Macroeconomics 2 Flashcards
(265 cards)
1
Q
Globalisation
A
When countries become more closely integrated
2
Q
Characteristics of globalisation
A
Increase in trade in goods/services between different countries
Increase in movement of labour/capital between countries
3
Q
Factors contributing to globalisation in last 50 years
A
Fall in transport costs/cost of communications
Lowering of trade barriers
Growth of MNCs
Increase in size/number of trading blocs
4
Q
Impacts of globalisation on countries
A
Increased specialisation
Structural unemployment (when there is financial crisis)
Inequality (against developing countries)
Less cultural diversity due to MNCs
5
Q
Impacts of globalisation on governments
A
Economic growth so rising incomes leads to higher tax revenues
Transfer pricing could lead to lower tax revenue
6
Q
Impacts of globalisation on producers/consumers
A
Economies of scale/lower production costs due to global sourcing - greater price competition - Lower prices for consumers
Increase incentive to invest in R&D (better resource allocation)-Increased choice of goods
7
Q
Impacts of globalisation on workers
A
Exploitation of workers due to ease of movement of labour
Reduces unemployment
8
Q
Impacts of globalisation on environment
A
Increase pollution/global warming
9
Q
Transfer pricing
A
When global firm manages accounts in country with lowest corporation tax rate/shows highest profits
10
Q
Absolute advantage
A
When a country can produce more of a good than another country
11
Q
Comparative advantage
A
When a country can produce a good at lower opportunity cost than another
12
Q
Assumptions of comparative advantage
A
No transport costs No trade barriers Constant returns to scale (no economies/diseconomies of scale) All FoPs are mobile Perfect knowledge
13
Q
Advantages of specialisation and trade
A
Efficient allocation of resources due to incentive
Increased world output so higher living standards
Lower production costs
Lower prices and more choice for consumers
Larger consumer markets so economies of scale
14
Q
Disadvantages of specialisation and trade
A
Unrealistic assumptions of comparative advantage
Specialisation of primary products in developing countries could prevent diversification
Over dependence on imports
Country’s goods may be elastic in demand leading to persistent trade deficit
15
Q
Factors influencing pattern of trade/changes in trade flows between countries
A
Changes in comparative advantage (due to skills/productivity changes/discovery of resources/tech)
Impact of emerging economies
Growth of trading blocs and bilateral trading agreements
Changes in relative exchange rates (affects competitiveness in long term)
16
Q
Terms of trade calculation
A
(Index of export prices/index of import prices)x 100
17
Q
Terms of trade definition
A
Average price of a country’s exports relative to average price of its imports.
When imports rise quicker than exports, terms of trade index falls/worsens.
18
Q
Factors influencing a country’s terms of trade
A
Relative inflation rates (high inflation rate increase exports) Changes in raw material prices Changes in exchange rates Tariffs Primary product dependency
19
Q
Impact of changes in country’s terms of trade
A
Living standards
Current account on BoP (rise in ToT reduces competitiveness of goods so BoP worsens causing depreciation in currency)
Rate of inflation
Developed countries (due to resources, stronger currency so ToT rises, decreasing competition and slowing growth)
20
Q
Types of trading blocs (regional/bilateral trade agreements)
A
Free trade areas
Customs unions
Common markets
Monetary unions
21
Q
Free trade areas
A
No trade barriers between member countries, but countries can impose barriers on non-members individually
Eg. NAFTA
22
Q
Customs unions
A
Free trade between member countries and common external tariff on imports from non-members
Eg. EU
23
Q
Common markets
A
Free trade/movement of all FoPs
Common external tariff on imports from non members
Eg. SEM
24
Q
Monetary unions
A
Free trade and common currency
Common external tariff on imports from non-members
Eg. EU Eurozone
25
Costs of regional trade agreements
Trade diversion
Distortion of comparative advantage (due to trade restrictions-less efficient resource allocation so slows global growth)
Loss of independent monetary policy
26
Trade diversion
Cheap trade from producers outside bloc mag be diverted for expensive trade from producers within bloc
27
Benefits of regional trade agreements
```
Trade creation (between members)
Increase in FDI (MNCs want to avoid trade restrictions)
```
28
Benefits of monetary unions ONLY
ElimInates transaction costs
Easy to compare prices
ElimInates currency fluctuations so attracts FDI
29
Role of WTO in trade liberalisation
To promote free trade between members to encourage competitiveness and improve efficiency
To settle trade disputes between members
30
Possible conflicts between regional trade agreements and WTO
```
Trade diversion (although more free trade now)
Distortion of comparative advantage reduces competition and efficiency
```
31
Reasons for free trade restrictions
To protect infant industries
To ensure employment protection
To prevent dumping
To correct BoP deficit on current account
To restrict imports from lower regulated countries
To reduce dependency
To raise tax revenue from tariffs
Because another country has restrictions too
32
Dumping
Exporting goods at below average cost of production
| Illegal
33
Tariffs
Taxes on imports
| Can be fixed or ad valorem
34
Types of restrictions on trade (protectionist policies)
Tariffs
Quotas
Subsidies to domestic producers
Non tariff barriers
35
Quotas
Restriction on amount of imports
Causes import prices to rise and domestic producers gain more revenue
But govt doesn’t receive revenue from this
36
Subsidies to domestic producers (protectionism)
Grants by govt to artificially lower production costs to increase competition
37
Non tariff trade barriers
Can include:
Health and safety regulations
Environmental standards
Country documentation checks
Increases costs to foreign producers
38
Impact of protectionist policies on consumers
Higher prices
| Less choice
39
Impacts of protectionist policies on producers
Less incentive for domestic producers to be efficient
40
Impact of protectionist policies on governments
Increased tax revenue from tariffs
Subsidies incur cost on taxpayers
Difficult to remove trade barriers once introduced, due to effect on domestic producers
41
Impact of protectionist policies on living standards
Less efficient resource allocation due to reduction in specialisation and comparative advantage, leading to fall in world output and lowering living standards.
42
Impact of protectionist policies on equality
Trade barriers imposed by developed countries on developing countries increase inequality between countries.
43
Exchange rate
Price of one currency in terms of another
44
Fixed exchange rate
When central bank/government decides value at which one currency exchanges for another
45
Floating exchange rate
When market forces (supply and demand) determine value at which one currency exchanges for another
46
Managed exchange rate
When market forces determine value at which one currency exchanges for another but government intervenes to prevent economic shock
47
Revaluation
Increase in value of fixed exchange rate
48
Appreciation
Rise in value of floating exchange rate
49
Devaluation
Fall in value of fixed exchange rate
50
Depreciation
Fall in value of floating exchange rate
51
Factors influencing floating exchange rates
```
Relative inflation rates (purchasing power falls so currency value falls)
Relative interest rates (FDI)
State of economy
Balance of payments on current account
Political stability
Speculation
```
52
How does govt intervene in currency markets
Foreign currency transactions
| Use of interest rates
53
Foreign currency transactions
Central bank can intervene in foreign exchange market to influence exchange rate
To appreciate, bank would buy it’s currency on foreign exchange market to increase demand for domestic currency to raise value.
54
Use of interest rates in currency markets
To appreciate currency, central bank would raise interest rates, so more attractive to foreign investors to save in the country, increasing demand for currency and value.
Hot money flows are more significant than money flows associated with trade
55
Currency war
Competitive devaluation/depreciation
56
Consequence of currency wars
Increase in rate of inflation as imports more expensive
Decline in world trade due to uncertainties about fluctuating exchange rates
Fall in efficiency
Countries could retaliate by imposing protectionist measures
57
Components of current account
Trade balance
Primary income
Current transfers (secondary income)
58
Trade balance
Value of exported goods minus value of imported goods
| Can be Separated as trade in goods balance and trade in services balance
59
Primary income
Income flows into country from non residents minus income flows out of country from residents
Income refers to compensation to employees and investment income
60
Current transfers (secondary income)
Movements of money between countries not paying for goods/services or investment income eg. sending money to family
61
Components of capital and financial accounts
```
Foreign direct investment
Portfolio investment
Financial derivatives
Reserve assets
Short term flows (hot money)
```
62
Portfolio investment
Investment in financial assets overseas
63
Financial derivatives
Contracts whose value is based on value of an asset eg. Foreign currency
64
Reserve assets
Financial assets held by BofE to be used when needed
65
Hot money flows
Moving money between countries to make profit through changes in exchange rates
66
Causes of current account deficits
```
Relatively low productivity
Relatively high inflation rate
Overvalued exchange rate
Dependence on expensive imports
Fewer manufacturing industries
Protectionist policies imposed by other countries
```
67
Causes of current account surpluses
```
Relatively high productivity
Relatively low inflation rate
Undervalued exchange rate
Abundance of raw materials that are in high demand by other countries
More manufacturing industries
Protectionist policies to reduce imports
```
68
Measures to reduce country’s imbalance on current account
Supply side policies
Expenditure reducing policies
Expenditure switching policies
69
Supply sides to reduce current account imbalance
To increase productivity/competition to increase exports and reduce imports
Eg. Education and training, tax breaks and investment allowances (to encourage I in capital), privatisation and deregulation.
70
Expenditure reducing policies to reduce current account imbalance
To reduce AD to decrease imports
| Eg. Deflationary fiscal policy, raise taxes, decrease G.
71
Expenditure switching policies to reduce current account imbalance
Protectionist policies
| Devaluation/depreciation of currency
72
Impact of changes in exchange rates on current account of BoP
Fall in exchange rates make exports cheaper/imports expensive so domestic goods would be more competitive and current account would improve, reducing size of deficit
Only if Marshall Lerner condition fulfilled
73
Marshall Lerner condition
Sum of price elasticities of demand for imports and exports must be greater than 1 (elastic)
74
J curve effect
Could be time lag before effects of fall in currency works fully
Sum of elasticities would be less than 1 in short run (inelastic) but greater than 1 in long run (elastic)
So current account worsens initially (due to contracts/stock/time takes to adjust to price changes )
75
Impact of changes in exchange rates on econ growth and employment/unemployment
Fall in currency increases exports increasing AD, increasing real output and economic growth - increases employment
76
Impact of fall in exchange rates on rate of inflation
Increase in exports and AD increases inflation
Increase in import prices could increase costs of production (inelastic raw materials) for domestic producers, decreasing AS and increasing inflation due to increase in price level
77
Impact of fall in exchange rates on foreign direct investment
More attractive to invest because more value for money
| But if fall in currency is due to uncertainty in economy, lack of confidence could cause FDI not to rise
78
International competitiveness
Ability to provide goods that are better value/cheaper than rival countries
79
Measures of international competitiveness
Relative unit labour costs
| Relative export prices
80
How do relative unit labour costs measure international competitiveness
Measures costs of labour in different countries
| Figures converted into single currency then index number to easily compare
81
How do relative export prices measure international competitiveness
Measures relative export prices in terms of labour productivity (output per worker per hour) as export prices can be affected by labour productivity
82
Factors influencing international competitiveness
Real exchange rates
Wages costs and non wage costs
Other factors
83
How do real exchange rates influence international competitiveness
Nominal exchange rate adjusted for changes in price levels between countries’ economies
Real exchange rate= (nominal exchange rate x domestic price level)/foreign price level
If nominal rate falls, real exchange rate depreciates, increasing competitiveness of domestic goods
84
How do wage costs influence international competitiveness
If wages higher in a country, then price of their goods expensive, causing international competitiveness to fall
85
How do non wage costs influence international competitiveness
Higher in developed countries (than developing) so international competitiveness falls in developed countries
86
What non wage costs influence international competitiveness
Taxes on employment (national insurance)
Health and safety/environmental regulations
Employment protection
Contribution to pension schemes
87
Other factors influencing international competitiveness
Supply side policies
| Protectionism
88
How do supply side policies influence international competitiveness
Improves it
89
How does protectionism influence international competitiveness
Cannot increase international competitiveness if members of WTO/EU
90
Is British Pound floating or fixed
Floating so govt can’t devalue it to increase international competitiveness
91
Can BofE control interest rates
No it is independent
92
Benefits of international competitiveness
Current account surplus on BoP
Export led growth
Low levels of unemployment
93
Problems with international competitiveness
Fall in trade in goods balance on BoP - could lead to increase in domestic unemployment
Fall in exports could have negative multiplier effect on GDP, reducing economic growth
94
Absolute poverty
When incomes too low to afford basic needs
95
Relative poverty
When people have lower incomes relative to others in the country, and living below certain income threshold
96
How is absolute poverty measured
According to purchasing power parity (adjusted for international comparison)
Based on set standard that is consistent over time and between countries
97
How is relative poverty measured
In comparison with other people in country, so people will always be relatively poor
98
Causes of changes in absolute/relative poverty
```
Aid
Debt relief
Fair trade schemes
Micro finance schemes
Employment opportunities
Education and training
Wage rates and NMW
Property rights
Ownership of assets
Social benefits (transfer payments)
```
99
Wealth inequality
Inequality based on tangible assets’ value (property, shares)
100
Income inequality
Inequality based on incomes from wages, rent, profit
101
Measures of income inequality
Lorenz curve
| Gini coefficient
102
The Lorenz curve
Shows distribution of income graphically
Diagonal line shows perfect equality and cumulative share of income is equal to cumulative share of population
Curved line represents unequal distribution of income - the further away Lorenz curve is from diagonal line, the greater income inequality
103
The Gini coefficient
G=A/A+B
A is area between diagonal line and Lorenz curve
B is area underneath Lorenz curve
Gini coefficient has value between 0 and 1
O = absolute equality (everybody earns same)
1 = absolute inequality (one person earns all income in country)
104
Causes of income/wealth inequality within/between countries
```
Education and training
Wage rates
Unemployment
Social benefits (transfer payments)
Progressive/regressive taxes
Inheritance
Ownership of assets
Pensions (state and private)
```
105
Impact on economic change/development on inequality
Inequality because owners of firms will be wealthier than workers - but inequality could be constraint on economic change/development
Very poor people unable to start businesses as no collateral
High absolute poverty in countries with high inequality
People on low incomes have low mps, so low investment constraining growth
People on high incomes may spend on imports/capital flight mainly preventing economic change
Inequality could increase crime rate constraining development
106
Capitalism
Belief in private sector economy
107
What does private ownership of resources mean for inequality
People who accumulate more assets will be richer relative to those who own fewer resources - inequality
108
Why is profit motive essential in free market economy
To encourage entrepreneurs to take risks involved in production so they become richer relative to workers (if businesses are successful) increasing inequality
109
Human Development Index (HDI)
Measures/ranks countries’ levels of social/economic development
Highlights quality of life through:
Education
Health
Standard of living
Results combined for each country and given index number between 0 and 1 to easily compare- the higher number, higher level of development
110
Advantages of HDI
Looks at development not just standards of living
| Looks at quality of life to compare developing and developed countries
111
Disadvantages of HDI
Life expectancy may have no correlation with quality of life
Years spent in school doesn’t indicate quality of teaching/learning
GNI (standard of living) inaccurate as doesn’t include hidden economy (big part of less developed countries)
Doesn’t measure extent of inequality in country
112
Other indicators of development
```
Energy consumption per person
Amount of women working
Proportion of population with:
Clean water access
Mobile phones
Internet access
```
113
Factors influencing growth and development
```
Primary product dependency
Volatility of commodity prices
Savings Gap: Harrod-Domar model
Foreign currency gap
Capital flight
Demographic factors
Debt
Access to credit/banking
Infrastructure
Education/Skills
Absence of Property Rights
Non-Economic factors
```
114
Primary product dependency
Dependency on raw materials
115
Prebisch singer hypothesis
As incomes rise, price/demand of manufactured goods rises quicker than demand/prices for PPs so ToT for developing countries worsens
116
Impacts of primary product dependency on growth and development
Price fluctuations compromises standard of living/future investment
Natural disasters affect production
Protectionism by developed countries means no demand for PPs from developed countries
Prebisch-Singer hypothesis
Increase in production of PPs increases exports so exchange rate rises
117
Problems with primary product dependency
Rostow’s model of development- stuck at first stage
Products too expensive because exchange rate is too high to compete so can’t exploit EoS - so needs foreign currency reserves but developing countries don’t have enough money so raise money by selling FDI/portfolio investment into country/selling bonds- but hard cos lack of financial market/confidence from foreign investors
118
Volatility of commodity prices factor
Commodities are price inelastic in supply/demand
119
Impact of volatility of commodity prices on growth and development
Price changes fluctuates producers’ incomes/foreign exchange earnings - if export revenue falls, leakage in circular flow, AD falls and growth contracts so currency falls crating cost push inflation
If export revenue falls, capital account would have to improve - by selling assets/using foreign currency reserves
120
Foreign currency gap
```
Shortage of foreign currency due to:
Dependence on export earnings from primary products
Dependence on imports
Need to pay interest on debt
Capital flight
```
121
Impacts of foreign currency gap on growth and development
Difficult to export goods so BoP worsens of over reliant on exports
If fixed exchange rate, difficult to maintain currency without reserves so may have to change interest rates dramatically instead - fluctuates economic growth greatly
122
Capital flight
Moving money abroad to buy shares/assets or invest
123
Impacts of capital flight on growth and development
Contributes to savings gap and foreign currency gap
Less tax revenue from assets/leakage on circular flow
Investment income goes out of country worsening current account so AD falls and growth restricted
124
Savings Gap: Harrod-Domar Model
When there is low GDP per capita
Growth dependent on level of savings and capital output ratio
Low incomes->low savings ->low investment-> low productivity-> low incomes
125
Problems with savings gap/Harrod Domar
Savings and investment alone not enough to promote growth
Only eligible when taking into account physical capital, not human capital
Increase in incomes may not lead to increase in savings
126
Demographic factors
Population growth in developing countries
| Movement of workers from rural to urban sector
127
Impacts of demographic factors on growth and development
Growth of population is greater than growth of GDP in developing countries so GDP per capita falls
Rural to urban means moving from primary to secondary sector improving manufacturing industry/exports - but most people living in rural areas so difficult to “take off”
Lower quality education in rural due to less finance so difficult to get secondary education
128
Rostow’s model
Generate income from production of raw materials
Production of elastic goods on bigger scale
Product diversification - mass consumption of goods
129
Debt factor
Developing countries struggle to pay off loans
130
Impacts of debt on growth and development
Large opp cost from not able to spend on health, education and infrastructure
Abolishing debt results in moral hazard
Fall in currency in developing countries increases burden of debt
Difficult to finance imports
131
Access to credit and banking factor
Lack of financial infrastructure in developing countries
132
Impacts of access to credit and banking on growth and development
Lower return on savings due to lack of choice, so money spent instead, decrease productive potential due to fall in investment opportunity
Inability to borrow money to set up businesses due to risk of lending
133
Economic development
Improvement of well being of people
134
Economic growth
Increase in long run productive capacity of economy (real GDP)
135
Infrastructure
Includes transport, communications and energy
136
Impacts of infrastructure on growth and development
Difficult to attract domestic/foreign investment
Difficult to get goods to market so hard to trade - reduces exports
Firms inefficient reducing productive potential
137
Education/skills factor
Standards are low
138
Impacts of education/skills on growth and development
Low productivity so fall in exports decreasing growth
Hard to attract MNCs to invest due to training costs
Education needed to move into manufacturing to be able to compete
139
Absence of property rights
Ownership of land, property or goods
140
Impacts of absence of property right on growth and development
No collateral to get loan to set up business
No incentive to innovate/develop and trade due to copying so investment/risk taking falls - don’t benefit from EoS and joking perfectly competitive market
141
Non economic factors
```
Corruption
Poor governance
Civil wars
Political instability
Geography
```
142
Corruption factor
Rise in costs (bribery) and less efficient allocation of resources
143
Poor governance factor
Govt failure
144
Civil war factor
Destroy infrastructure and less confidence for FDI
145
Political instability factor
Uncertainty for investment
146
Geography factor
Land locked countries have higher transport costs due to isolation
147
Impacts of non econ factors on growth and development
Deters domestic and foreign investment
148
Strategies influencing growth and development
Market orientated strategies
Interventionist strategies
Other strategies
149
Market orientated strategies
```
Work through operation of market forces and measures are to remove government intervention
Includes:
Trade liberalisation
Promotion of FDI
Removal of govt subsidies
Floating exchange rates
Micro finance schemes
Privatisation
```
150
Benefits of trade liberalisation
Consumer surplus rises due to lower prices and higher quality/choice of goods
Firms benefits from EoS as free trade diversifies risks
Increase in competition so high investment and productivity
More employment for low skilled workers in foreign countries
Increase in exports
151
Problems with trade liberalisation
Structural unemployment due to fall in uncompetitive firms so firms have to shut down
Environmental costs
Prevents developing economies from diversification/developing infant industries
152
Promotion of FDI strategy
Injection into circular flow
| Increases employment opportunities so productive potential of economy increases
153
How to promote FDI
```
Reduce corporation tax
Tax incentives and grants
Reduce regulations
Reduce labour laws
Reduce trade barriers
```
154
Removal of govt subsidies strategy
Subsidies can lead to mid allocation of resources due to distortion of operation of market forces
Expensive to economy
155
Floating exchange rates strategy
Could result in depreciation of currency so domestic goods more competitive
Could encourage FDI as currency not overvalued
156
Micro finance schemes strategy
Provides extremely poor families with small loans to help be more productive/grow tiny businesses
Can help to increase income, build businesses and reduce vulnerability to external shocks
157
Key features of micro finance schemes
Microcredit must be repaid
Interest charged to cover costs
Focuses on people whose only other income would be from informal market, where interest charged would be high
158
Problems with micro finance schemes
Low repayment rate
Concerns about collection methods
Could lead to reduction in aid from NGOs
159
Privatisation strategy
Sale of publicly owned assets to private sector through issue of shares
Increases efficiency and productivity due to competition and profit incentives (characteristics of private sector)
160
Interventionist strategies
```
Strategies that involve govt intervention to influence resource allocation
Includes:
Development of human capital
Protectionism
Managed exchange rates
Infrastructure development
Promoting joint ventures with MNCs
Buffer stock schemes
```
161
Development of human capital strategy
Countries with poor education standards experience slower econ growth
Improvement in education lead to increase in skills/productivity
Encourages FDI
162
Protectionism strategy
Controls on imports
Encourages diversification and industrialisation
Promotes import substitution
163
Problems with protectionism
Distorts comparative advantage so there is resource misallocation
Lack of competition could lead to inefficiency
164
Managed exchange rates strategy
Maintaining overvalued exchange rates to keep imports cheap to help with growth and development
165
Infrastructure development strategy
Physical and organisational structures and facilities needed for operation of enterprise
Helps with growth and development
166
Promotion of joint ventures with MNCs strategy
Association of 2 or more businesses to engage in specific enterprise for profit
To combine strengths/increase competitive advantage/minimise risks
167
Buffer stock schemes strategy
Storing/releasing commodity in times of surplus/shortage
Setting floor/ceiling price which price must stay between
To reduce price fluctuations
Removes uncertainty from market
168
Problems with buffer stock schemes
If ceiling price too low, insufficient stocks available if shortage
Storage costs
All producers must agree to be part of scheme
Could lead to inefficiency as govt sets prices
Commodities could be perishable
169
Other strategies influencing growth and development
```
Industrialisation: The Lewis model
Development of tourism
Development of primary industries
Fair trade schemes
Aid
Debt relief
```
170
Industrialisation: The Lewis Model
Large manufacturing sectors leads to econ development
171
Industrialisation Lewis model key features
Transfer of surplus labour from low productivity agricultural sector to high productivity industrial sector
Excess supply of workers in agricultural sector means marginal productivity low due to law of diminishing returns - opp cost of transferring workers to industrial sector is 0
172
Industrialisation benefits
Increases FDI increasing productivity and profits, leading to reinvestment and further growth
Profits as % of GDP rises so savings ratio rises increasing funds for investment leading to econ growth
173
Problems with industrialisation
Profits may not be invested locally
Reinvestment may be into capital so extra labour made redundant
May not be excess labour in agricultural sector
174
Development of tourism strategy benefits
Valuable source of foreign currency
Increases FDI, increasing GDP via multiplier
More jobs so fall in unemployment
Increased tax revenues so improves public services - improvements in infrastructure may be made
175
Problems with development of tourism strategy
Increases imports worsening BoP on current account
Only seasonal employment
Tourism subject to fashion
External costs (pollution, waste, water shortage)
176
Development of primary industries strategy
Comparative advantage of agriculture/hard commodities so more efficient resource allocation
Increased tax revenues could gain comparative advantage in other goods
But fewer workers will be needed as farms become more capital intensive
177
Fair trade schemes
Paying producers above market price to ensure specific labour/production standards
Premium is spent on development programmes by producers
178
Benefits of fair trade schemes
Producer receives higher price
Smaller price fluctuations
Extra money can be used to improve quality/diversify into other products
179
Problems with fair trade schemes
Distortion of market forces - fixed price set above equilibrium so could lead to oversupply
No incentive to improve quality
Dependency trap for producers
180
Aid strategy
Voluntary transfer of resources from one country to another
Tied aid is aid with conditions
Bilateral aid is given directly from one country to another
Multilateral aid is when countries pay international agency that distributes money to countries
181
Benefits of aid
Reduces absolute poverty
Reduces savings gap in developing countries
Provide funds for infrastructure to industrialise
Improves human capital through training and healthcare
Possible increase in globalisation/trade
Reduces world inequality
182
Problems with aid
Leads to dependency culture
May not benefit those for whom intended
No guarantee that leads to reduced absolute poverty
Leads to resource misallocation by distorting market forces
Opp cost for developing countries on tied aid
183
Debt relief strategy
To reduce external debts to sustainable levels (of poorest, most heavily indebted countries)
To cancel debt
184
Benefits of debt relief
Developing countries would have more foreign currency to buy imports from developed countries
If money used for purchase of capital goods, could lead to higher econ growth in future
Reduces absolute poverty
Reduces savings gap/foreign exchange gap
185
Problems with debt relief
Longer to agree than aid
No guarantee that will lead to better macro policies
Corruption could lead to govt officials benefitting rather than poor
Bank shareholders may get some burden in developed countries
May be less effective than reducing protectionism
186
World bank
Provides finance, low interest loans, credits and grants, investment in public goods
Aims to end extreme poverty by 2030
Aims to promote shared prosperity by supporting econ growth for bottom 40% of people
187
Criticisms of world bank
Loan conditions don’t take borrow countries’ circumstances into account, so doesn’t target econ problems
Finances infrastructure projects that has social/environmental effects on population there
Works under private sector so undermines states role as primary provider of essential gds
Decisions made by G7 (largest donors) so no consultation with developing countries
188
International money fund (IMF)
To promote monetary cooperation (to facilitate global trade)
Improving macro stability in developing countries
To promote growth/reduce poverty
To stabilise exchange rates
Loans to countries in financial crisis
Provides tech assistance/econ training
Helps to deal with BoP adjustment
Independent to world bank
Financed by member countries (joining fee)
189
Criticisms of IMF
Nation econ policies predetermined so not specific to country
Loss of state authority to govern own country
Reduced investment in public goods
Lack of G and AD -> Long term recession
190
Non governmental organisations (NGOs)
To help development
Self-funded/relies on donations
Provide services (humanitarian relief, community support, financial assistance)
Part of 3rd sector who aim to improve social welfare
191
Role of financial markets
To facilitate saving
To lend to businesses/individuals
To facilitate exchange
To provide forward markets with currencies/commodities - to reduce price volatility risks
To provide a market for equities (stocks/share)
192
Causes of market failure in financial sector
```
Asymmetric info
Externalities
Moral hazard
Speculation and market bubbles
Market rigging
```
193
How does asymmetric info lead to market failure in financial sector
Asymmetric info about financial markets and products they deal with
194
Externalities cause
Caused by failure of financial institutions eg. Bankrupt businesses
195
Moral hazard cause
Banks may continue to take risks knowing could be bailed out by govt if in danger of going bankrupt
196
Speculation and market bubbles cause
When prices rise dramatically, they crash when unsustainable eg. Stock prices rose so demand rose due to speculation, but became unsustainable and acted as bubble (crashed/popped)
197
Market rigging cause
Price fixing/manipulating
| Eg. Banks manipulated interbank rate (Libor) in 2015
198
Role of central banks
Implement monetary policy
Banker to govt
Banker to banks (lender of last resort)
Role in regulation of banking industry
199
How does central bank implement monetary policy
Controls cost/supply of money
| Sets interest rates, purchases assets (QE), responsible for sales
200
How does central bank regulate banking industry
Prevent risk of banks requiring bailout from govt
201
Public expenditure
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Govt spending
Includes:
Capital expenditure
Current expenditure
Transfer payments
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202
Capital expenditure
Spending on long term investment projects (public sector investment) to yield external benefits/deal with external costs
203
Current expenditure
Day to day spending on goods/services eg. Salaries or drug costs by NHS
204
Transfer payments
Payments made by govt to individuals for which there is no output in return eg. Welfare payments
205
Reasons for change in public expenditure globally
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Level of GDP
Size/age distribution of population
Political priorities
Income redistribution
Discretionary fiscal policy
Debt interest
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206
How does level of GDP affect public expenditure globally
When incomes⬆️expectations⬆️ so demand for public goods⬆️ by more than ⬆️in income because demand is income elastic so public expenditure ⬆️
207
How does size/age distribution affect public expenditure globally
If size⬆️ public spending has to ⬆️
| If age distribution⬆️ demand for public goods⬆️ because of need for medical/social services
208
How do political priorities affect public expenditure globally
In developed country, priority may be public spending but in developing country, priority may be to deal with political issues
209
How does income redistribution affect public expenditure globally
When global economy strong, public spending on people in relative poverty⬆️ significantly in many countries
When global economy weak, austerity measures causes ⬇️in public spending resulting in relative poverty⬆️
210
How does discretionary fiscal policy affect public expenditure globally
When economy weak, fiscal policy used to manage global economy causing public spending⬇️
211
How does debt interest affect public expenditure globally
Weak economy increases interest payments so less money available for public expenditure
212
Significance of changes in public expenditure levels as Proportion of GDP
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Productivity and growth
Living standards
Crowding out
Level of taxation
Equality
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213
Productivity and growth significance
Spending on health, education and infrastructure increases productivity and LRAS⬆️
AD⬆️because injection into circular flow, so there will be multiplier effect on GDP so public spending⬆️ increasing econ growth
214
Living standards significance
Spending on public services could increase living standards
| But not if spending focused on defence or interest payments
215
Crowding out significance
⬆️public expenditure causes crowding out
216
Resource crowding out
When there’s full employment and ⬆️public spending means insufficient resources available for private sector
217
Financial crowding out
When ⬆️public expenditure financed by ⬆️public sector borrowing so demand for loans⬆️ causing interest rates⬆️
218
Level of tax significance
Countries with low public expenditure may also have relatively low levels of tax
Could improve efficiency at resource allocation so consumers have more spending choices increasing growth
Some countries have higher living standards even if public spending high
219
Equality significance
Higher equality when spending focused on benefits, health, housing and education
Higher inequality when spending focused on defence and investment projects
220
Progressive tax
Tax (as proportion of income) rises as income rises
221
Proportional tax
When tax (as proportion of income) stays the same as income rises
222
Regressive tax
When tax (as proportion of income) falls as income rises
223
Direct tax
Paid by person on whom legally imposed
224
Indirect tax
Can be paid in whole/in part by person whom legally imposed/third party
225
Economic effects of changes in direct tax rates on incentives to work
⬆️tax leads to ⬇️incentive for unemployed to find work/employed to work more hours/seek promotion
226
Econ effects of changes in direct tax on tax revenues
⬆️tax leads to ⬇️tax revenues because disincentives to work are greater
⬆️tax -> ⬆️tax avoidance/evasion so revenue⬇️
Laffer curve shows n shaped curve (tax revenue by tax rate)
227
Econ effects of changes in direct tax on income distribution
As progressive income tax⬆️ income distribution more equal
228
Effects of direct tax changes in real output and employment
⬆️income tax rates ⬇️disposable income ⬇️consumption and AD
| ⬆️income tax ⬇️LRAS ⬇️real output and ⬆️unemployment
229
Effect of direct tax changes on price level
⬆️tax ⬇️disposable income and consumption so AD⬇️ so price level⬇️
230
Effects of direct tax changes on trade balance
⬆️tax ⬇️disposable income and consumption ⬇️imports so trade balance improves
231
Effects of direct tax changes on FDI flows
⬆️income tax ⬇️FDI (fall in total revenue)
232
Effects of indirect tax changes on incentives to work
⬆️indirect tax encourages people to work to maintain current standard of living
233
Effects of indirect tax changes on tax revenues
⬆️tax ⬆️tax revenue
| But too high taxes may reduce tax revenues on certain products
234
Effects of indirect tax changes on income distribution
Indirect taxes are majority regressive so people on low incomes pay higher proportion of income in tax so unequal income distribution.
235
Effects of indirect tax changes on real output and employment
⬆️indirect tax ⬇️real income ⬇️consumption and AD so real output ⬇️ and employment⬇️
236
Effects of indirect tax changes on price level
⬆️indirect tax ⬇️real income ⬇️consumption and AD ⬇️price level
⬆️tax ⬆️price of most goods which could lead to trade unions demanding higher wages ⬆️inflationary wage price spiral
237
Effects of indirect tax changes on trade balance
⬆️VAT/excise duties wouldn’t affect trade balance
| ⬆️tariffs ⬇️reduces imports -> improves trade balance
238
Effects of indirect tax changes on FDI flows
⬆️indirect tax ⬇️FDI because goods would be expensive so consumers’ real income⬇️
239
Other effects of indirect tax changes
⬆️indirect tax ⬇️supply
| ⬆️indirect tax ⬆️prices above marginal cost so there’s allocative inefficiency
240
Automatic stabilisers
Some forms of govt spending/tax revenues change automatically to account for GDP changes/state of economy
To reduce fluctuations caused by business cycle
241
Fiscal deficit
When public expenditure greater than tax revenues (public sector net borrowing)
242
National debt
Cumulative total of previous borrowing by govt
243
Structural fiscal deficit
Estimate of how big deficit would be if economy operated at sustainable level of employment/activity
Difficult to estimate
244
Cyclical fiscal deficit
When fiscal deficit caused by recession
245
Factors influencing size of fiscal deficits
GDP
Size/age distribution of population
Discretionary fiscal policy
246
How does GDP influxes size of fiscal deficit
During recession, GDP⬇️ but public expenditure⬆️ and tax revenues⬇️ due to auto stabilisers so fiscal deficits worsen
When real GDP⬆️ public expenditure⬇️and tax revenues⬆️ due to auto stabilisers so fiscal deficits improve
However, demand for public goods⬆️more than proportionately as income elastic in demand so public expenditure must⬆️
247
How does size/age distribution of population affect size of fiscal deficits
⬆️population ⬆️public spending on public goods worsens fiscal deficits
Ageing population ⬆️dependency ratio ⬇️tax revenues/⬆️ spending On pensions worsening fiscal deficit
248
How does discretionary fiscal policy affect size of fiscal deficits
If exports falling, ⬆️public expenditure worsens fiscal deficit
249
Factors influencing size of national debt
Fiscal deficits
Fiscal surpluses
Cyclical fiscal deficits
250
How do fiscal deficits influence national debt size
If country had persistent fiscal deficits, National debt⬆️
251
How do fiscal surpluses influence national debt size
If country had persistent fiscal surpluses, National debt⬇️
252
How do cyclical fiscal deficits influence national debt size
Leads to automatic stabilisers so G on benefits⬆️/taxes⬇️ so fiscal deficits worsen due to ageing population so ⬆️pension/health spending
253
Significance of size of fiscal deficits and national debts
Opp cost for future generations as less money available for public goods due to repayments
Crowding out due to ⬆️size of public sector (if that’s cause of national debt)
Danger of inflation (if national debt caused by persistent fiscal deficits) as injections rising relative to leakages
254
Measures to reduce fiscal deficits and national debts
Govt could increase taxes/reduce G
But this austerity could lead to ⬇️AD and real output so employment⬇️ tax revenues⬇️ public spending on benefits would have to rise
255
Measures to reduce poverty and inequality
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Increase benefits
Increase progressiveness of tax system
Increase in NMW
Subsidised housing for very poor
Increased support for children from low income families
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256
Changes in interest rates
To influence cost of money
To achieve inflation target set by govt
But full effect of ⬆️interest taxes takes 18-24 months so business costs⬆️ exchange rate⬆️ so country’s goods less price competitive due to confidence and consumers/firms may continue to borrow/spend
257
Changes in money supply
Through QE
To increase bank deposits to ⬆️ ability to lend easily to firms/individuals
But less effective if banks are risk averse and keep money for emergencies instead
But increased money supply -> inflation
But increased money supply ⬇️exchange rate ⬆️exports and AD
258
Measures to increase international competitiveness
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Investment in capital to raise productivity
Improvement in design/quality of goods through R&D
Measures to increase mobility of labour
Macroeconomic stability
Public sector reforms to reduce red tape
G on infrastructure
Privatisation
Incentives for investment eg. Tax breaks
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259
Red tape
Withheld info
260
Characteristic of external shocks
Sudden increase in oil prices
Tsunami with global implications
Major financial crisis with repercussions for global banking system
Wars/civil unrest disrupting transport links
Cyber attacks affecting communications globally
261
Macro policies to reaping to external shocks
Varies according to situation and priorities of policy makers
Eg. In 2008 financial crisis, banks cut interest rates to 0.5% in UK, cut taxes and increased public spending
262
Measures to control global companies’ operations
Regulation of transfer pricing
| Limits to govt ability to control MNCs
263
Regulation of transfer pricing measure
Companies with subsidiaries may aim to minimise tax liability by ensuring profit made in countries with lowest tax rates
But difficult to regulate in practice
264
Limits to govt ability to control MNCs measure
Their investment decisions may have big impacts on economy so difficult for individual govt to control MNCs
265
Problems facing policymakers
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Inaccurate info (about GDP, BoP and retail sales)
Risks/uncertainties (long term impact of financial crisis/ QE in eurozone)
Inability to control external shocks (hard to predict)
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