Macro chains Flashcards
(13 cards)
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Assess the drawbacks of more MNCs in your economy
It can cause the Tragedy of the Commons as more economic agents use up the same limited resources. Pollution can increase affecting living standards, and this increased demand for resources and labour from MNCs can push up resource costs, lessening domestic firms’ international and internal competitiveness. As smaller domestic firms may not be able to compete with the larger economies of scale of smaller domestic firms, they might lose business or be forced to shut down. Additionally, regional multiplier effects might be limited due to the MNCs repatriating their profits back home and also, they might choose to bring their own specialist workers instead of train local workers. Via transfer pricing by MNC’s, domestic economies might lose out too much tax revenue from the MNC. Zambia has been a victim of this but the hew global 15% minimum tax rate should help this which over 150 countries have signed.
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Explain the costs of a current account deficit
A current account deficit means imports are greater than exports. From this perspective, in regards to trade, leakages are greater than injections and will negatively impact net injections and national income. A persistent trade deficits means more money is leaving the economy’s circular flow than coming in and means a country will be losing out to export multiplier effects and associated accelerator effects. This might limit short run growth and improvements in living standards. Additionally, a persistent current account might suggest issues with productivity, and lack of international competitiveness which need attention, such as poor quality labour and labour shortages. It’s developing economies which require export led growth the most to help them develop.
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Evaluate ‘explain the costs of a current account deficit’
It depends on the cause of the current account deficit. One reason might be rising income and higher demand more imports, or a temporary increase in the exchange rate, which automatic adjustments of a floating exchange rate will deal with.
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Explain the cons of deflation
As firms see some inflation as an incentive to produce, deflation can be seen as a disincentive. Consumers delay their purchases when deflation is experienced, waiting for prices to fall further. This shifts AD to the right and with prices falling further, consumers continue to delay their purchases and thus the deflationary spiral occurs with negative multiplier and accelerator effects. Once deflation is in an economy, it is hard to tackle as Japan experienced. It can negatively affect growth and reduce demand for labour, increasing unemployment and the burden on the government for welfare payments at a time when income tax revenue is also falling. This negatively affects government finances and its ability to use expansionary fiscal policy. This can all negatively affect consumer confidence. Investment and animal spirits will also be negatively affected via the fall in firms’ profits as they suffer continual falling demand. These conditions of low confidence, make expansionary monetary policy and its transmissions mechanism very hard to work. This is because even if when central banks lower interest rates significantly, consumers and firms don’t respond. It’s in this environment that quantitative easing may be utilised, with varying results.
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How does globalisation increase inequality (give data babes)
Through globalisation, there’ll be increased specialisation and trade, and hence more exploitation of countries comparative advantage. This could perpetuate relative poverty as it may lead to an industry moving out; the workers may suffer from structural unemployment and a decline in real living standards. e.g seen via Steel industry in the U.K, where jobs have fallen 90% since 1971, and more holistically, deindustrialisation in the U.K, which has heightened the ‘north-south’ divide within the U.K. Similarly seen within the U.S, where the N.I claimed by the top 1% of the population climbed from 11% in 1980 to 20% in 2014.
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In the long term, why might the UK Philips curve be more steeper
Over the medium-long term, we may see a more steeper rise in the Philips curve for the U.K due to Brexit, as well as deglobalisation, (which has been seen in America, for e.g between 1998-2010 (or about this time), manufacturing jobs declined by about 35%, but by 2019, jobs rebounded by 15+%). Brexit will have particularly profound implications on the Philips curve as the low imported wage inflation will no longer be possible due to ‘brain drain’.
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Why has the Philips curve in the UK been flattening
It’s been flattening due to the increase in competition and contestability in labour and product markets. e.g growth of the ‘gig economy’ with new firms such as deliveroo emerging, whom have considerable monopsony power; can drive down wages. In addition, wage inflation has also been kept down by high levels of net inwards migration of labour.
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To what extent is slowbalisation a good thing
Good, as less trade growth between countries –> helps to protect domestic industries from foreign competition which may get rid of U.K jobs –> infant industry argument. Also, less pressure on falling wages due to the inwards labour migration. Also, possibly less impact on income inequality –> also less dumping from foreign countries, e.g like China used to do to U.K.
Bad as it thwarts economic development, export mutliplier effects, loss of export revenue (high trade to GDP ratio), less choice, also gap between developed and developing countries increases, higher costs for firms and higher prices for consumers.
Why trade imbalances are not an issue
- May be due to higher growth; causing higher incomes; higher spending on imports.
- C.A deficit means that F.A is in surplus; leads to greater inflows of F.D.I/ investment. E.g seen between the U.K and China, although the U.K runs a trade deficit with China, China finances the deficit by investing in nuclear power stations in the U.K. (e.g the ‘Hinkley plant’ where they hold a 33% stake in the production of it)
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Investment into education impact on UK economic growth
One interventionist supply side policy is investment into education/ training. Education and training would increase levels and quality of human capital. This would provide more skilled workers and decrease occupational immobility of workers as they can gain new skills and apply the new skills in new jobs. This should decrease level of structural unemployment and increase productivity of economy as output per worker increase. Decrease in structural unemployment also reduce the financial burden of govt spent on unemployment benefits/ welfare payments. It should reduce the opportunity cost and could spend it elsewhere like healthcare (to increase life expectancy of people or provide more productive workforce with less absences for the economy). This should increase output per worker, increase LRAS an stimulate economic growth.
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Govt expenditure EV
A rise in govt expenditure worsens the UK budget deficit as debt to GDP ratio was 103.8% in 2024. This could lead to private investment crowding out/ resource crowding out as near full employment and don’t want decrease in investment as they already have an investment gap. Higher government spending could lead to increased borrowing, raising interest rates and discouraging private sector investment. This is bad as the UK has the lowest rates of investment in the G7 economy. Govt expenditure incurs a huge opportunity cost as money could’ve been spent elsewhere such as education, given the UK lags behind other G7 countries in education spending per student. The UK’s per-pupil spending in 2023 was £6,000, significantly lower than Germany (£8,500) and France (£7,200). Additionally, infrastructure projects take years to complete so the impact of economic growth isn’t immediate.
Discuss/assess/evaluate impact/effect of anything in question which shifts AD to right for developed economy like UK (from lower ER, higher growth, lower income tax etc)
This should allow short run growth, reducing the negative output gap, allowing the economy to get closer to full employment. This is because to meet this demand, firms may need to utilise more factors like labour and labour has derived demand. This should reduce demand deficient unemployment. Because O= Y= E, higher output, should also increase national income and expenditure. Higher output should also increase corporate tax revenue for the government and increased employment should also increase income tax revenue. This is especially important due to the national debt amassed after COVID, and the growing public expenditure burden of an aging population many economies like the UK and Japan are facing. Depending on the strength of the marginal propensity to consume (mostly affected by confidence), the positive multiplier effect which increases national income, could also affect the positive accelerator effect, promoting more investment. This is much needed in a country like the UK which has an aging capital stock and has fallen considerably in the international competitiveness ratings. This improved competitiveness could then increase foreign currency into our economy, which could be used to reduce our capital output ratio via more efficient foreign capital. Additionally, the increased tax revenue may allow the increased likelihood of increased spending on areas such as health and education, helping alleviate hospital waiting times and deal with teacher shortages. This should overtime, ease the demand-pull inflationary pressure, by shifting LRAS to the right. This is valuable for the UK whose LRAS has shifted to the left via the millions of economically inactive workers and BREXIT labour migration back to the EU. This higher national income should also allow more money to be saved in banks allowing access to investment for firms according to the Harod Domar Growth model. This could help reduce the investment phobia experienced in the UK and improve the UK’s productivity issues which hinder living standards via the impact on growth in wages. All these cumulative effects make an increase in AD a positive thing in the UK, especially amid stagnant growth and counter the lowest consumer confidence in 30 years. It could also help alleviate poverty with 1/5 experiencing this in the UK via our progressive tax system and the Trickle-down theory.
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Benefit of Zambia primary product dependency
According to the factor abundance model, Zambia export copper and copper is price inelastic. Higher terms of trade (currently 121) mean export prices have risen, and with PED as inelastic, this will incentives more copper production and export earnings will rise. Labour has derived demand and with rising profits in copper, there will be an increase in employment and reduce the 6% unemployment. This is so important in Zambia, considering it has one of the highest levels of poverty in the developing world. Additionally, tax revenue will rise for the government which can be further spent on raising living standards and infrastructure and reduce the budget pressures. This is important for Zambia, considering its debt default to China. This can also be used on investment in education given education was made free 4 years ago but now classes are crammed with 100+ students in one class, reducing book to pupil ratio. Zambia can now afford to buy more foreign capital goods, and this will reduce Zambia’s capital output ratio, making exports more competitive and allowing growth. According to Solow (better capital, higher labour productivity and innovation): better capital will allow growth. Zambian living standards should increase, because Zambians can afford more luxury items from abroad. Zambians will benefit from more foreign currency and some of this can be used to pay back debt to China. This will all help their development and increase their GNI/head.
