easily assessable, investment will be high
- tight government regulation is likely to limit investment , eg. high taxes
137
real incomes
as real incomes rise, demand for imports rises
| this decreases net trade (X-M). in other words it increases a country's current account deficit
138
non-price factors
the exchange rate does not affect the quality of traded goods, and changed to exports/imports as a result of exchange rates changes could be mitigated if domestic goods are particularly high quality or unique
139
X+M form about
2% of AD
140
in a recession
inflation lowers so exports may increase and imports decrease
141
in a global recession
total volumes of exports and trade will fall
142
national boom
exports decrease and imports increase
143
global boom
total volumes of imports and trade will rise
144
exchange rate increase
exports fall and imports rise as UK exports appear MORE EXPENSIVE
145
depreciation
imports fall and exports rise as UK exports appear cheaper
146
Classical LRAS
assumption is that firms operate at full capacity
147
Keynesian LRAS
assumption that the economy can have output gaps due to market imperfections
148
short run AS
refers to AS where capital is fixed and only labour is variable
149
long run AS
refers to AS where all factor inputs are variable
150
factors affecting long-run AS
- technical improvements
- changes in relative productivity
- improvements in education and skills
- changes in government regulation
- demographic changes - immigration increase long-run AS
- changes in competition policy - more competition increases long-run AS
151
factors affecting short-run AS
- changes in raw material costs - eg. if cost of oil rises, short-run AS will decrease
- changes in exchange rate - eg. if the exchange rate rises, imports become cheaper
- changes in changes in tax rates - eg. if tax rates are reduced, short-run AS will increase
152
an outward shift in AS
extends AD
real output increases
price level falls
153
outward shift in AD
shift in AD expands AS
real output increases
price level rises
154
Injections
G
I
X
155
Withdrawals
T
S
M
156
withdrawals ...
decrease AD and growth
157
actual economic growth is
real growth measured using GDP figures
158
potential economic growth is
the overall capacity for growth in the economy. This may be higher than actual economic growth.
159
causes of growth;
| demand side factors
increases in the components of AD will increase growth (C,I,G, X-M)
160
causes of growth;
| supply side factors
technological advancement
education and skills
demographic changes/ migration
government regulation
161
actual growth rate is
recorded for a particular time period
162
trend rate of growth is
the average rate of growth over time
163
impacts of growth;
| benefits
```
more jobs
better living standards
reduced poverty
more public goods
improved government finances
```
164
impacts of growth;
| costs
environmental damage
high inlfation
wider gap between the rich and poor
165
output gap
is the difference between the actual and the potential real GDP
166
negative output gap is where
actual real GDP < potential real GDP
| spare capacity and high unemployment
167
Keynesians believe that a negative output gap can occur in
short and long run
168
positive output gap iw where
actual real GDP > potential real GDP
| over capacity and high inflation
169
classical economists believe that negative and positive output gaps only occur in
the short run
170
in a boom
```
economic growth is
unemployment is
inflation is
consumers/business confidence is
government finances are
change rates. are
```
```
high
low
high
high
high tax revenue, low welfare spending
strong currency (high imports, lower exports)
```
171
in a recession
```
economic growth is
unemployment is
inflation is
consumers/business confidence is
government finances are
change rates. are
```
```
low
high
low
low
low tax revenue, high welfare spending
weak currency (lower imports, high exports)
```
172
a rise in MPC
increases the multiplier
173
a rise in MPS
reduces the multiplier
174
a rise in MPT
reduces the multiplier
175
a rise in MPM
reduces the multiplier
176
the multiplier effect would shift the AD
to the right every time there is an injection into the economy
177
role of the bank of England
maintains financial stability of the economy, its aim is to maintain a target inflation rate of 2%. The Monetary Policy committee (MPC) discusses the long-term growth prospects, the effects of government policy, debt levels in the economy
178
there are 2 types of demand side-policies
fiscal policy
| monetary policy
179
monetary policy refers to the use of
intrest rates and money supply by the central bank to influence the economy
180
fiscal policy refers to the use of
taxes and government spending by the state to influence the economy
181
high interest rates -
increase savings and decrease spending and investment - reduce AD/AS and growth and rise versa
182
high money supply -
increases borrowing and investment - increases AD/AS and growth and rise versa
183
demand side policies;
| strengths
shorter time lags
184
demand side policies;
| weaknesses
can cause inflation
| slow and inaccurate data collection may lead to incorrect decisions
185
budget deficit occurs
when government spending > tax revenues
186
budget surplus occurs
when government spending < tax revenues
187
macro economic objectives
```
high economy growth
low unemployment
low and stable inflation
greater income equality
environment sustainability
balanced government budget
balanced current account on BofP
```
188
supply side policies
improve infrastructure (investment in transport links)
research and technology (R+D)
increase incentives (raising min wage)
increasing competition (preventing monopolies)
reforming labour market (min wages abolishment)
human capital (training)
189
supply side policy;
| strengths
can reduce inflation
create more jobs
lead to international competitiveness
190
supply side policy;
| weaknesses
longer time lags
large opportunity cost
slow and inaccurate data collection may lead to incorrect decisions
191
types of supply side policies
market based - little gov action
| interventionist policies - gov takes action in a more direct manner
192
high economic growth will
- low inflation
- current account balance
- environmental sustainability
- low unemployment
- balanced budget
- income inequality
- not keep inflation low
- no environmental sustainability
- low unemployment
- no income inequality
193
policy conflicts;
| fiscal policy
- increasing spending today to increase AD might mean that tomorrow taxes will have to be increased
reducing spending may reduce budget deficit but it may lower living standards
194
policy conflicts;
| monetary policy
- cutting interest rates may control inflation but it also erodes the value of savings
- increasing interest rates can reduce AS, as borrowing becomes expensive (lower investment). this could lead to cost push inflation
195
policy conflicts;
| supply-side policies
more spending today may mean less spending tomorrow
| infrastructure projects can harm the environment
196
supply side policies will shift the LRAS curve
inwards
197
expansionary fiscal/monetary policy will shift the AD curve
to the right
198
impacts of globalisation;
| positive
increase in consumer choice
low prices for consumers
improved standard of living
access to cheap factor inputs for businesses
firms an make higher profits due to a bigger market
encourages specialisation - increased efficiency
reduction in unemployment
increased revenue form import tariffs for governments
199
impacts of globalisation;
| negative
increased environmental degradation/ pollution
increased interdependence - recession in one country spreads quickly
access to chap labour abroad - local unemployment will rise
200
increased globalisation has meant that over the last 50 years
better means of communication and transport
world trade organisation (WTO) - reduction in trade. barriers
creation on TNCs
201
characteristics of globalisation
increased trade
increased interdependence
more foreign direct investment (FDI) and transnational companies (TNCs)
easy access to factor inputs
202
the world trade organisation
promotes freee trade by following a policy pf trade liberalisation. it provides platform for trade negotiations ana d settlement of any trade issues between member countries
203
regional trade agreements/monetary unions;
| advantages
no transaction costs
greater price transparency
no need to account for ER fluctuations which hurt countries' competitiveness
attract FDI - good for growth
204
regional trade agreements/monetary unions;
| disadvanatages
transition costs eg. menu costs
| no control over monetary policy
205
types of trading blocs;
| free trade area
- free movement of goods and services
| - each member can set their own trade barriers for non-members
206
types of trading blocs;
| customs union
member countries have a joint trade policy for all non-members
207
types of trading blocs;
| common market
free movement of factor inputs
208
types of trading blocs;
| monetary union
single currency - as in the Eurozone
conditions necessary for success include:
similar growth patterns and business cycles of member countries
similar cultures to decrease barriers to free movement
increase spending in adversely affected areas
209
specialisation is about
a country producing goods in which it has a comparative advantage
210
assumptions/limitations of the theory of comparative advantage
```
all countries produce identical goods
free movement of factor inputs
0 transportation costs
0 economies of scale
perfect information
```
211
trade and specialisation;
| advantages
```
greater choice for consumers
cheaper goods for consumers
greater efficiency
firms experience economies of scale
wider market - high profits
increased growth and higher living standards
```
212
trade and specialisation;
| disadvantages
countries become interdependent
terms of trade may worsen
over-reliance on the production of one good
countries lacking comparative advantage will lose out unwanted good can be 'dumped in poorer countries at very low prices, which is bad for local firms
may widen the rich and poor gap
bad for 'infant industries'
213
types of trade barriers
tariffs - tax on imports
quotas - limit on number of imports
subsidies - grants to local producers
non-tariff barriers - eg. health and safety requirements
214
impacts of trade barriers;
| advantages
revenue for gov form tarrifs
local firm make higher profits
local jobs are protected
215
impacts of trade barriers;
| disadvantages
less choice for consumers
higher prices for consumers
lower living standards
inequality
216
terms of trade calculates
the amount of imports that a country exports can buy
217
tot =
(index of export prices ÷ index of import prices) x 100
218
impacts of terms of trade;
| advantages
greater choice for consumers
| better living standards
219
impacts of terms of trade;
| disadvantages
loss of international competitiveness
leads to a current account deficit
as demand for exports decreases, unemployment in the export industry increases
220
factors that affect ToT
relative inflation rates - higher inflation - exports costly - ToT improves
relative productivity rates - greater productivity - comparative advantage - ToT improves
exchange rate - higher Er - exports costly - ToT improves
221
trade diversion
divert trade from old to new partners
222
trade creation
create ne strade
223
factors that influence
poorer countries tend to export low value goods
no. of emerging economies
growth of trading blocs and bilateral trade agreements
changes in relative exchange rates
224
reducing current account imbalances
expenditure reducing policies - things that reduce AD eg.increasing income tax
expendititure switching policies - policies that affect demand for imports
supply side policies - policies that affect demand for exports - eg. increasing spending on education
doing nothing
225
causes of current account deficit
- high inflation rate - cheap imports
- relatively low labp=our productivity - increased average cost - cheap imports
- higher exchange rate - cheap imports
- high domestic growth - increased demand for imports
- growth in large economies - increased demand for imports
226
causes of current account surplus
protectionist measures decrease imports
- low inflation - cheap exports
- low domestic growth - increased demand for exports
- relatively high labour productivity - low average cost - cheap exports
227
international competitiveness;
| beneifts
Cretes jobs in the export industry
export-led growth
improves tarde déifiait
228
international competitiveness;
| costs
over-reliance on exports can become a problem if the world economy experiences recession - massive job losses
229
factors affecting international competitiveness
relative unit costs
relative level of regulation
relative inflation
relative non-wage costs
230
measures of international competitiveness
relative unit labour cots
| relative export prices
231
3 types of exchange rates
floating
managed
fixed
232
exchange rates is
the value of one currency in terms of another
233
value decreases =
depreciation
234
value increases =
appreciation
235
what determines the value of the currency - floating
forces of demand and supply
236
factors influencing the ER
relative intreats rates - high = ppl save = demand for £ ^ = appreciation
relative inflation rate - higher = export more expensive = demand for UK exports falls - £ depreciates
speculation - ppl speculate value will fall - demand for £ decreases - depreciates
state of the economy - economy improving - investors feel confident - demand for £ rises - £ appreciates
237
what determines the value of the currency - managed
indirect gov intervention eg.buying/selling currency
238
managing the ER
foreign currency transactions - to increase currency value, central bank will buy domestic currency - reduces supply of £ and increases demand - £ appreciates
interest rates - to increase the currency value, central and will raise the interest rate, this increases demand of £ - £ appreciates
239
effects of devaluation/ depreciation
makes exports more competitive - current account surplus
| however if all countries devalue their currencies then nobody gains from it
240
A depreciation of the exchange rate makes imports more ............. and exports ............
i. expensive
| ii. cheaper
241
Import expenditure is a
and export revenue is an
This means that
This will improve
leakage from the circular flow
injection
less money will be leaving the economy and more money will be entering it.
the current account.
242
import demand is
inelastic in the short run - contracts
| elastic in the long run
243
exchange rate increases, price of imports will
increase
244
If the price of imports increases but the quantity demanded remains the same, what will happen
the current account will worsen
245
a depreciation will
Decrease imports
246
a appreciation will
Increase imports and decrease exports
247
explain the j-curve
short run, demand for imports is inelastic meaning a depreciation will increase import expenditure and worsen the Current Account.
long run, demand becomes more elastic over time (like when companies finish their contracts), the demand for imports decreases leading to a decrease in import expenditure. This will then improve the Current Account.
248
what happens at the point where the current account improves
when the current account deficit starts to improve we say that the Marshall-Lerner condition has been satisfied
249
what is the Marshall Lerner condition
PED for exports + PED for imports > 1
250
if there is a decrease in import expenditure what will happen the current account
improve
251
if ER depreciates what happens to employment and growth
demand for exports rises, job creation, more consumer spending = more growth
252
if ER depreciates what happens to inflation
imports appear more expensive, and if a country is reliant to imports then - inflation
253
if ER depreciates what happens to FDI flows
domestic goods appear cheaper - more FDI flows
254
causes of inequality
```
regressive tax system - more equality
weak trade unions - more quality
unfair pensions scheme - more equality
lack of social security - more equality
level of education
employment/inheritance laws
```
255
capitalism allows
individuals to pursue their own goals
256
to profit maximise firms
employ highly skilled labour - who demand high wages
| whereas low skilled workers earn much less - creates inequality
257
absolute poverty
refers to a situation where a person is denied basic needs over a long period of time (eg. food shelter and clothes)
258
causes of changes in poverty
high growth - decreases absolute poverty due to the creation of jobs
high growth - increases average income - possible increase in relative poverty
more FDI - more jobs - decreases AP
more trade - more jobs - decreases AP
increased income tax - reduced relative poverty
259
relative poverty occurs when
a person can meet basic needs but earns considerably less. than the country's average person
260
wealth inequality
refers to the extent of the difference in the value of assets that people in a country own
261
income inequality
is the extent of the difference in the amount people in a country earn
262
wealth. is a
stock concept = asset
263
income is a
flow concept = liquid money
264
the gini coefficient
is a number between 0 and 1, which shows the level of inequality. the further the value is from 0 the greater the inequality
265
gini coefficient =
area A ÷ (areas A+B)
266
privatisation
this is about selling state-owned firms to private sector because the latter is more efficient
267
efficiency translates into
lower prices fro consumers and higher profits for firms
| this leads to increased consumer spending and investment which results in higher growth
268
Microfinance schemes
about providing small loans to poor people whoa re unlikely to get loans from big banks
loans are given to groups so that repayment is guaranteed this helps poor people escape poverty
269
floating exchange rates are where
demand that demand and supply decide the value of the currency which means the currency is likely to depreciate
-imports become expensive while exports become cheap - local industries will flourish leading to higher growth
270
removal of subsides
subsidies lead to inefficiency
removing subsidies increases competitiveness -increases productive/ allocative efficiency
competitiveness means lower prices
271
foreign direct investment
creates jobs - more consumer spending - higher AD - growth
countries can benefit from expertise of other nations
foreign firms may spend on local infrastructure
272
trade liberalisation
this is about reducing trade barriers
free trade promotes growth by creating jobs
free trade leads to greater allocative efficiency
but this could rescue growth if a country is flooded with cheap imports
273
foreign currency gap
developing countries tend to face a shortage of foreign currency this is mainly due to
low export earnings
increase in global prices
using foreign currency on debt repayment
274
harrow-Doar model
midel posits that savings level and the capital - output ratio are the main determinants fo growth
developing countries have low levels of savings - lack of investment in capital - ow growth
275
volatility of commodity prices
inelastic demand and supply price instability - overall economic instability (high inflation, unemployment)
276
primary product dependency
primary goods = commodities (generally low - valued)
countries dependent on primary products tend to remain poor
demand is income inelastic, which means rising incomes do not increase demand to the same extent
such countries export low -valued goods while importing high value goods, leading to falling terms of trade
277
HDI
human development index is a composite measure of development
278
education index
average and expected years of schooling
279
life expectancy index
life expectancy at birth
280
income index
GNI per person
281
benefits fo HDI
multidimensional
| uses 2 measures for education
282
drawbacks of HDI
ignores inequality as t uses averages
| missing factors eg.happiness
283
how do we measure inequality
Lorenz curve and mini coefficient
284
head count ratio
counts the number pf poor people
285
mutlidimensional poverty
looks at income and things like crime, sanitation, water etc.
286
factors influencing growth and development
economic factors
- infrastructure - trading costly - discourages FDI
- education - lack educational infrastructure
- capital flight - ppl saving money in more secure foreign banks with high i/r - developing countries lack investment in capital = low frowth
- demographic factors - tend to have large populations- ^ - dependency ratio - low income per head
absence of property rights - property rights give sense of certainty - good for investment/ borrowing and growth however developing countries lack some property rights
- debt - developing countries tend to be drowned in debt - gov takes loans and often is the future generation that has to -pay this money back - becomes worse off
access to credit - essential for doing business, counties that lack such facilities (eg.microfinance) limit growth a s ppl r unable to escape poverty
287
factors influencing growth and development
non-economic factors
wars: disrupt growth and development
children can't attend schools
discourages FDI
brain drain
poor governance : this leads to an inefficient resource allocation as resources are used to produce goods/services that are popular
corruption: corruption leads to an inefficient resource allocation
288
Customs union
Have some tariffs on non member countries
289
Common market
Free movement of factors of production
