macro theme 4 Flashcards

Question

what are the disadvanatges of the multi-dimensional poverty index?

Answer 1

- doesnt take into account the environment - cannot be calculated for all countries because the indicators are specific and the information isn't always available

Answer 2

HDI that is adjusted to take into account inequality

Answer 3

- still criticised for not taing into account enough measures of inequality

Answer 4

- economic indicators: personal consumption, inequality and cost of unemployment - environmental indicators:cost of pollution, loss of natural areas, CO2 emissions, depletion of non-renewable resources and ozone depletion

Answer 5

- measures economic sustainability: if there is genuine growth without resource depletion

Answer 6

- shows the importance of the environment. argues that developed countries experience negative growth over time because of their negative impact on the environment - however has been criticised for being biased and constructed to prove the anti-growth case

Answer 7

the movement of all fixed assets between countries

Answer 8

measures all transactions between one country and the rest of the world - always sums up to 0

Answer 9

- records all international investments and transactions in financial investments

Answer 10

the investment of physical capital by foreign firms

Answer 11

the flow of money to purchase financial assets, like bonds and derivates

Answer 12

a record of all paymenst for trade in goods and services plus income flow - trade in goods - trade in services - net income - current transfers

Answer 13

- dtermines whether the balance of trade will improve/worsen in response to a change in the exchange rate - DEPRECIATION OF THE CURRENCY WILL IMPROVE BOP IF: - sum of the price elasticities of demand for the country's imports and exports is greater than 1.

Answer 14

- SR: rapid depreciation may worsen CA - because domestic firms may need tie to grow production capacity and UK customers may not switch to domestic producers immediately - however, time lag can mean that the PED of imports becomes more elastic and therefore there are increased exports and decreased imports

Answer 15

the less price competitive, the less exports an economy will have - caused by: high inflation, access to cheap imports from low- wge countries and poor productivity

Answer 16

- affects demand for goods - affects demand for luxury imports - may prefer imports if they are cheaper

Answer 17

- affect export revenue and import expenditure

Answer 18

unemployment is likely to rise if the deficit is caused by a loss of price or non-price competitiveness in the UK - if caused by a domestic boom leading in increased MPI

Answer 19

- argues that there shoud be a dualistic economy. - as majority of the labour is employed on the land their may be diminishing marginal returns - urban workers make higher wages and have higher output and therefore it is desired that the economy move towards an industrial economy

Answer 20

- when a country is able to produce a product with fewer factors of production than other countries

Answer 21

- basically the removal of a tariff - trade moves from a high cost, inefficient domestic producer to an efficient world producer who has the comparative advantage - there is a gain in consumer surplus and world efficiency as a result

Answer 22

- moving from an efficient world producer to an inefficient producer within the trade union - inefficiency increases because of the inefficient domestic producer - makes the price of the trade union the most competitive

Answer 23

- marxist critiscims: profits may be retained by the capitalist entrepreneur - may cause slums as there is an excess of immigrants, decreasing living standards and increasing relative or absolute poverty, for example 1.5 million in slums in cape town - high surplus labour in towns and cities may lead to high unemployment

Answer 24

inverse curve showing the inverse relationship between inflation and unemployment - this is because as AD increases there is higher GDP and unemployment decreases - as the economy reaches full capacity there is an increase in inflationary pressures, because when there is low unemployment workers can demand higher wages and leads to an increase in the money supply

Answer 25

- in the 70s there was stagflation - monetarists do not believe in the theory of the Phillips curve because they believe that workers only receive a nominal wage increases and unemployment remains unchanged but inflation will increase

Answer 26

- Leaders are likely to make decisions which benefit themselves rather than benefiting the economy. - High levels of bureaucracy are often linked to corruption and this is costly and time-consuming, deterring new businesses and reducing output of those already established. - it can also increase a country debt and how much they have to pay back as the money taken is not going towards development - Ghana’s high level of freedom and democracy is one reason why it has been able to develop so quickly

Answer 27

- can generate a lot of investment in the short run - some countries can use primary products to develop and reinvest into manufacturing and industry similar to saudi arabia and dubai - however: prebisch- singer hypothesis - natural disasters mean that farmers and agricultural producers could take large loss of capital - they may be producing non-renewable goods - dutch disease: country will quickly become a significant commodity producer for a certain good causing a massive increase in demand for the currency. overall export prices will increase and reduce competitiveness in the economy and reduce output for other sectors, non oil sectors of venezuala and nigeria

Answer 28

- primary products are of low income elastic demand. they are necessities so economic growth around the world may not cause an increase in demand for primary products. the long run price of primary goods declines in proportion to manufactured goods - however what developing countries import (manufactured goods) is income elastic, as incomes increase people demand more of them - in the long run there will be a decline in the TOT of countries who depend on natural resources exports - a worsening of the terms of trade means that countries may have to export more to finance their imports. this may lead to a fall in living standards and it may become harder for indonesia to pay off their foreign debt

Answer 29

- inability to generate investment - inelastic demand and supply which means that small changes in demand or supply can lead to large changes in price - this means that producers income and the countries earnings are rapidly fluctuating making it difficult to plan and carry out long term investment. producer’s earnings can fall rapidly causing poverty - When prices of commodities rise for a number of years, there tends to be over-investment in the production of the commodity causing long term risk when the price eventually falls.

Answer 30

savings gap: the difference between actual savings and the level of savings needed to achieve a higher growth rate - lower incoems and therefore will save less. generational poverty. less money for banks to lend and therefore reducing borrowing and investment/consumption - harrod- domar model: savings provide the funds which are borrowed for investment purposes and therefore growth rates depend on the level of saving and the productivity of the investment - economic growth depends on the amount of labour and capital. developing countries have a vast supply of labour, so capital is the problem - investment in necessary to improve capital and savings are necessary for investment - economic growth is not economic development, their investment could be wasted

Answer 31

exports from a developing country are too low in comparison to the imports to finance the purchase of investment or other goods from overseas this is because: - when currency outflows are higher than currency inflows ( country has a persistent current account deficit) - outflow of capital from investors (capital flight) investors in bond and equity markets may be taking out their money to put in safe haven countries - may be caused due to a fall in the value of remittances from overseas internationals this leads to: - a country wont have enough foreign currency to pay for essential imports, because there is a decline in foreign currency reserves - FOREIGN CURRENCY GAP IN EGYPT DUE TO $20 BILLION WORTH OF OUTFLOWS DUE TO UKRAINE RUSSIA WAR.

Answer 32

large amounts of the money being taken out of the country, withdrawal, rather than being left in the country’s banks for people to borrow and invest and create credit lack of confidence a country’s stability, hide it from authorities or for profit repatriation - caused the argentine economic crisis 2001. happening in Pakistan because of political instability

Answer 33

- developing countries have higher population growth, which limits development. If population grows by 5%, the economy needs to grow by 5% to even maintain living standards. This means developing countries need to have higher rates of growth to develop than more developed countries would do. - The high population growth is caused by high birth rates, which increases the number of dependents within a country but does not immediately increase those of working age. It places strains on the education system and leads to youth unemployment.

Answer 34

- 1970s and 1980s, developing countries received vast loans from banks in the developed world. Now, they suffer from high levels of interest repayment ;sometimes even higher than the loans and aid they receive from developed countries, meaning money is flowing from developing to developed countries. - This means they have less money to spend on services for their population and they may need to raise taxes, which limits growth and development. - Borrowing for growth makes sense, just as firms borrow to expand, but the problem occurs when governments take on too much debt and do not spend it well - Nigeria’s debt is 52% of GDP.

Answer 35

- limited access to credit and banking in comparison to developed countries those in developing countries cannot access funds for investment and they struggle to save for the future. - some people may use loan sharks which gives them high interest rates and leave them permanently in debt

Answer 36

- Low levels of infrastructure make it hard for businesses to trade and set up within the country, for example if there are a lack of roads. It makes their services and production less reliable. - However, the development of infrastructure can be expensive and tends to conflict with environmental goals. - India is a good example of country suffering from poor infrastructure. For example,they saw power blackouts in 2012 and this damages their potential tourism industry. About half their roads are not paved and they need to invest around $400bn in the power sector.

Answer 37

- Poor education within these countries means that workers are low skilled, sometimes unable to read and write, so have low levels of productivity. - Countries like China and South Korea invested heavily in their human capital when they were developing, and this has benefitted them in the long term. Ethiopia suffers from high illiteracy rates at around only 49%. - However, there is debate about what type of education is needed and problems concerning over-education i.e. if graduates are unable to find graduate level jobs

Answer 38

- Property rights are where individuals are allowed to own and decide what happens to certain resources. A lack of rights mean that individuals and businesses c annot use the law to protect their assets, leading to reduced investment. They will be unwilling to buy machinery, build factories or establish brands. - The loss of property rights in Zimbabwe led to economic collapse.

Answer 39

- if there is a lack of foreign exchange countries can reduce their reliance on imports through import substitution - export-led growth - removing trade barriers means that producers will have to become as efficient as other producers - countries like Singapore and south Korea have benefitted from this

Answer 40

- Privatisation can end the corruption within a firm who is owned by the state, as well as encouraging them to be more efficient by increasing competition - Selling off a firm, particularly if it is loss making, will improve government finances and reduce levels of debt. - HOWEVER if the firm is privatised as a monopoly there will be no competition within the market. On top of this, it can be associated with corruption where politicians or officials sell the company at below market price to a friend or family member or receive bribes to accept one company’s bid. - The water industry in Ghana was privatised in 2006 but when the contract was expired in 2011, the government did not extend it. Water quality improved but reliability did not. There had been increased revenue and efficiency and improved customer service -

Answer 41

- firms will undertake FDI because production costs are lower in developing countries and it will allow them to access another market - country doesn't own money to foreigners if it fails - transfer of knowledge as staff will gain production and management techniques as well as training - create jobs and multiplier effect. labour productivity will increase and wages are higher. fills the savings gap - repatriation of profits, the country may feel exploited by the company as they are receiving lower profits and worse working conditions than they would in a developed country - lose some soverignty and become dependent on another country’s firm for wages. local competition may find it hard to set up as the best jobs may go to imported labour, leaving only unskilled labour for locals - environmental damage and exploitation of natural resources - India has benefitted from FDI: make India initiative: 48% increase in FDI

Answer 42

- can reduce absolute poverty and ensure a minimum standard of living - HOWEVER - can be poorly targeted: subsidy on rice would benefit everybody not just the poor. alternative maybe cash payments directly to poor households - subsidies to producers may increase inefficiency - represent a large amount of govt spending: incurring an opportunity cost and leading to high levels of debt - can cause corruption. in venezuala subsidised fuel is smuggled across its borders and sold in neighbouring countries for profit. The fuel subsidies have also led to high emissions, an unintended consequence. - removing subsidies can be politically unpopular

Answer 43

- market forces determine the currency and govt doesn't worry about foreign currency and gold reserves, govt doesn't intervene - HOWEVER the currency can be volatile which makes it difficult for exporters/importers to make decisions about the future and can cause large changes in macroeconomic variables, including economic growth -

Answer 44

- poor and near-poor households get permanent access to a range of financial savings ( loans, savings, insurance and fund transfers) - this aims to make more people financially independent: use these loans to set up businesses or go into education - may be less effective at reducing poverty on a large scale. in south Africa has increasingly been used to finance consumption spending. - unemployment may mean that people may not have the necessary funds to ensure repayment - has increased informal economy, very little being spent on sustainable methods of development.

Answer 45

the increasing interconnectedness and integration of countries. this is due to developments in technology and global communications

Answer 46

- lewis model. in the dual economy the agricultural sector has low wages and low productivity meaning low savings. the modern industrial sector can attract workers with higher wages, and consequently they would have higher savings and increased MPI. HOWEVER - additional labour maybe needed seasonally, such as during the harvest season - not necessarily true that those with higher incomes will invest that money, they may just use it to consume - government can invest and develop industries, but if they fail that is a waste of resources.

Answer 47

IN MORROCO 7 NEW RESORTS ARE BEING BUILT ON THE NORTH COAST WHERE UNEMPLOYMENT IS 40% - tourism industry can provide them with funds to develop their economy and improve living standards - income elastic nature: as global economy growths developing country using this strategy will benefit, unlike prebish singer hypothesis, but also means that they will be negatively impacted during a recession - foreign currency gap, countries can fund their imports - attract investment from transnational hotel companies who may provide knowledge too. alos may be improvements in infrastructure as tourism needs reliable water, electricity, etc. +jobs are created locally because tourism relies on low skilled locals +govt recieves higher tax revenues due to incomes and profits - however industry is seasonal and low paid jobs, limits impact of the multiplier. - tourism destinations may go out of fashion and therefore some areas may see a loss of employment and investment - wealth may be withdrawn as TNCs repatriate their profits , causing capital flight - externalities like pollution and waste

Answer 48

+ development becase of an abundance in natural resources. allows a country to diversify and follow indfrastructure development - however they are volatile, corrupt and PPD can cause issues like Dutch DIsease. +Norway tackles dutch disease by using oil revenue to invest overseas, increase supply of their currency and depreciate it so that industries can compete abroad.

Answer 49

- fairtrade seeks for more equity in trade: fair price, community development, fair working condtiions and protecting the environment + gives producers stability and raises their income + child labour is not use, children are likely to be in education instead, production is sustainable no enviornmental degradation + study in sri lanka shows that shows under fairtrade benefit from higher income and satisfaction. they were able to save for the future and invest/ financial stability - HOWEVER STILL DIDNT FIND THAT THEIR INCOME WAS SUFFICIENT - insifgnifican t impact. benefits fairtrade producers but can leave others worse off as non-fairtrade consumers may see a fall in demand - higher income may reduce the incentive to farmers to diversify and may keep theme engaged in low profit activities

Answer 50

AID IS THE TRANSFER OF RESOURCES ON CONCESSIONAL TERMS + aid can reduce absolute poverty, emergency relief such as after the flooding in Pakistan - however , improvement of infrastructure does little to reduce absolute poverty of those most affected + can fill the savings gap, thus provide funds for investment + also provides foreign exchange to fill the foreign currency gap + contribute to increasing world trade and reduce world inequality - may result in a dependency culture, countries mya become unconcerned about their finances, because they know they can raise finances from another country - corruption means that the money may not always go where it is meant to and in the long run may mean that the country loses money - concessional loas have to be repaid and this may therefore limit how the money is spent, may have to spend money on things that will see a return in the short run

Answer 51

- tied aid: conditions attached, such as economic or political reforms or a commitment to buy goods from the donor ccountry - bilateral aid: directly from one country to another - multilateral aid: given to an organisation who distributes it - concessional loans: oans given on lower or no interest rates

Answer 52

- high interest rates of loans may limit economic growth + eases government finances and allows more money to spend on provision of goods and infrastructure which will aid development - however moral hazard of setting a precedent that every poor country may expect to receive debt relief.

Answer 53

World bank aims to bring about long- term development and reduce poverty - international bank of reconstruction and development and the international development association providing financing, policy advice and technical assistance. IFC, MIGA and ICSID help strengthen the private sector by providing developing countries with finance, technical assistance, political risk insurance and settlement of disputes. The World Bank has funded over 12,000 development projects since 1947 through interest free loans and grants and supports long term human and social development.

Answer 54

- ensures that exchangeg rate systems work well + provide loans to when countries when there are international exchange rate crosses or cannot afford to pay off international debt + IMF insists that countries make macroeconomic reforms for countries when providing them with loans. - however this may cause problems for countries, because usually the IMF says reduce imports and increase exports which reduces amount of resources for domestic consumption or lower government spending + The IMF also provides advice which aims to bring about economic stability and raise living standards and help countries to develop their economic institutions through training and technical assistance, for example the central bank in Kosovo.

Answer 55

not- for profit organisations run independently from the govt +provide direct assistance in the form of project work: education, wells or healthcare (emergency or long run) + act as pressure groups to lobby governments to adopt more pro development strategies - NGOs believe they need the help of the government - anti- capitalism agenda

Answer 56

+ provides workers with the skill to be more efficient and improve productivity. businesses struggle to expand where there is skills shortages and it also hinders innovation + higher skills could transform the economy from agricultural to industrial (lewis model) and overcome PPD

Answer 57

+This will create jobs in the short run and will allow the industry to develop, perhaps to the extent where the barriers can be removed , and the industry can compete globally. - However, it means countries lose out from the benefits of specialisation and comparative advantage and could cause inefficiency, since domestic producers suffer from a lack of competition. Other countries are likely to retaliate.

Answer 58

The currency could be fixed against a number of different exchange rates . They can introduce high exchange rates for the import of essential products and lower exchange rates for others. There could be an even lower one for exports. A high exchange rate for essential products will mean that the price within the country is low, which helps to reduce poverty if the goods are consumer goods and encourages investment if they are capital goods. A lower exchange rate for other imports will mean that the price of these goods within the country is higher, discouraging their import and encouraging consumers to buy from domestic producers. ● The problem with these tiered exchange rates is that they often fail to work in practice; black markets in foreign exchange develop which can destabilise the system and corruption becomes an issue, when government officials buy currency at one exchange rate and sell it for profit at another. ● Alternatively, governments can manage a single exchange rate which will reduce volatility, but speculation may mean that countries find it difficult to maintain an exchange rate over a number of years

Answer 59

- Infrastructure is essential for development ; a country needs roads, airports, schools, hospitals, railways - government may not have the funds to provide the infrastructure and it is argued that they may be inefficient. Infrastructure projects are often associated with bribery and corruption , cause environmental damage and may be poorly built and maintained. - Some argue that intermediate technology, which uses local materials and can be fixed locally, is better than large scale infrastructure.

Answer 60

● One way to reduce the exploitation of countries as a result of FDI would be to set up a joint venture. The government may insist that firms setting up production plants in their country find a local partner to create a jointly owned company with. This will help to keep some of the profits generated within the country , which can be used in investment. ● Tata Starbucks Pvt.Ltd is a joint venture company with Starbucks in India

Answer 61

government imposes both a maximum and minimum price for goods, buying up stocks when there is excess supply and selling them off when there is excess demand. As a result, it should be self-financing: money is raised when selling the products, which allows the government to buy the next lot of stocks. ● It is used on commodities, where the prices are volatile, and can either be set up by a group of countries or within a country. When it works effectively, it is beneficial because it stabilises prices and thus encourages investment since producers can plan for the long term. It also prevents sharp falls in prices, meaning that producers are kept from falling into absolute poverty, and prevents sharp rises in prices, meaning that consumers are able to afford the good. It can solve some of the issues relating to primary product dependency. ● However, it requires stocks to go up and down ; if they keep rising, then the scheme will run out of money and if they keep falling, the scheme will run out of stocks. They require huge start-up costs , as well as administration costs and problems of storage. ● Other countries may benefit from a buffer stock system since it keeps global prices fairly stable when undertaken by a group of countries, and so they can be seen as free riders of the system. This may mean that some countries will not want to introduce the system. ● The biggest issue is that minimum prices may be set too high, encouraging producers to become inefficient. They will produce as much as they like and know they will be able to sell it anyway, meaning that supply is high and the government has to continually buy up the stocks. ● If the scheme is operating at a loss, the taxpayer feels the burden and government finances are worsened. ● The Ivory Coast and Ghana implemented a buffer stock scheme for cocoa in 2017 due to low prices

Answer 62

when a rapid increase in government spending causes a transfer of productive resources from the private to the public sector where productivity is often lower

Answer 63

new - original/ original x 100

Answer 64

international monetary system which made gold the basis for the US dollar and pegged other countries to the US dollar and was dissolved in the 1970s

Answer 65

- However, the government is able to enjoy economies of scale when it provides goods, and this improves productivity. - They also provide the infrastructure, such as roads, necessary for the economy to run efficiently. - Education creates the human capital necessary for growth whilst the healthcare system reduces the number of days workers lose from serious illness. Spending on research and development may not be done by the private sector and the government will undertake it to give businesses a long term competitive edge. -Through spending, the government can create a multiplier effect and this can be focused on areas of the country with high unemployment, creating growth.

Answer 66

+ corrects market failure and provides public goods , which improves social welfare. + reduce absolute poverty by providing benefits and basic goods, such as education and healthcare. In developing countries, governments do not have the resources to do this and this leads to malnutrition, poor water such as. in pakistan - government may be inefficient at providing g + s, will have a negative disincentive impact on workers, meaning that output overall is reduced and so living standards fall. - government suffers from the principal agent problem since they make decisions on behalf of the people and individuals may have spent that money differently. As a result, there is a loss in welfare and so a fall in living standards. + However, the political system means that society decides the government and so therefore decides to an extent where it would like money to be spent

Answer 67

In order to spend money above their tax revenues, the government has to borrow from individuals and businesse s. However, the amount of money in the economy available to borrow does not increase. The government will therefore be competing with the private sector for finance and will cause higher interest rates . This will discourage firms from investing and individuals from buying on credit. ● On top of this, the limited number of resources in the economy means that for every resource used in government spending, there are less resources available for the private sector. The result is that government borrowing crowds out private sector borrowing and spending and may lead to no real increase in AD. ● Free market economists argue that investment would be more efficient if done by the private sector and that the government targets investment poorly and is wasteful. ● The crowding out effect is felt most at full employment, but it is not always the case. Transfer payments have no impact on output and so would not cause crowding out as resources are simply taken from one group and given to another; the government isn’t taking resources from the economy. Moreover, when levels of unemployment are high then extra government spending could lead to crowding in where it encourages investment through the multiplier.

Answer 68

The tax rate might increase if government debt gets too high. If confidence is lost in the government’s ability to repay the debt, governments might have to raise interest rates to encourage investors to buy bonds, so that they can finance the debt. It could lead to higher taxes and austerity measures, especially if the debt becomes uncontrollable. In some countries, the government is able to finance spending through other means, for example oil revenues

Answer 69

Redistributive policies and welfare payments, such as Income Support, could be used to help those on the lowest incomes. Also, government spending on housing and the provision of public services, such as education and healthcare, helps provide equal opportunities for people from all income backgrounds. This ensures that even those on low incomes can afford a good standard of healthcare and education. By providing these services, the government ensures that all members of society can achieve a minimum standard of living.

Answer 70

A proportional tax has a fixed rate for all tax payers, regardless of income. It is also called a flat tax. For example, all tax payers might have to pay 20% income tax rate. The incidence of taxes is equal, regardless of the ability of the taxpayer to pay. It could encourage people to earn higher incomes, because the rate of tax paid does not increase.

Answer 71

A progressive tax has an increase in the average rate of tax as income increases. As income increases, the proportion of income taxed increases. For example, in the UK income tax is progressive. This should help reduce inequality, because those on lower incomes pay less tax. The tax is based on the payer’s ability to pay. Higher income households are more able to pay higher rates of tax than lower income households. Generally, direct taxes are more progressive.

Answer 72

A regressive tax does not relate to income, but means those on lowest incomes have a higher average rate of tax. In other words, the proportion of income paid as tax is higher for those on lower incomes than those on higher incomes. For example, as a percentage of income, the London Congestion Charge and Council Taxes are higher for those on lower incomes. This leads to a less equitable distribution of income. Generally, indirect taxes are more regressive.

Answer 73

Direct taxes affect AD; a fall in direct taxes will cause a rise in AD. Indirect taxes affect SRAS; a fall in indirect taxes will increase SRAS. Some taxes can affect LRAS because of their impact on work incentives or investment. The impact on output and employment therefore depends on which taxes are implemented and the impact they have.

Answer 74

Indirect taxes could cause cost push inflation. Indirect taxes could increase the cost of goods such as cigarettes or fuel, if producers choose to pass the costs onto the consumer. Since the demand for cigarettes and fuel is relatively price inelastic, producers are likely to pass the cost of the tax onto consumers. The price level will also be affected by the changes to AD and AS which affect output and employment

Answer 75

Taxes could be imposed on imports into a country. These are tariffs and they make it more expensive to import goods, which should, in theory, improve the trade balance. However, other countries might retaliate, so exports might decrease as well.

Answer 76

Governments can provide a competitive tax environment to encourage FDI, so that the market is profitable, fair and has macroeconomic stability. Taxes should also be consistent and predictable, so they are business friendly. This would encourage FDI flows. High, fickle taxes are likely to discourage FDI flows, since investors will choose to invest elsewhere.

Answer 77

A government has a fiscal (budget) deficit when expenditure exceeds tax receipts in a financial year. The national debt is the amount of money the government has borrowed at one time through issuing securities by the Treasury.

Answer 78

Cyclical deficit This is a temporary deficit, which is related to the business cycle. A deficit might occur during recessions, when governments increase spending to stimulate the economy. 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

Answer 79

The 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. Interest payments If interest rates increase on government debt, the amount the government pays in interest payments increases, so the deficit might increase. Privatisation An industry is privatised when the government sells the industry to the private sector. This provides them with a one-off payment, which could improve the budget deficit.

Answer 80

The national debt is the accumulation of the government deficit over time. It is the total amount the government owes. If the government is continuously running a deficit, the size of the debt increases. If the government reduces the size of their deficit, the rate of increase of the total debt is slower, but the debt is still increasing. It is only when the government runs a budget surplus that the size of the national debt decreases. Currently, the UK government is trying to reduce the size of the deficit and eventually run a budget surplus by 2019-2020, at which point they will start paying off the debt.

Answer 81

- Budget deficits : less government spending and higher taxes. However, this could lead to lower economic growth, which might cause government finances to worsen since tax revenue falls. Moreover, if taxes are too high, people could be discouraged from working, since they are not keeping much of their income. - Economic growth could be promoted to help reduce a deficit. This would increase revenue from taxes without needing to raise the rate of tax. For example, consumers would spend more, which raises revenue from VAT. However, this is not effective is the government has a structural deficit. - Governments can issue bonds to raise finance. This is not considered to be an effective long term solution to eliminate the government debt. However, it can help the government avoid raising taxes in the short run. The government has to pay interest to the investors who buy the debt, which has to be repaid at some point. - Governments could choose to default on their debt if it is no longer manageable. However, this can make accessing credit in the future difficult. - Russia and Argentina have defaulted on their debts in the past. - Sweden managed to use spending cuts and tax increases to balance their budget between 1994 and the late 1990s. Saudi Arabia used the sale of oil to reduce the debt burden from 80% of GDP to 10.2% of GDP between 2003 and 2010.

Answer 82

- There can be income redistribution and wage equality through government intervention. inheritance tax - sustained economic growth - progressive taxes, such as higher rates of income tax for the richest earners. This puts most of the tax burden on high income earners, and it allows the government to reduce regressive taxes and raise welfare payments. However, this could reduce incentives to work harder and earn more, and it could result in a fall in government revenue, as shown by the Laffer curve. - National Minimum Wage which ensures all workers can access a minimum standard of living. This aims to prevent employees exploiting their workers by paying them low wages, and it prevents people falling into extreme poverty. - governments might improve human capital by making education more widely Available - diversify the economy in order to stimulate economic growth and job creation. For example, countries such as Sri Lanka and tried to develop their tourism industry.

Answer 83

Governments could use monetary policy to stimulate the economy and raise government revenue. For example, governments in the UK, the US and the EU have used low interest rates. This can encourage spending and investment, in order to try and boost economic growth. Central banks can also pump money into the economy electronically to try and stimulate the economy. This is quantitative easing (QE). QE is usually used where inflation is low and it is not possible to lower interest rates further. It has been used by the European Central Bank to help stimulate the economy. Since the interest rates are already very low, it is not possible to lower them much more. The bank bought assets in the form of government bonds using the money they have created. This is then used to buy bonds from investors, which increases the amount of cash flowing in the financial system. This encourages more lending to firms and individuals, since it makes the cost of borrowing lower. The theory is that this encourages more investment, more spending, and hopefully higher growth. A possible effect of this is that there could be higher inflation.

Answer 84

International competitiveness is the ability of a nation to compete successfully overseas and sustain improvements in real output and living standards. Generally, the cheaper the relative unit labour costs, the more competitive the country in manufacturing. For example, countries such as China, India and Bangladesh have lower labour costs than countries such as the UK and US, which means that a lot of production requiring manufacturing, such as textiles, clothes and technology, has moved abroad. However, countries such as Germany are famous for producing high quality engineered goods, such as cars, so consumers might be willing to pay more for them. China has previously used currency manipulation in order to increase their international competitiveness. They devalued the Renminbi in order to make their relative export price lower. However, this is not a policy relevant for countries with floating exchange rates, such as the UK. Unit labour costs rise when wages increase at a faster rate than productivity. China’s large population means wages are generally low, but the rise of the middle class and consumer spending is pushing wages up. The UK government has tried to increase competitiveness by lowering the corporation tax rate from 21% to 20% in 2015. This is the joint lowest in the G20 and should help increase inward investment. Moreover, the UK government has established the ‘Red Tape Challenge’, which aims to simplify regulation for businesses, so it is cheaper and easier to meet environmental targets and create new jobs. It should help to encourage investment and innovation, so domestic firms can become more internationally competitive.

Answer 85

Due to globalisation, the world’s economies are increasingly interdependent. This means that economic shocks in one part of the world affect many countries. It is estimated that shocks in the global economy accounted for about 2/3 of weaknesses in UK output after the financial crisis. For example, economic decline in the Eurozone negatively affected the UK’s exports, since Eurozone countries form a large proportion of UK trading partners. The UK MPC reacted to this by lowering interest rates to 0.5%, the historic low, in order to encourage economic growth. Since this was the lowest that interest rates could realistically go, the bank started using QE to try and stimulate economic activity. Moreover, worsening conditions in the Euro area meant that UK banks faced higher funding costs. In order to support them, the government introduced the Funding for Lending Scheme, which aimed to lower these costs and provide cheap funding to banks and building societies. Following the vote for Brexit, the chancellor has set aside around £3bn (as of 2018) to deal with the effects. Interest rates were originally lowered to improve confidence. They have been raised slightly in order to deal with the inflation following the fall in the pound.

Answer 86

Transactions between companies in the same multinational group form up a significant proportion of global trade. The price of these transactions is known as transfer pricing. This price is set up in accordance with tax rules that determine the rate of tax on profits in different countries. Transnational companies have to calculate their taxable profits, but the rules are complex and difficult to apply. They can allocate their profits to different countries with different tax rates. Sometimes, transnational companies exploit these rules so they can reduce the amount of tax they have to pay. They could say that their activities have been in countries with low tax rates, for example, to reduce how much tax they pay. Companies can relocate parts of their company such as financial assets and intellectual property to low tax rate countries. This means that profits are taxed at a low rate. In the UK, companies which do not allocate sufficient profits to the UK, in accordance to rules, are challenged by HMRC. This means they have managed to earn billions of pounds in tax.

Answer 87

The tax rules are complex and difficult to apply and regulate. There could be costs to HMRC to challenge firms which do not declare their profits truthfully. Although HMRC managed to secure £4.1 billion in tax revenue for the UK Exchequer, this might have taken a long time to sort out

Answer 88

Inaccurate information Some policies might be decided without perfect information. This might require a full costbenefit analysis, and it could be time-consuming and expensive. For example, government housing policies are long term, and have failed several times in the past. However, it is impractical for governments to gain every bit of information they need, so assumptions are made. o Risks and uncertainties With government policies, consumers react in unexpected ways. A policy could be undermined, which could make government policies expensive to implement, since it is harder to achieve their original goals. o Inability to control external shocks For example, the financial crisis was unexpected and uncontrollable, and meant policies employed by policy makers did not have the intended effects.

Answer 89

- ability of a nation to compete successfully overseas and sustain improvements in real output and living standards

Answer 90

- RELATIVE UNIT LABOUR COSTS: how much labour costs per unit of output - could compete on non-price competitivesness if a niche market is targeted using product differentiation - RELATIVE EXPORT PRICES: ratio of one countrys export prices relative to other, expressed as an index. lower the export prices, more competitive the country

Answer 91

- ABILITY TO ATTRACT FDII FROM MNCs: a country can attract more fdi can increase productive capacity, helps produce long term growth and raise living standards Cost Factors: Labor Costs: Lower labor costs can improve competitiveness. Production Efficiency: Efficient production processes reduce costs. Exchange Rates: Favorable exchange rates can make exports more competitive. Quality and Innovation: High product quality and continuous innovation can enhance competitiveness. Investing in research and development (R&D) can lead to competitive advantages. Infrastructure and Logistics: Efficient transportation, communication, and infrastructure support competitiveness. Shortened supply chains can reduce costs and improve delivery times. Government Policies: Favorable trade policies, tax incentives, and regulations can boost competitiveness. Stable political environments and legal systems are crucial.

Answer 92

explains the relationship between exchange rayes, interest raytyes and output in an open economy. can be used to analyze short term fluctuations in deve,oped economies triangle with capital flow at the top. bottom left would be fixed exchange rate and bottom right is monetary autonomy. there is a conflict because you cannot have all three at once. - cant have a fixed exchange rate w one or more countries whilst having free flow of capital with others. cant have independent monetary policy because interest rate fluctuations would create currency arbitrage, stressing currency pegs and causing them to break. disadvantage of joining a monetary union - if you want free capital flow and monetary autonomy have to allow a free floating exchange rate if the government was worried about inflation, it could increase interest rates. These higher interest rates would cause appreciation in the currency. Countries which wished to promote growth would cut interest rates, but lower interest rates would cause hot money flows out of the economy and lead to a fall in the exchange rate - cant have a fixed exchange rate and monetary union: ;

Answer 93

Increased Exports: Competitive countries can sell more goods and services abroad, boosting economic growth. Job Creation: Export-oriented industries often create jobs, reducing unemployment. Higher Standards of Living: International competitiveness can lead to higher incomes and improved living standards for citizens. Foreign Direct Investment (FDI): Competitive environments attract foreign investment, leading to economic development.

Answer 94

Trade Deficits: Uncompetitive countries may import more than they export, leading to trade imbalances. Economic Decline: A lack of competitiveness can result in declining industries and economic stagnation. Unemployment: Uncompetitive industries may shed jobs, leading to high unemployment rates. Income Inequality: A lack of competitiveness can exacerbate income inequality as some industries decline while others thrive.

Answer 95

- the country will sell their reserves of their currency to buy a foreign currency - the country needs to depreciate the exchange rate to bring it back to its fixed

Answer 96

the price of one currency in terms of another

Answer 97

(nominal er or domestic price level)/ foreign price

Answer 98

tells consumers the amount of goods or services they will be able to buy when they change currencies

Answer 99

- terms of trade improve when they increase - to improve terms of trade export prices need to increase or import prices to decrease - if terms of trade decrease living standards will also decrease - improvement of terms of trade will decrease competitiveness as exports become more expensive relative to imports - decrease in competitiveness and exports means a decrease in AD and real GDP and less derived demand for labour and less export revenue, increasing current account deficit. - increase in competitiveness means an increase in exports, This will: lead to an increase in AD and then real GDP. Also, it increases the derived demand for labour to produce these extra exports, thus increasing employment. Increase in export revenue which will improve the current account deficit

Answer 100

- raw materials - increase in price of raw materials for poorer countries exporting them will improve ToT - increase in price of raw materials for rich countries importing them will decrease ToT - tariffs - Trump’s 30% America First tariff would increase the index of import prices which will deteriorate America’s terms of trade - exchange rates - a depreciation of the currency - will make imports more expensive and exports cheaper. this increases index of import prices and decreases the index of export prices, meaning terms of trade will deteriorate - A depreciation in the pound will lead to a(n) **deterioration** in the UK’s terms of trade. As a result, the UK’s international competitiveness will **improve or increase**. - an appreciation of the pound - will make imports cheaper and exports more expensive this will improve terms of trade - inflation - a country’s inflation rate is higher than its trading partners - its index of export prices will rise more and faster than its index of import prices. Therefore its terms of trade will improve. their living standards will also improve

Answer 101

- raw materials - increase in price of raw materials for poorer countries exporting them will improve ToT - increase in price of raw materials for rich countries importing them will decrease ToT - tariffs - Trump’s 30% America First tariff would increase the index of import prices which will deteriorate America’s terms of trade - exchange rates - a depreciation of the currency - will make imports more expensive and exports cheaper. this increases index of import prices and decreases the index of export prices, meaning terms of trade will deteriorate - A depreciation means deterioration in TOT and decrease im living standards. Improvement in international competitiveness. - an appreciation of the pound - will make imports cheaper and exports more expensive this will improve terms of trade - inflation - a country’s inflation rate is higher than its trading partners - its index of export prices will rise more and faster than its index of import prices. Therefore its terms of trade will improve. their living standards will also improve

Answer 102

the ratio of export prices to import prices. it calculates changes in relative prices of imports and exports

Answer 103

+ makes international trade easier - lack of automatic correction to current account imbalances + helps avoid issues of over values exchange rates - lack of monetary sovereignty. And need to to hold extensive reserves of foreign currency

Answer 104

+ monetary policy autonomy. Set expansionary or contractionary policy when they choose to - loose the ability to manage exchange rate as a deliberate policy tool MUNDELL FLEMING + trade balance adjustment: can correct trade imbalances over firm by depreciating the currency. BUT DEPENDS IN THE PRICE ELASTICITIES AND DEMAND FOR THE GOODS. - exchange rate volatility which discourages investment. Not immune to speculation attacks

Answer 105

The price of one currency in terms of another

Answer 106

- they provide legitimate and safe institutions to hold consumers and businesses money. - ensure the safety of deposited funds - encourage saving by paying interest - Pool the savings of many customers of the bank and stimulate economic activity by using these funds for investments and loans

Answer 107

- act as intermediatories between savers and lenders - use deposits of savers to give it to those who need the capital - financial institutions are supposed to test the reliability of borrowers before lending to them - this facilitates growth

Answer 108

- provide a wide range of payment and transaction services - play an important role in everyday economic transaction systems

Answer 109

- financial institutions allow individuals to buy and sell shares of publicly traded companies - stock exchange, brokerage firms will facilitate this exchange - this allows capital formation and efficient allocation of resources

Answer 110

- trade creation: can exploit their comparative advantage. Firm doesn’t need to worry abt the exchange rate being stronger or weaker. Can exploit economies of scale. European Central Bank which sets an exchange rate for everyone. One size does not fit all. Germany booming, requires tight fiscal policy. Greece is struggling and therefore Greece needs loose monetary policy - results in fdi. Coke sets up headquarters in the uk so they don’t have to place a common external tax Bailout Germany has to pay €56 billion to Greece On the balance of the evidence, costs outweigh the benefits

Answer 111

1) reducing the exchange rate (through depreciation or devaluation) when the pound falls Uk exports are more competitive and will increase their quantity demanded. Depreciation will make imports more expensive. THIS DEPENDS ON THE ELASTICITY OF DEMAND. If demand for imports in inelastic a fall in price will only lead to a small fall in demand and therefore the value of exports will decrease because lower price will only decrease revenue and not necessarily increase demand - if demand for exports is elastic then a fall in price will lead to a bigger increase in demand - MARSHALL LERNER CONDITION: DEPRECIATION IN THE EXCHANGE RATE WILL ONLY IMPORVE THE CURRENT ACCOUNT IF PED X+ PED M > 1 - using quotas. However other countries could retaliate. Would break rules of WTO - supply side policies: aim to improve productivity and competitiveness of the UK, such as investing in education or in infrastructure - deflationary fiscal policy: higher tax and lower government spending which would lead to less spending on imports HOWEVER may also lead to decreased spending on domestic goods.

Answer 112

- yield on bonds will increase ( for a risky economy the price of th bond will be low but will promise a high interest rate) - a AAA country will have high price bonds and low yields. - if a country’s debt as a proportion of real gdp may lead to a downgrade in their credit rating and therefore will lead to a decrease in demand for their bonds. If a country cannot sell bonds, it would therefore be harder for the government to service their debt. This increases chances of them going bankrupt - HOWEVER Japan has a debt to gdp ratio of over 250%, Japan has low interest rates. - HOWEVER this can only be a cause for concern if their interest rate fluctuates and is incredibly high. The governments yield on their bonds will increase and may owe the bond buyers money. As long as there is demand for the bonds they can refinance their debts with more bonds. - however investors may lose trust and stop buying the bonds. - deflation leads to negative wealth effect - if their is high debt like 100% debt in the UK, the country may have to pursue a policy of austerity which means higher taxation for the government to service their debt.

Answer 113

- implies that the country is not internationally competitive and therefore could be more efficient - decreased demand for the currency where as there is increased demand for the other currency.

Answer 114

harrod- domar model: savings provide the funds which are borrowed for investment purposes and therefore growth rates depend on the level of saving and the productivity of the investment

Answer 115

- higher demand for exports will translate into higher prices. This will only lead to an improvement in the terms of trade if there is an increase in export revenue, the theory assumes that the demand for exports will remain the same. - higher inflation may lead not lead to higher export revenue, depends on Marshall Lerner condition.

Answer 116

- graphical representation of the Marshall Lerner condition - argues that after a currency depreciation there may be a time lag until the economy benefits from depreciation. - this is because demand may be inelastic in the SR - initially the quantity of imports/exports may remain the same of previous contracts signed - earnings form selling exports may be insufficient to compensate for higher total spending on imports of inelastic goods

Answer 117

If countries use all their resources to produce the goods they have a lower opportunity cost of producing then global output would increase

Answer 118

- facilitate savings Allow people to invest savings - lend to businesses and individuals Capital markets can be used by businesses to borrow money or to sell shares, the lending can be used for investment - exchange of goods and services - provide forward markets - provide a market for equities allow people to buy and sell shares Effective and efficient financial institutions enable economic growth but

Answer 119

- money markets: provide short-term finance to banks, govts, companies and individuals. Short-term debt may have a maturity period of 24 hours or a year -capital markets: provide medium and long term finance:

Answer 120

- implementation of monetary policy: contro interest policy, quantative easing. - act as a banker to the government - act as a banker to other banks, lender of last resort. Sets the capital requirements for how much reserves of capital requirements a bank needs. Banks borrow short term but lend long term and may have a shortage of liquidity and therefore the central bank can provide liquidity. CB charges bank a higher rate of interest for emergency loans to encourage responsibility - regulator of the banking industry - aims to have 2% inflation, if this target is not met then they have to write to the chancellor explaining why they didn’t meet their goal

Answer 121

+ prevents panic and a run on the banks + it helps reduce the impact of financial instability - can lead to moral hazard by encouraging banks to take excessive risks - can lead to banks not holding sufficient liquidity - can seem unfair that the central bank will try to save financial institutions but not non-financial firms

Answer 122

- in charge of achieving price stability

Answer 123

- financial crisis usually happens after a long period of prosperity which causes low interest rates, easy credit, excessive speculation and overconfidence - a minor problem in a bank can quickly spread and cause the breakdown of a whole market or financial system

Answer 124

- speculation means buying assets cheaply and selling them at a higher price. If asset prices fall, the speculator will lose money - exciisevly high estimates of future asset prices can lead to market bubbles. This can create an overpay: prices in a market are much greater than the assets true worth - when investors finally owe confidence, the bubble will burst and investors will rush to sell their assets to avoid large loses, leads to prices plummeting, leaving investors with large debts( if they borrowed the money) and worthless assets - speculators often have leveraged funds, meaning the banks can also be complicit in creating market bubbles if they give out credit too easily

Answer 125

- financial crisis 2008 partially caused by a speculative bubble in US housing market - growth in sub-prime mortgages (mortgages market for borrowers with poor credit rating) caused house prices to rise because demand increased - the bubble burst when people who had taken on mortgages couldn’t afford to pay for them anymore and began to default and therefore house prices began to fall - the banks level of capital had to be reduced creating the credit crunch - this triggered a losss of confidence in the wider economy, a fall in AD and a deep recession

Answer 126

- asymmetric information is when one party in a contract has less information than the other. Borrowers may know better than the lender how Kelly they are to repay a loan - asymmetric information can lead to adverse selection and a moral hazard: - adverse selection: the most likely buyers of a product are those that the seller would preferably not sell to: the seller may not be able to te the difference between a bad seller and a good seller - a medical insurance company will set a premium for their insurance plan. If they set it too high, the consumers with good health (from who the company can make the most profit) will not want to buy it. However those with poor health (from who the company will make a loss) would buy it. - this would result in the insurance company only selling to unprofitable consumers meaning that they risk a huge financial loss and that could lead to it collapsing - moral hazard refers to when someone is willing to take risks because they know someone else will have to pay the consequences if anything goes wrong. For example, banks may be willing to take more risky ventures if they think they are too big to fail and will be bailed out by taxpayers

Answer 127

- occurs when traders on financial markets crude deliberately to manipulate markets and make huge profits - may make the demand for securities appear higher that it is to artificially inflate the price, preventing the market form working as it should - laws and regulations designed to stop market riffing and punish those that engage in it but if the penalties are not tough enough they wont act as a deterrent - in 2023 hsbc used tactics to move swap and treasury prices in a way that increased HSBC profits at the expense of clients who were engaging in trades. Despite having multiple fines in the past for market rigging.

Answer 128

- set up by the Bank of England - indentifying, monitoring and protecting against systemic risks in the financial system, issuing instructions to the PRA and FCA to tackle the problems that affect the financial system - advises the government on managing financial markets

Answer 129

- promotes stability of banks and promotes effective competition by - supervising firms and financial institutions to ensure they successfully manage risk - setting standards for conduct and management and making sure they are followed - specifying capital and liquidity ratios

Answer 130

- protected consumers and increase confidence in financial institutions and products - supervised conduct of firms and markets to ensure things are done legally and fairly. - promotes competition so that better deals ware lei jaded for consumers - bans projectscts that don’t benefit consumers - banning or forcing firms to change misleading adverts for financial products and services

Answer 131

- ensure the global financial system is well regulated and resilient to crises. Through the finnxil sector assessment program they evaluate strengths and weaknesses Essex of a countries financial market and recommend policies to reduce chance of a future financial crisis - both help countries in the aftermath of the financial crisis - imf and world bank criticised for encouraging austerity measures and reduce public spending, this would affect poor people the most - decision making of the imf and world bank is dominated by the richest countries and therefore favours interests of developed countries ahead of developing countries

Answer 132

- a country will discover minerals/ natural gas/ oil - foreign investment inflows will increase demand for the currency and make it stronger - other industries begin to decline because the currency becomes stronger and therefore internationally uncompetitive

macro theme 4 Flashcards

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