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Zak copy econ > Macro year 2 NOT FINISHED > Flashcards

Macro year 2 NOT FINISHED Flashcards

1
Q

what causes a shift in SRAS

A
  • a increase/decrease in CoP
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2
Q

what is the main differences between classical and keynesian economics

A
  • Classical likes minimal government, trusts in market self-correction.
  • Keynesian prefers government involvement, especially in tough times, to boost demand and tackle unemployment.
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3
Q

what 2 factors does the phillip curve join
what type of relationship do the factors have

A
  • inflation rate % and unemployment
  • they have an inverse relationship
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4
Q

what does the phillip curve show us

A
  • there is a conflict between inflation and unemployment
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5
Q

re is

what is meant by stagflation

A
  • high inflation and high unemployment
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6
Q

what is the multiplier effect

A
  • Possibility that when the initial shift in aggregate demand encourages more spending, which effects other consumers, encouraging further spending, savin , investment and so on
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7
Q

what is the equation to find the multipler

A
  • 1/1-MPC
  • 1/MPW

MPC refers to marginal propensitry to consume

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8
Q

what actually is meant by MPC (marginal propensity to consume)

A
  • out of each extra pound being earned how much of that is going to be spent on consumption
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9
Q

what actually is meant by MPW (marginal propensity to withdraw)

A
  • out of each extra pound earnt how much of it will be a withdrawal/leakage from the economy (savings, imports, taxation)
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10
Q

how do the values of MPC link to the values of the multiplier

A
  • the bigger the values of MPC the bigger the multipler and visa versa
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11
Q

what could cause a decrease in peoples MPC

A
  • an increase in peoples marginal propensity to withdraw
  • ^increase in marginal propensity to save,taxation and import
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12
Q

what is the accelerator effect

A

investment would be likely to increase if rate of GDP growth is increasing as firms predit an increase in demand and growth in the future and so firms pre-emptively invest

Vice versa if decreasing rate of GDP growth

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13
Q

what makes up the balance of payments

A
  • current account
  • financial account
  • capital account
  • net errors + omissions
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14
Q

what does the capital account, account for

A
  • inheritance tax (international)
  • debt forgiveness
  • death duties (internationally)
  • sales of tangible assets overseas (selling skyscraper)
  • transfer of financial assets by migrants
  • sales of intangible assets overseas (such as land)
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15
Q

what does the financial account, account for

A
  • portfolio investment transactions (buying and selling of financial assets)
  • FDI
  • reserves (of currency or gold)
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16
Q

how could AD be affected by a current account deficit

A
  • could lower AD
    ^X-M is the biggest component of current account
  • chances are in CA deficit gonna have negative trade balance (X-M = negative), which would pull down AD
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17
Q

how can a current account deficit cause a currency crisis and potential economic crisis

A
  1. Borrow to cover deficits.
  2. Accumulate debt (e.g. gov bonds, corporate bonds)
  3. Investor confidence declines.
  4. Currency sell-off by investors (causes depreciation)
  5. people in country with savings, debt (money) move money out (worsening of depreciation)
  6. exchange rate risks
  7. Debt servicing becomes challenging.
  8. Potential for a currency crisis and economic problems.
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18
Q

how could a current account deficit have consequences for the exchange rate

A
  • if a country is selling more of its currency (to import) than is demanded (in exports) by other countries than there will be an increasing of supply of domestic curreny in the market
  • ^ this creates downward pressure on value of currency (depreciation)
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19
Q

what could be an evaluative point when talking about how a current account deficit can affect the exchange rate

A
  • in theory as downward pressure put on currency (depreciation) CA deficit could rectifiy itself due to WIDEC and imports falling
  • but could argue that if country is already in CA deficit could be sign of lack of competitiveness
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20
Q

what main type of policies are available to goverments to close a current account deficit

A
  • expenditure reducing policies (policies to reducing spending on imports in economy)
  • expenditure reducing policies
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21
Q

what are some evaluative points that can be used when talking about contractionary monetary & fiscal policy that aim to help close a current account deficit

A
  • conflict of obj (by reducing AD, increasing unemployment, reduced growth, perhaps recession)
  • consumer/business confidence (e.g. could be so high AD does not fall if intrest rates rise)
  • output gap (if econ at full employment even if AD goes left incomes may not decrease)
  • MPM (if not high, policies may not be effective enough to cause impact)

MPM = marginal propensity to import

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22
Q

what are some evaluative points that can be used when talking about weaker exchange rates for purpose of reducing CA deficit

A
  • marshall-lerner condition (How price elastic of demand for imports and exports)
  • inflation (can be cost push and demand pull)
  • retaliation & currency wars (essentially protectionist measure, countrys may do something, u dont get benefits)
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23
Q

what are the demand side causes of a current account surplus

A
  • high incomes abroad (↑ importing by them, higher exports by us)
  • low incomes domestically (low imports)
  • weal exchange rate (WIDEC)
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24
Q

what are the supply side causes of a current account surplus

A
  • low relative inflation (high international competitveness)
  • low unit labour costs: can pass on lower prices (high productivity, weak TUs, low min wages)
  • strong investment (keep prices low in LR, is capital up to date)
  • gains in comparative advantage (specalisation of one good, can export it)
  • new resource discoveries (can sell them around world, up export rev)
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25
Q

what are the consequences of a current account surplus

A
  • ↑(X-M), ↑AD, ↑ growth, ↓ unemployment, ↑ inflation
  • appreciation of exchange rate (increased demand for currency)
  • financial account deficit, to balance balance of payments (can buy gov bonds, what if foreign country has issues)
  • can harm international relations (can cause trading wars with CA deficit countries, especially if using dirty tactics such as heavy protectionism)
  • sign of unbalanced economy (if products are being exported, maybe not enough products for domestic consumers)
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26
Q

what is absolute advantage

A

occurs when a country can produce a product using fewer factors of production than another nation

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27
Q

what is comparative advantage

A

states that a country should specalise in the goods.services it can produce at the lowest opp. cost, and then trade with another country

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28
Q

how would you calculate the comparative advantage of a good/service

A

divide both values by the value of the good your trying to find the opp. cost for

e.g. produce 20 apples and 10 berriers
to find opp.cost of producing apples divide both sides by 20 and you will find out to produce 1 apple they are given up 0.5 berries

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29
Q

what must occur for given countries to exploit there comparative advantage and achieve mutally benefical trade

A
  • a rate of exchange must be suitable (this lies between the oppurtunity costs of production for the given countries)
    ^its only worth trading with another if what they get in return is greater than what they could of made themselves
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30
Q

when can a country consume outside of their PPF curve by using comparative advantage

A
  • by specalising in where they have the comparative advantage and by coming to a suitable rate of exchange
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31
Q

what are some limitations to the theory of comparative advantage

A
  • assumes perfect knowledge: consumers might not know where lowest prices are
  • assumes no transport costs: can erode comparative advantage if huge costs
  • assumes no economies of scale: country that doesnt have comparative advantage could exploit EoS, distort comparative advantage
  • rates of inflation ignored: if high rates erodes comparative advantage benefits
  • no import controls: could have tariffs, quotas on imports, comparative advantage distored
  • non-price competitiveness
  • exchnage rate movement ignored
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32
Q

what are some benefits of free trade

A
  • higher efficency, better allocation of world resources (comparative advantage)
  • access to goods that wouldnt be produced domestically (both goods and raw materials)
  • lower prices: ↑ competition, ↑ EoS, ↑ technological transfers
  • greater consumer choice (quantity of goods and variety of goods)
  • economic growth (if comparative advantage, not just supply domestic market but world market, ↑ export rev)
  • increase in consumer surplus (eval decrease in producer surplus)
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33
Q

what are some arguements for protectionism

A
  • protect infant industries: may only need short term protectionist measures
  • protect against dumping: sale of a good below its cost of production
  • protect domestic employment
  • protect against exploitative low cost labour abroad
  • protect product standards (if goods coming in dont follow the same standards you do)
  • to raise gov rev (tarrifs)
  • avoid risk of over specalisation (allow other industries mature so you arent dependent on one industry in which you have the comparative advantage)
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34
Q

what is an embargo

A
  • a government-imposed restriction on the trade of specific goods/services with one or more countries.
  • It involves a complete ban on imports or exports
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35
Q

what are some evaluative points that can be used when talking about the arguements for protectionism

A
  • protect infant industries arguement: can allow them room for inefficency
  • dumping arguement: it is very hard to prove, if you do protect due to think dumping it occuring and its not, retaliation
  • protect domestic employment: if industry already going into decline may be longing out process
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36
Q

what is dumping and how can it occur

A
  • practice of exporting goods at a price that is below the cost of production
  • if country has surplus product may sell it off for cheap overseas
  • may also be short term stragtery to gain market share and drive out competers
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37
Q

what actually is a tariff

A
  • a tax/duty imposed by a government on goods traded internationally.
    ^It can be a percentage of the value of the goods (ad valorem) or a fixed amount per unit (specific)
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38
Q

how would a tariff affect a domestic market

A
  • shifts world supply up (raises prices in market)
  • ^ contraction of domestic demand, extension of domestic supply
  • imports decrease
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39
Q

what are some disadvantages of using tariffs

A

General arguements against protectionism:
- market distortion (↑price, ↓choice, ↓ consumer surplus)
- production inefficencies (deadweight loss of world efficency)
- retaliation

specific:
- regressive (especially because tariffs are often on necessity items)

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40
Q

what is some evaluation that can be used when talking about tariffs

A
  • the price elasticity of domestic demand and supply (if inelastic not big change, perhaps other policies may be better)
  • size of tariff
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41
Q

what is an import quota

A
  • a restriction set by a government on the quantity of a particular good that can be imported within a specified time period
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42
Q

how does an import quota effect a domestic market

A
  • quantity of imports capped (the creates excess demand)
  • ^this leads to increase in price in market
  • shift of supply in market to right (because new suppliers enter market, incentivised by higher price)
  • contraction of domestic demand due to higher price
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43
Q

what are the arguements for a import quota

A
  • protect infant industries
  • protect against dumping
  • protect domestic employment
  • protect against exploitative low cost labour
  • may improve trade position
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44
Q

what are the arguements for a trade subsidy

A
  • protect infant industry
  • protect against dumping
  • protect domestic employment
  • may improve CA position
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45
Q

how does trade subsidies effect a domestic market

A
  • extension of domestic supply
  • raised effective price for domestic firms
  • decrease in imports
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46
Q

what is the world trade organisation

A

international organisation that regulates world trade

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47
Q

how many states are members of the world trade organisation

A
  • 164 members (117 of which are developing)
  • 86% of countries are in world trade organisation
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48
Q

what is ideal trade according to the world trade organisation

A
  • non-discriminatory
  • free from barriers (protectionism)
  • predictable (easier for investment decesions to take place, business can grow)
  • promotion of fair competition (even SR protectionism if it is needed)
  • benefical for developing countries through special provisions
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49
Q

what are the roles/functions of the WTO

A
  • set and inforce rules on international trade
  • resolve trade disputes (reduce retaliation)
  • provide a forum for negotiating trade liberilisation and monitor it
  • to increase the transparency of decision making process by the WTO
  • to help developing countries fully benefit from global trade
  • cooperate with other major economic institutions
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50
Q

what is the IMF (international monetary fund)

A
  • works to achieve sustainable growth and prosperity for all of its 190 member countries
  • 97% of countries are members
  • It does so by supporting economic policies that promote financial stability and monetary cooperation
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51
Q

what is meant by international competiveness

A

the ability of a nation tom compete successfully overseas and sustain improvements in lliving standards and outputs

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52
Q

what 3 things can international competivieness be broken down into

A
  • price competitivness
  • non-price competitiveness
  • ability to attract factors of production (FDI)
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53
Q

what are the 3 fundamental measures of international competitnessess

A
  • unit labour cost (UCL)
  • global competitveness index (GCI)
  • terms of trade (greater the terms of trade the worse the price competitiveness)
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54
Q

what is the equation for unit labour costs
what kind of things will determine unit labour costs

A
  • total labour cost/output
  • productivity (if high lower UCL)
  • skills
  • high min wages (increase unit labour costs)
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55
Q

what are some factors that determine international competitiveness

A
  • ULCs
  • labour flexibilty, skills (flexbility of hours, skills, part-time, how easy someone can leave and enter industries)
  • tex regime (corp tax, effects reinvestment, useful for efficency gains, if low can also attract FDI, if income tax low can attract foregin workers)
  • innovation (both price and non-price comp)
  • infrastructure (can boost efficency)
  • regulation (can enforce costs, can elongate process of business, can also improve non-price comp)
    • economic stability (stabiler is it easier to attract FDI and for domestic business to grow)
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56
Q

where is the uk ranked on the global competitiveness index

A
  • 9th out of 140 countries
  • in top 6%

lowest corportation tax rate in developed world

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57
Q

why would a goverment want ot improve their international competitiveness

A
  • to rebalance an economy (if growth led by consumption would work to improve exports to give another avenue for growth)
  • for the longterm longevity of the economy and sustained growth
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58
Q

what are some examples of policies that can be used to increase international competitiveness

A
  • gov spending on transport infrastructure: make business more efficent (easier,quicker, cheaper), attracts FDI
  • tax incentives: lower income/corp tax, tax allowances on investment (investment, attracts FDI, increase size of labour force)
  • deregulation: lowers CoP, attracts FDI
  • gov spending on education: improving skills (curiculum reforms, re-training), apprenticeships (drive down unit labour costs)
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59
Q

what are some evaluative points when it comes to policies to increase international competitiveness

A
  • cost -> opp. cost (costs may have to go up in future to fund, counter productive)
  • no guarentee such policies will work
  • time lag (education reform especially)
  • targeted (policy may be uneffective if targets wrong area)
  • relative concept (may be using policies but if another country using policys more wouldnt see benefits)
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60
Q

what is globalisation

A

process in which national economies have become increasingly intergrated (countries becoming more alike) and inter-dependent (they rely on eachother more)

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61
Q

what are some causes of globalisation

A
  • trade liberalisation
  • trading blocs (more and deeper)
  • growth of MNCs (greater intergration)
  • technological advancement (easier to intergrate)
  • mobility of labour and capital (increased intergration and inter reliance)
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62
Q

what are the pros of globalisation

A
  • increased competitiveness: lower prices, innovation, efficency gains (good for firms & consumers)
  • free movement of labour and capital: FDI (trading blocs)

benefits of trade:
- high growth
- higher tax revenues for govs,
- in developing countries promotes economic development
- greater employment
- benefits from large EoS (increased market size)
- tech transfer and innovation

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63
Q

what are the cons of globalisation

A
  • growing inequality
  • higher structual unemployment (demand deficant unemployment)
  • environmental costs: lack of sustainability
  • trade imbalances (export led growth is lucrative, but if slows down/shock trade wars may begin to rectify imbalances)
  • greater risk of external shocks (if one country has crisis could take down others, even in particular industries)
  • less cultural diversity
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64
Q

what percentage of wealth does the top 1% hold

A

between 55-63% of global wealth

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65
Q

what must the goverment have if they wish to have a fixed exchange rate

A

the gov or central bank requires large amounts of currency reserves

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66
Q

what is a fixed exchange rate

A

a value determined by the government compared to other currencies.

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67
Q

what would the goverment/central bank do if the currency has increased in value compared to your fixed exchange rate

A
  • gov/central bank would sell their currency and buy up foreign currencies
  • ^to increase the supply of their currency in the market to devalue the currency back down to the desired value
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68
Q

what would the gov/central bank do if the currency has devalue below the value of the fixed exchange rate

A
  • they would need to increase demand for their currency hence revalue the currency
  • ^would use foreign currency reserves to buy up their currency in the market (e.g. forex trading)
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69
Q

when would depreciation and devaluation be used, the same with appreciation and revalueation

A
  • devalue and revalue in fixed exchange rates
  • appreciaition and depreciation would be used when talking about semi and free floating exchange rates
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70
Q

what is an acronym to remember the effects of a appreciation of exchange rate

A

-SPICED
- strong, pound, imports,cheap, exports, dear

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71
Q

what are the cons of an appreciation in exchange rate

A
  • lower growth: potential current account deficit due to↓ (X-M)
  • higher unemployment in exporting and domestic industries (domestic firms have to compete with cheap imports)
72
Q

what are some pros of an appreciation in exhange rate

A
  • lower cost push and demand pull inflation
  • cheaper imports: higher material living standards
  • potential efficency gains for domestic producers (due to higher competition)
73
Q

what is an acronym to remeber the effects of a depreciation in the exchange rate

A
  • WIDEC
  • weak, imports dear, exports cheap
74
Q

what are the pros of a depreciation in exchange rate

A
  • increased employment in exporting and domestic industries (for domestic imports dearer so consumer may switch to domestic)
  • increase in growth, but could decrease again due to shift left of SRAS as CoP increase
75
Q

what are the cons of a deprication in exchange rate

A
  • higher cost push and demand pull inflation: demand pull due to increase in AD, ↑ (X-M)
  • could negatively impact growth due to SRAS shiftling left due to higher CoP, but AD shifts right to increase it
76
Q

what are some evaluative points that can be used when talking about appreciations and depreciations in exchange rates

A
  • the extent to which the exchange rate has changed
  • price elasticity of demand for exports and imports
  • depends on whether their is restrictions on trade (protectionism)
77
Q

how could a current account deficit (trade deficit) affect an exchange rate

A
  • it would cause a depreciation as there would be a higher supply of the pound than demand,
    ^because people would need to exchange pounds for foreign currencies in order to buy foreign goods and so supply of pound would increase
78
Q

how could a floating exchange rate bring about automatic correction of a current account deficit

A
  • if CA deficit, assume trade deficit, higher supply of currency than demand for it (due to exchanging domestic currency for foreign currency), this would cause depreciation of domestic currency -> WIDEC, could decrease imports and increase exports bettering CA position
79
Q

what is an evaluative point that can be used when talking about a floating exchange rate automatically correction a CA deficit

A
  • speculation: dominates impact of trade on supply and demand of a currency
  • marshall-lerner condition
  • j curve effect
80
Q

what is the marshall lerner condition

A
  • a currency depreciation will only correct a current account deficit if PED(exports) + PED(imports) > 1
  • PED (X-M) is elastic
81
Q

what is an acronym that helps explain the link between elasticity and total revenue

A
  • EOIS
  • elastic opposite
  • inelastic same
  • raise prices on elastic good total rev falls (vice versa)
  • raises prices on inelastic good total rev increases (vice versa)
82
Q

explain how the marshall lerner condition can actually be evaluation for a depreciation in exchange rate to fix a CA deficit

A
  • if exports and imports inelastic, and depreciation occurs (WIDEC)
  • import expenditure increases as more expensive
  • export revenue decreases as exports cheaper
  • worsen CA deficit
83
Q

what is the j curve effect
how can it be used as evaluation against the marshall-lerner condition

A
  • in the short term when a currency depreciates PED(exports) + PED(imports) is often less than 1 (inelastic) so the marshall lerner condition is not met (as domestic and foreign consumers/firms take time to adjust)
  • the effect of a depreciation takes time to be realised and so CA deficit would not get better at first but get worse then get better
84
Q

what is the purchasing power parity

A

theory that suggests that in the long run, exchange rates between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in both countries.

85
Q

what is the objective of the purchasing power parity

A
  • used to compare relative value of currencies,
  • assess whether a currency is undervalued or overvalued based on the price levels of goods/services.
86
Q

what can be used to measure the purchasing power parity between 2 countries

A
  • the real exchange rate can be used
  • it takes into account changes in cost/prices
87
Q

what does it mean if a currencies real exchange rate is different from its purchasing power parity exchange rates

A
  • If actual exchange rates are different from nominal (PPP) rates, a currency is undervalued or overvalued
  • e.g. if nominal rate (PPP rate) is £1 = $1.60 and then the real exchange rate changes to £1 = $1.70 it means the £ is undervalued against the $ (vice versa)
88
Q

How could the real exchange rate lead to an appreciation of the nominal exchange rate of a currency

A
  • Undervalued Currency: If a country’s currency is relatively cheaper (undervalued), demand for its exports may rise, increasing demand for the currency leading to currency appreciation.
89
Q

How could the real exchange rate lead to a depreciation of the nominal exchange rate of a currency

A

Overvalued Currency: If a currency is relatively expensive (overvalued), demand for its exports may fall, as demand for its currency decreases causing currency depreciation.

90
Q

what is the objective of the big mac index

A
  • it applies purchasing power parity theory to work out if currencies are over or under valued
91
Q

how is the big mac index actually used

A
  • look at the price of a big mac in the USA (e.g. $4.75), would then look at nominal exchange rates and compare what the price of a big mac would be in other countries (e.g. swiss price is $7.54, this means swiss franc overvalued)
92
Q

what is the difference between the real and nominal exchange rate

A
  • Adjustment for Inflation: real exchange rate takes into account changes inflation, whereas the nominal exchange rate does not.
  • Comparing Purchasing Power: real exchange rate helps in comparing purchasing power of different currencies
93
Q

what are the cons of a floating exchange rate

A
  • volatility: can reduce incentive for FDI, trade
  • self-correction of trade deficit unlikely: speculation more likely to affect supply and demand
  • inflation rates: if high inflation, maybe reduce net exports, supply of currency increasing more than demand, downward pressure on exchange rates, this could highten inflation (cost push)
94
Q

what are the pros of a fixed exchange rate

A
  • reduced exchange rate uncertainty: promotes FDI & trade
  • some flexability permitted: semi-fixed exchange rate, gov can also re/de value if want
  • reduction in cost of trade: reduced hedging
  • discipline on domestic producers: can’t rely on falling exchange rate, have to be competitive
95
Q

what is hedging

A
  • strategy used by firms to protect themselves against the volatility of financial markets and commodity prices.
96
Q

what does hedging involve

A

It involves taking action to minimize potential losses that may arise from adverse price movements in the future.

97
Q

what are the cons of fixed exchange rates

A
  • intrest rate effects: reduces flexibilty of monetary policy
  • large currency reserves needed: costly -> opp. cost
  • speculative attacks if exchange rate set to high or low:
98
Q

why do most goverments use semi-fixed exchange rates

A
  • get most of the pros of floating while minimising the cons
  • best of both
99
Q

why would goverments want to intervene with foreign exchange markets

A
  • improve employment: lower exchange rate exports cheaper, more employment in those industries, general employment as well
  • fight inflation: increase exchange rate means imports cheaper, lower cost push and demand pull as lower AD
  • maintain a fixed exchange rate:
  • stabalise a floating exchange rate:
  • improve a CA deficit: weaker exchange rate needed to improve trade deficit
100
Q

How would a goverment intervene in an exchange rate market

A
  • buy/sell domestic currencies using currency reserves (increase supply/demand in markets to influeunce rates)
  • using intrest rates: using hot money in and out flows to manipulate supply and demand in markets
101
Q

what are the benefits of economics growth

A
  • rise in material living standards: increase in incomes
  • unemployment reduction: derived demand
  • positive impact on gov finances: higher income and corp tax rev, spending on unemployment benefits falls
  • promotes investment ->accelerator: if sustained, firms know demand in future gonna be higher
102
Q

what are the costs of economic growth

A
  • income inequality -> especially capital intensive or industry depenedent growth: if industry already rich could just make them richer, if no labour in production no incomes generated
  • higher rates of inflation
  • negative externalites: such as pollution, resource depletion and degradation
103
Q

what are the costs of unemployment to the economy

A
  • lost output: unused resource, wasteful in production (inside PPF curve)
  • deteriation of gov. financies :higher unemployment benefits, lower income tax rev, spending on impoverished areas
  • hysteresis: especially if LR unemployment, discouraging of workers who cant get employment after long time (less spending in economy)
  • soical costs: divorce, worse mental health, drug use
  • reduced trade in other countries: reduction in their export market and so revenue
104
Q

what is austerity

A
  • policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both
105
Q

what are some costs of unemployment to the individual

A
  • loss of income: reduced spending, loss of material living standard
  • loss of status/self worth: can lead to worse mental health
106
Q

what are some benefits of unemployment

A
  • firms benefit from greater pool of workers: can be more choosy when picking workers
  • workers have time to look for the best job for them
107
Q

what are some evaluative points that can be used when talking about the costs and benefits of unemployment

A
  • type & duration: cyclical can be bad in recession, structural can be LR, frictional healthy as can get benefits
  • severity: how big in unemployment rate, if at NRU healthy
  • level of unemployment benfits & type of country: if high can reduce individual costs, but large cost, could incentivse unemployment
    ^if advanced country with good welfare state not bad, if in developing country with no welfare state could be bad

NRU = natural rate of unemployment

108
Q

what are some costs of inflation

A
  • reducing in purchasing power: lower material living standards, lower consumption in future
  • menu costs: costly for businesses of reprinting and calculating prices
  • shoe leather costs: time and effort taken to minimize effect of inflation on eroding purchasing power of money
  • fiscal drag:
  • reduction in international competitiveness: As high relative prices of exports, price of imports less than domestic prices
  • anticipated inflation: wage price spiral, consumption led spiral
  • uncertainty: could put firms off investing as dont know what prices could be in future
  • savers: real value of savings erode, bad for OAPs and retired who rely on saving
109
Q

what is fiscal drag

A

when people pay higher taxs becuase of inflation and rising incomes and not a rise in real income

110
Q

when can fiscal drag occur

A
  • when progressive tax systems are not adjusted for inflation.
111
Q

what is the result of fiscal drag

A

individuals may move into higher tax brackets because their nominal incomes have increased with inflation, not necessarily because their real incomes (adjusted for inflation) have risen

112
Q

what is a wage price spiral

A
  • negotiation of higher prices by workers to match current and/or anticipated inflation, this raises CoP, this means firms could pass on higher prices leading to greater inflation
  • this can repeat itself hence spiral
113
Q

what is a consumption lead spiral

A
  • buying immediately to protect yourself from anticipated higher inflation in future, this results in spike in AD leading to high demand pull inflation
  • this can repeat itself hence spiral
114
Q

what are some of the benefits of inflation

A
  • workers: can demand higher wages
  • incentivises production: firms can increase their prices with inflation, produce more to earn more leads to higher profit
  • less unemployment in recession: can give pay rise to workers but less than inflation, can raise prices by inflation create room to maintain workers
  • stable levels of consumption : incentivises you to buy now instead of future

only really occur if low and stable

115
Q

what are some evaluative points that can be used when talking about the costs and benefits of inflation

A
  • cause: demand pull often accompanies growth, cost push inflation often bad (can lead to recession)
  • duration: if high inflation in SR can be fined, if LR more costs can occur
  • anticipated vs non-anticipated: anticipated can lead to spirals
  • severity: if very high bad, if low good
116
Q

explain the crowding out effect

A
  • when the government borrows money in the form of issuing bonds it can increase interest rates, making it more expensive for businesses and individuals to borrow
  • reducing private sector activity and crowind them out
117
Q

explain how crowding out can occur

A
  • Government Borrowing: issues bonds in exchange for loanable funds, these funds are given out with promise of intrest essentially making intrest rates the price
  • Increased Demand for Loanable Funds: demand shifts right for loanable funds hence raising the intrest rates in hopes for more lucrative deals
  • Interest Rate Effect: Higher interest rates make borrowing more expensive for economy
  • Private Sector Response: deter private sector borrowing and spending, postpone or scale back investment projects, and consumers may reduce spending on big-ticket items
  • ^this causes a reduction in private sector economic activity hence crowding it out
118
Q

what essentially are bonds

A

debt instruments that promise to pay back the initial amount with interest at a specified future date

119
Q

explain the steps of quantitive easing

A
  • CB creats money electronically
  • money used to buy financial assets from financial insitutions
  • price of gov bonds increase and yeild decreases
  • financial institutions either loan or invest in riskier corporate bonds or shares
  • price of corporate bonds increase and yeild decreases (lower cost of borrowing)
  • access to credit improves, general intrest rates lower, willingess to lend at lower intrest rates should increase
  • stimulates borrowing, investment & spending

CB = central banks

120
Q

when is quantitave easing used

A
  • when traditional approaches to monetary policy have failed
    ^low availability of credit
    ^low consumer/firm confidence
    ^low willingess of banks to lend
121
Q

what does the laffer curve illustrate to us

A
  • increasing tax rates will increase tax revenue up to a point, however increasing taxes beyound the efficent tax rate you will see a reduction in tax revenue
122
Q

what are reasons behind why the laffer curve shows a reduction in tax rev even if tax rates increase

A
  • disincentivises harder work/entrepreneurship
  • emigration
  • tax evasion/avoidance
123
Q

what is teh difference between tax avoidance and evasion

A
  • tax evasion is not declaring all your income to the goverment and it is illegal
  • tax avoidance is finding loopholes in tax system where you dont pay as much tax and it is legal
124
Q

How can taxation be used as a policy to redistribute income/wealth

A
  • make progressive tax systems more progressive: tax rich more or raising tax free allowance
  • decreasing regressive taxation: reducing burden on poor

can use tax rev to redistribute and provide for poor

125
Q

what are some examples of regressive taxation

A

duties on de-merit goods such as cigerette and alcohol duty, VAT is very regressive

126
Q

what are the problems of using taxation as a policy to rebistribute income/wealth

A
  • laffer curve arguements: tax avoidance/evasion, discourage hard work, emigration
  • reducing in tax rev from big earners
127
Q

what are transfer payments

A
  • payments from the goverment to an economic agent where there is no transfer of goods/services involved
128
Q

What are some policies that can be used to redistribute income/wealth

A
  • taxation
  • benefits/welfare state
  • min/max wage
  • legislation
  • gov spending on education, training, healthcare: improving productivity to they are worth and then earn higher incomes
129
Q

what is the difference between mean tested and universal tested benefits

A
  • mean tested benefits are benefits to those who need them and are taken away when living conditions improve/incomes rise above certain level (e.g. unemployment benefit)
  • universal tested benefits available to anyway and are not taken away when conditions change (e.g. transport)
130
Q

what are some issues that come with using benefits as a policy to redistribute income/wealth

A
  • poverty trap (incentive to not work as means tested benefits will be taken away from you if your conditions change)
  • gov. financies (costly -> opp.cost)
131
Q

How can legislation be used as a policy to redistribute income/wealth

A
  • anti-discrimination (help reduce wage differentials)
  • hiring/firing (making it harder for firms to fire workers)
  • min wages
  • leave (by allowing more maternity and paternity leave): increases fairness
132
Q

What are some issues that can come with using legislation as a policy to redistribute income/wealth

A
  • cost to businesses
  • enforcement (if not done properly could have not effect)
  • gov. failure (firms may shut down due to cost, may relocate where legislation isnt as strict)
133
Q

what are some issues with using gov spending on education, training and healthcare as a policy to help redistrubition of income/wealth

A
  • gov financies: very costly
  • time lag: only really effective in long term not short term
134
Q

what are some evaluative points that can be used when talking about policies to redistribute income/wealth

A
  • incentives: some polices may provide counter intuitive incentives
  • state of gov financies: many policies can be costly
  • equity vs efficency: which one is more important
  • normative judgements: is it really best reason to intervene in market
  • gov. failure: can be side product of some policies
  • is inequality always bad: is gap between rich and poor so big it requires intervention, can incentivise entrepranuship
135
Q

how are incomes and wealth mutually reinforcing

A
  • high incomes -> buy assets -> higher incomes -> more assets
  • as one increases you can gain the other
136
Q

what are some reasons for differentials of income and wealth between people

A
  • age: wealth accumilated overtime = higher incomes, older you get the higher their earning potential as you gain skills, experience = higher incomes
  • education: more education you are more skillful, productive you can be and so earn more
  • ownership of financial assets: more you have better off youll be (stronger the employer more likely you are to gain financial assets like pension)
  • ownership of property: more you have the better off you are, big divide in wealth especially over time
  • wage differentials: difference in wages in different jobs, imperfect labour markets (state benefits play role here)
137
Q

what is the lorenzo curve and the gini coefficent measures of

A
  • income inequality
138
Q

what does the distance of the lorenze curve from the line of perfect equality tell us

A
  • closer the lorenze curve is to the line of perfect equality the more equal the distribution of income (vice versa)
139
Q

what is the equation to calculate the gini coefficent

A
  • section A / section A + section B
  • section a is the area between the lorenze curve and the line of perfect equality
  • section B is the area beneath the lorenze curve
140
Q

what do the values of the gini coefficent tell us

A
  • 0 = perfect equality
  • 1 = perfect inequality
141
Q

what is absolute poverty

A
  • incomes below a threshold (2$/day) to access the most basic, life sustaining goods/services
142
Q

what is relative poverty

A
  • incomes below a given average in society
143
Q

what is the difference between equity and equality

A
  • equity = fair distribution of income
  • equality = equal distribution of income
144
Q

what is horizontal equity

A
  • equal treatments of equals, those with the same incomes are taxed the same
145
Q

what is vertical equity

A

higher income earners taxed more -> progressive taxs

146
Q

what are some causes of poverty

A
  • unemployment: cyclical, structural
  • poor education/skills: MRP not high enough to access jobs
  • poor health/healthcare
  • wage differentials (relatively poverty)
  • born into poverty/raised by single parent
  • tax cuts for well off (relative poverty): as increase average wage in society while taking money from poor
  • subsistence agriculture (developing countries)
147
Q

what is meant by economic intergration

A

process whereby countries coordinate to reduce trade barriers and to harmonise monetary and fiscal policy

148
Q

what is a trading bloc

A

a group of countries that join together and agree to increase trade between themselves

149
Q

what is meant by bi and multi lateral trade agreements

A

agreements to reduce tariffs and quotas between 2/multiple countries

150
Q

what are the types of trading blocs, name them in order of increasing economic intergration

A
  • preferetial trading area (PTA)
  • free trade area (FTA)
  • custom union
  • common market
  • economic and monetary union
  • full economic intergration
151
Q

what are preferential trade agreements

A
  • countries join together to reduce tariffs and quotas but only on certain goods/services
  • e.g. between the E.U and afro/caribean nations, for reducing tariffs on some primary commodities and inreturn afro/caribean get manufactured goods
152
Q

what are free trade areas

A
  • countries join together and eliminate all trade barriers , they are free to trade however they want with countries outside the FTA
  • NAFTA is an exmple of this (north american free trade agreement)
153
Q

what are custom unions

A
  • eliminates all trade barriers between member nations, countires also have to employ common external barriers (such as tariffs) against non-member nations (limits trade with non member nations)
  • examples include the E.U (common external barrier is tariff in this case), A.C.N
154
Q

what are common markets

A
  • eliminate all trade barriers between member nations, impose common external barriers on non member countries, adopt common policies on things like regulations, free movement of labour, capital, business
  • examples include E.U, CARICOM
155
Q

what is an economic & monetary union

A
  • eliminates trade barriers between member nations, imposes barriers between non-member nations, allows free movement of capital, labour, business
  • member nations adopt same currency, central bank and therefore same monetary policy
  • examples include eurozone
156
Q

what is full economic intergration

A
  • countries completely haromize all policy
  • political power is also given to one govering body
  • eliminates trade barriers between member nations, imposes barriers on non-member nations
  • free movement of labour, captial, business
  • examples include UK
157
Q

What are the features of the E.U

A
  • free trade between member nations
  • common external barriers on imports from non-member nations (tariff in this case)
  • common policies: common agriculture scheme (subsidies and minimum prices on goods), fishary policy (quota on how much fish can be extracted from see)
  • free movement of labour, capital, business
  • co-ordination of economic policy
  • 17/28 member nations have adopted euro (central currency)
158
Q

what are the pros of being part of the E.U

A
  • free trade between member nations: jobs, higher GDP/capital, growth
    • increased FDI: good for foreign and domestic countries,
  • huge market size: more competition (pros and cons of comp)
  • contributions to E.U budget can be small % of GDP
  • free movement of labour & capital
159
Q

what are some cons of being a member of the E.U

A
  • forced to follow EU regulations and laws
  • cost of contributions to EU budget
  • could get trade benefits from FTA while also having free trade with other nations
  • high level of immigration: risk of drain public resources, take advantage of benenfit system
160
Q

what is meant by trade creation what is good about it

A
  • theory that derives from a countries membership of a custom union
  • movement from a high cost domestic producer to a low cost producer inside the custom union

getting rid of common external barriers, high cost now low cost imports

also get other benefits of joining custom union

161
Q

what is meant by trade diversion, what are its benefits

A
  • theory that derives from a country’s entry into a custom union
  • movement from a low cost foreign producer to a high cost producer with the custom union

as common external barriers now imposed on low cost producers

162
Q

what are the advantages of joining a monetary union

A
  • non-fluctuating exchange rate: especially for smaller nations
  • lower costs from currency conversion (consumers/firms in union dont need to exchange money)
  • increased firm confidence (as more stable currency easier to predit price in future and plan ahead)
  • currency more stable against speculation (more stable)
  • prices between countries easier to compare (
163
Q

what are the disadvantages of monetary unions

A
  • loss of monetary policy autonomy (you circumstances may be different but cant do anything)
  • no potential for countries to alter their exchange rate (harder to reduce CA deficit, harder to get export lead growth)
  • cost of currency conversion very high (when first joining the union)
  • lack of fiscal union (id dont adopt fiscal union as well one country could distabalise whole union, burden on other nations)
164
Q

what is a non-fluctuating exchange rate a benefit

A
  • especially for smaller countries
  • currency more stable so should hold its value and reflect PPP
  • promote investment
  • increased business confidence
  • increased international trade
165
Q

what is the equation to find out terms of trade

A

(weighted average of export price/weighted average of import price) x 100

166
Q

what are some factors that can affect terms of trade in the short run

A
  • demand/supply of exports/imports: as can influence price of exports/imports
  • relative inflation rates: High relative inflation can increase terms of trade as exports worth more (vice versa)
  • exchange rate movements: affects price of exports/imports depending on appreciation/depreciation
167
Q

what are some factors that can affect terms of trade in the long run

A
  • incomes: incomes rise, increase demand for imports can raise import prices and deterioate TOT
  • productivity: can lower CoP for exports, lower prices, deterioration in TOT
  • technology: can lower CoP for exports, lower prices, deteriation in TOT
168
Q

what does the terms of trade actually tell us

A
  • the quantity level of exports that need to be sold in order to purchase a given level of imports
169
Q

who does the terms of trade affect the most

A
  • developing countries as they rely on export revenues in order to purchase manufactured imports

NOT TO SAY IT ISNT IMPORTANT FOR DEVELOPED COUNTRIES

170
Q

what does it mean if the terms of trade have improved

A

the price of the basket of exports can buy more imports than it could previously

vice versa for deterioration of TOT

171
Q

How can incomes affect terms of trade

A
  • Deterioration of TOT in developing countries:
    as incomes in developed countries rise the demand for manufactured goods rise, raising price. The price of primary goods will also rise (normal goods) but not as much as manufactured goods. This can harm terms of trade for developing countries as there exports have not risen nearly as much as the price of imports
172
Q

what are some evaluative points that can be used when talking about terms of trade

A
  • international competitiveness
  • quantities of exports and imports
  • PED of exports and imports

TOT talk purely about price but these factors may increase,decrease export rev or may increase import expenditure, your real terms of trade may not improve/deteriorate with TOT

173
Q

what is the structure of a judgement

A
  • make clear choice (are micro/macro effectos greater)
  • state why (consider MOPS) use context with chains of reasoning
  • Discuss if any weight to alternative
  • discuss LR or SR

MOPS = market, objective, product, situation

174
Q

What does MOPS stand for

A
  • market
  • objective
  • product
  • situation
175
Q

what are the pros of using a floating exchange rate

A
  • reduced need for currency reserves
  • freedom of domestic monetary policy (some fixed exchange rate systems manipulate intrest rates)
  • useful instrument for macroeconomics adjustment (e.g. reduction in value of exchange rate, ↑export growth,↑ general growth)
  • ^partial automatic correction for a trade deficit
  • reduced risk of currency speculation (less chance of over/under valuation)
176
Q

what causes shifts in LRAS

A
  • a increase/decrease in quantity and or quality in FoP
  • An increase/decrease in productive efficency in the economy

Zak copy econ (7 decks)

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