Macro Theme 4 Flashcards

Question

Why would the government impose barriers?

Answer 1

+ to protect jobs: risk of too many job losses if domestic firms are outcompeted + need to protect infant industries: especially in developing countries will struggle against international firms. Governments may impose trade barriers until the firms are big enough to compete, risk that without international competition the firm will never become competitive + ban certain goods because they consider them bad for society + to avoid overdependence + to protect against dumping when companies sell goods at a price that is lower than the production cost to force other countries out of business + to correct balance of payments imbalances

Answer 2

+ tariffs: makes imports more expensive and therefore domestic manufacturers are better able to compete and raises tax revenue for the government + quotas can be fixed which may limit the quantity of a certain goods that can be imported + embargoes: bans placed on certain products + reduce the value of the currency: raises the prices of foreign imported and lowers the price of domestic exports

Answer 3

+ 39 different trade deals + ongoing trade talks with USA, India, EU, GCC + Australia and New Zealand trade deals: lead to trade creation and economic growth + lower prices, increase in quantity and choice + technology diffusion + inward FDI, free movement of businesses - domestic firms without comparative advantage will suffer. Aus and NZ, UK farmers complained that aus farmers will outcompete leading to rising unemployment - reduced standards: US product standards in agriculture are much lower this will reduce consumer welfare, worker health and safety standards, environmental standards - trade deficits can be shown on a free trade diagram Evaluation - takes a long time to get to trade deals - EU no tariff no quota deal but there are non-tariff barriers such as meeting eu standards. Differing VAT rates within the EU need to be applied to imports into the EU - unfair trade practices: domestic subsidies, state intervention

Answer 4

Annual growth rate: 1.1% (2024) Annual growth forecast: 0.75% according to BoE due to high interest rates and taxation, cuts to government spending, trump trade war influencing demand. High energy and food prices reducing the SRAS, weak investment and poor performance of public spending Output gap: -0.6% GDP per capita: £36k Unemployment rate: 4.4% cyclical unemployment. Natural unemployment is 3.5-3.8% Employment rates: 75.1% ONS have had difficulties getting people to partake in the labour force survey, meaning a very small sample size was tested doesn’t reflect the whole economy Wage growth: 5.9% higher wage bargaining power. Higher than inflation Low job vacancies: loose labour market Youth unemployment: 13.3% increased by 2% over the past year Low consumer confidence Inflation: 2.6%, UK economy experiencing disinflation Core inflation rate: CPI basket without including price volatile goods: 3.9%, indicates price volatile goods are going down Current account deficit: 2.6%, over the last decade was 4%. Low AD has quelled demand for exports Very weak investment since brexit and low productivyu Very high minimum wage 12.21 Weak pound exchange rate £1= $1.32 £1= 1.16 euro manufacturing only makes up 14%. Export non-price sensitive services so hard to take adv of weak pound. Import neccessities that we lack a domestic substitute for Govt finances: Prior to covid was 2% of GDP, forecasted 4.8% National debt was less than 80%, 95.5% of GDP Very contractionary fiscal policy Bond yields: 4.67% Fiscal drag, tax bands have frozen until 2028, will earn the government £45m increase Reducing national insurance: Corp tax: 25% VAT: 20% Gini coefficient: 0.35, increased over past few years. Interest rates: base rate: 4.5%. Taming inflation, was very low in dec. 5.25% reached. Savings ratio: 12% proportion of, prior to covid was 4-5% £450bn during covid years QE

Answer 5

Transmission mechanism: what happens to the different components of AD Monetary policy is the manipulation of interest rates and money supply to achieve macro objectives 1st KAA: disinflation Topic sentence: one impact of higher interest rates is disinflation AD= C+I+G+(x-m) Consumption: high interest rates increases the MPS as the reward for saving money has increased and the cost of borrowing has increased dramatically aswell. During Covid, expansionary demand side policy was implemented, and interest rates were cut to around 1%. This was the start of a period of high inflation. To offset this the government has since implemented. Contractionary policy, and the peak interest rate to reduce inflation was 5%. Credit- funded consumption. Less likely to use a credit card Mortgages: variable/tracker mortgage, track BoE interest rate. Less disposable income Investment: firms need to borrow money to invest As interest increases they will reduce i Be more risk averse because if their investment fails will have to pay back more money Evaluate: if economy is initially at spare capacity, raising interest rates will only lead to negative economic growth but not a decrease in inflation. Where as where an economy is overheating and the economy is near full capacity, reducing interest rates is smart. During Covid when there was high inflation, the UK had a negative output. A reason for high inflation were supply side shocks. ![IMG_2038.jpeg](attachment:0c75d61b-20a6-4ebd-9891-b3b8bb88bf06:IMG_2038.jpeg) Foreign exchange market: buying and selling pounds. Hot money flows will increase. Demand for £ will increase and the £ will appreciate Makes the UK economy less price competitive. This will cause exports to decrease because imports become cheaper in £. The UK current account will worsen Evaluate: Marshall Lerner. In order for current account to worsen, the Marshall Lerner condition must be satisfied Marshall Lerner condition the sum of the elasticities of imports and exports must be greater than 1 J curve: British firms may be in contracts. And so in the short run the current account will improve

Answer 6

- Trade in goods - trade in services - investment income: dividends from international firms, property income - current transfers: money going in or out without any corresponding output. International aid, remittances Value of exports- value of imports

Answer 7

- exchange rate - price competitive factors: wages - price competitive factors: non-wages - quality competitive

Answer 8

Used to make easy comparisons of data between years Base year 100 How to calculate index numbers? Price. Index Jan 05 45. 100 Mar 12 125 125/45 =2.778*100=277.8 Prices have increased as 177%

Answer 9

1) the harrod- domar savings gap: GDP per capita is very low and the MPS is very low. This means banks have little incentive to set up financial markets in these countries. This leads to capital flight. Even the people who have money in that economy are not incentivised to leave their money there, would rather invest abroad. People cannot save money to buy their own house or get a loan to do so: low capital accumulation 2) Low investment because firms cannot get enough money from banks to expand their business. Investment is needed to shift the LRAS curve. EVAL: aid can fill the savings gap. Individuals do not need to spend all their income on basic necessities now. World Bank Increase of technology: Apple Pay, online banking may increase savings 2) Harrod-domar model: foreign exchange gap. Foreign reserves of foreign currency are needed to import capital machinery. Currency may depreciate/ may experience a decrease in ToT due to volatile commodities/ prebisch singer hypothesis which means that it is harder for the country to import foreign machinery needed to invest. Also if a large amount of the country’s debt is foreign, it may be hard for teh country to service their debt. Increase in tourism may fix this problem, Egyptian foreign reserves reached $35 billion in June 2024 because of their large influx of tourism. 3) PPD. Exporting commodities, commodities are very price volatile. If a county is overly dependent on a price volatile good and there is a significant decline in the harvest/ production of that good it can have major economic impacts: mass unemployed leading to decreased tax revenue. Furthermore, can cause Dutch disease. In Norway, massive demand for exports of oil led to currency appreciation which lead to other sectors being uncompetitive. Eval: can be correcting with forward markets Buffer stock schemes 4) Prebisch singer hypothesis. Countries that are exporting primary products will experience deterioration in their ToT over time. YED commodities is income inelastic where as demand for a manufactured goods is income elastic. PPD country’s terms of trade will deteriorate, they will not be able to buy as much capital machinery. Eval: many countries can benefit from PPD. UAE exporter of oil. They have used the revenue to invest into their tourism. If you have comparative advantage or a natural resource this should be exploited Eval: 2000-2008 price of manufactured goods declined because of the entry of china as as a manufacturer. Lots of oil was demanded for production. This increased the ToT for PPD countires.

Answer 10

- bilateral aid: donor country sends aid direct;y to the recipient country. - multilateral aid: donor countries pass aid to an intermediate agency: world bank who then distrustibutes the aid - tied aid: aid sent on the condition that it is spent in a particular way (imports from the donor country) Development aid: sent as emergency relief or to promote development

Answer 11

+ reduced absolute poverty + improvements in health and education which improves a country’s human capital, improves their level of HDI + Fills the savings gap and the foreign exchange gap + multiplier effect

Answer 12

- can create a dependency culture, may encourage countries to rely on other countries for money instead of developing their own economies - can be misused by corrupt governments - may be used to secure favours for the donor country rather than actually helping

Answer 13

+for low income countries servicing debt can take up a large portion of their income and will have less money for other things. + the money saved can be used for capital spending to grow the economy + loans may not have been used properly, were used for corrupt reasons.

Answer 14

- creates dependency culture and moral hazard. May feel like just borrowing more in the future - the money freed by debt relief may be used for corrupt reasons - debt cancellation may be used to secure influence over recipient country.

Macro Theme 4 Flashcards

(38 cards)