Macroeconomics Flashcards
More SPICEE than a Ghost Pepper (261 cards)
1
Q
Give four costs of Globalisation
A
- Free trade damages developing economies without comparative advantage, meaning businesses could shut down leading to structural unemployment
- Environmental damage from greater trade
- Outsourcing prices out unskilled labour in developed economies
- MNCs exploit land and capital of developing economies
2
Q
Give four benefits of Globalisation
A
- MNCs train workers, bring capital to developing economies and generate foreign exchange
- Migration increases, labour gaps get filled, more income tax
- Lower input costs (outsourcing) means lower prices for goods
- Higher consumer choice
3
Q
Give four causes of Globalisation
A
- Lower transport costs and lower communication costs (development of E-Commerce)
- Creation of GATT (1947) and subsequent fall in trade barriers
- More transnational firms (MNCs) mean more FDI, increasing capital flows and global links
- Fall of socialism, restoration of capitalism in China (1991)
4
Q
Define - Globalisation
A
The integration of the world’s national economies into a single international market
5
Q
Define - Containerisation
A
The process of standardising shipping containers and shipping equipment (Introduced in 1956)
6
Q
20 Mark Question Breakdown
A
14 (3 Analysis points) - Application inc.
6 (3 Evaluation points)
24 minutes = 17 Minutes Analysis + 7 Minutes Evaluation
7
Q
Give the names and countries involved in four trade blocs
A
- ASEAN - Southeast Asian Economies
- CIS - Post-Soviet States
- NAFTA - North American Economies
- EU - European Economies
8
Q
Give four thing which affect the pattern of trade
A
- Creation of Trade Blocs
- Former soviet countries with low production costs being opened up to trade in 1991
- Newly industrialised countries such as China and India who have increased their share of manufacturing exports due to low cost production
- Shifting exchange rates
9
Q
Define - Trade Creation
A
The increase in economic welfare from joining a free trade area, such as a customs union
10
Q
Define - Trade Diversion
A
Where trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement
11
Q
Give four benefits to specialisation and trade
A
- Specialisation by comparative advantage results in higher world output
- Economies of scale (able to sell to bigger market)
- More innovation and consumer choice
- Greater competition
12
Q
Define - The Heckscher-Ohlin Model
A
The model says that countries will export products that use their abundant and cheap factors (endowments) of production and import products that use the country’s’ scarce factors
13
Q
Define - The Linder Hypothesis
A
A theory that suggests nations with similar demands would develop similar industries. These nations would then trade with each other in similar, but differentiated goods
14
Q
Define - Factor Endowments
A
The amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing
15
Q
Give four costs to specialisation and trade
A
- Countries can become overdependent
- Structural unemployment as industry priorities shift
- Lacking diversification in exports increases risk
- Benefits may just go to developed economies or the rich, increasing inequality
16
Q
Define - Absolute Advantage
A
The ability to produce a good more efficiently (e.g with less labour)
17
Q
Define - Comparative Advantage
A
The ability to produce a good relatively more efficiently (e.g at a lower opportunity cost)
18
Q
Define - The Law of Comparative Advantage
A
A theory arguing that there may be gains from trade arising when countries (or individuals) specialize in the production of goods or services in which they have comparative advantage
19
Q
What is the formula for the opportunity cost of producing an additional unit of Item A where Item A is one of two items an economy can produce?
A
Item B/Item A
20
Q
Given a table which shows the cost per unit of producing two goods in two countries in labour hours how do you find the maximum amount of good A Country A can produce given one unit of resource?
A
Swap the cost of good A in Country A with good B in Country A
21
Q
What is the key nature of a country’s PPF which has absolute advantage in both goods relation to the other country?
A
Their PPF’s never intersect, the one with absolute advantage is always greater than the other
22
Q
Give the default comparative advantage table
A
Australia: 300 sleds or 2 clarinets and Brazil : 200 sleds or 1 clarinet. Brazil had lowest opportunity cost in sleds, and have absolute advantage in neither
23
Q
Give four WTO (with their primary mandate being to liberalise trade) rules
A
- Not allowed to discriminate unless part of free-trade areas and customs unions
- Quotas are not allowed
- If one county benefits from another’s’ tariff reductions, they must reduce tariffs themselves
- Fair competition and few barriers
24
Q
Give 4 different types of trading blocs
A
- Preferential trade area, giving preferential access to certain products
- Free trade area where trade barriers are eliminated between them
- Customs Union is free trade area with CET
- Economic and Monetary Union with fixed exchange rate/single currency and common macroeconomic policies
25
Define - CET
Common external tariffs placed on imports from outside a free trade area
26
Give three factors of a Common Market
1. Common law
2. Common taxation
3. Free movement of labour, capital etc...
27
Define - Hot Money
Capital which is frequently transferred between financial institutions in an attempt to maximize interest or capital gain
28
Give four conflicts between Trade Blocs and WTO
1. Trade Blocs could distort world trade
2. Trade Blocs are discriminatory
3. Trade Blocs have conflicts with each other
4. WTO losing power at the hands of large blocs and agreements
29
Define - Breadbasket/Ricebowl
xAn area of high fertility, soil and good climate which allows for ideal agricultural growing conditions
30
Define - Quota
An agreement by a country to limit its exports to another country to a given quantity
31
Describe the steps to drawing a tariff diagram
1. Draw Price and Quantity axis
2. Draw domestic supply and demand
3. Draw world price across as world supply beneath equilibrium point
4. Draw tariff price across as world+tariff supply beneath equilibrium point but above world supply
5. Area between two prices and domestic supply is gain in producer surplus, loss in consumer surplus
6. Area between two prices and new import quantities is gain in government revenue, loss in consumer surplus
7. Remaining two triangles between prices either side of government revenue are deadweight loss
32
Describe the steps to drawing a quota diagram
1. Draw Price and Quantity axis
2. Draw world domestic supply and domestic demand
4. Draw world price below equilibrium, marking the difference which imports must make up between domestic supply and domestic demand
3. Shift out domestic supply by the quota amount to get world supply
4. Draw this new equilibrium and hence find the new higher price, new quantity supplied domestically and smaller quantity of imports
5. Foreign producers get the square between the two prices, and the two new import amounts
6. Domestic producers get the trapezium between the two prices and domestic supply as extra producer surplus
7. Two triangles left between prices are deadweight loss
33
Give four restrictions to trade
1. Quotas
2. Tariffs
3. Subsidies to domestic producers
4. Non-tariff barriers (administrative barriers)
34
Give four reasons for protectionism
1. Anti-dumping measures
2. Response to large trade deficits
3. Infant industries
4. Protect key/politically strategic industries
35
Give two effects of protectionism as stated by OECD
1. Import barriers raise domestic prices through higher costs for intermediate inputs
2. Each dollar of increased protection leads to a drop of 66 cents in GDP
36
Define - Current Account
The account made up of trade in goods, trade in services, income from investment and employment and transfers
37
Give the four components of the current account
1. Trade in goods
2. Trade in services
3. Primary income (UK earnings from direct investment)
4. Secondary income (General government transfers
38
Define - Capital and Financial Account
The account which records the flows of capital and finance between the UK and the rest of the world (FDI - Long Term Flow, Portfolio Investment - Short Term Flow)
39
Define - FDI
The net inflows of investment to acquire a lasting management interest in an enterprise operating in a foreign economy
40
Define - Portfolio Investment
The purchase of shares and bonds in international capital markets
41
Define - Reserve Assets
Foreign financial assets that are controlled by monetary authorities, used to finance deficits and deal with imbalances
42
What are the three components of the Balance of Payments?
1. Current Account
2. Capital and Financial Account
3. Net errors and omissions
43
Give four factors that are likely to worsen a current account
1. Consumer led economic growth (through expansionary fiscal or monetary policy) which boosts consumer spending on imports
2. High inflation in domestic economy
3. High relative wages = low relative competitive exports = high relative imports
4. Low labour productivity = low relative competitive exports = high relative imports
44
Give three factors that are likely to increase a surplus on the financial account
1. Having a higher rate of return on investment domestically than abroad means more foreign ownership of domestic assets than domestic ownership of foreign assets
2. Having lower risk domestically with investments than abroad means more foreign ownership of domestic assets than domestic ownership of foreign assets
3. A weaker domestic currency (£1:$1.20 -> £1.20:£120) makes foreign currency more expensive, making investment less profitable, meaning less domestic ownership of foreign assets and more foreign ownership of domestic assets
45
When does a current account deficit matter? Give four instances
1. If it is a large proportion of GDP
2. If the country has other liabilities which also characterise its external debt
3. If trust in the country breaks down and they can no longer secure financing (borrowing)
4. If the country are not using such borrowing to finance investment for long-term growth but rather just consumption
46
A current account deficit is financed by a surplus on the capital account and the _ which this surplus builds up
Liabilities
47
Give three policies which can reduce a trade deficit or prevent it from getting worse
1. Contractionary aggregate demand policy to reduce expenditure and push domestic producers to turn away from suppressed domestic markets and to export markets
2. Protectionist policies such as subsidies to domestic producers or trade barriers
3. Devaluation means foreign currency is more expensive, making import prices go up. Also domestic currency is cheaper for foreigners, meaning export demand goes up
4. Supply-side policy with relative unit labour cost improvements, increasing productivity or reducing wages
48
Evaluate contractionary policy as a means to reduce trade deficits, give two points
1. Only short run concern, does not increase competitiveness
| 2. Raised interest rates increase demand for pounds , raising exchange rate and making imports cheaper
49
Evaluate devaluation as a means to reduce trade deficits, give two points
1. J-Curve, in the SR devaluation makes deficit worse as ML doesn't hold, in the long run it does which makes deficit get better
2. If PED for a product is low, devaluation is irrelevant and people will still import that like US and oil (past)
3.
50
Define - Relative Unit Labour Costs
Wages/Output relative to other countries
51
Give two examples of supply side policy to reduce wages through increasing labour
1. Immigration
2. Reducing structural unemployment by education/training where there are skill mismatches or relocation programmes if geographical immobility is a problem
3. Frictional unemployment can be reduced if welfare payments are made less generous, so that search times between jobs are reduced -
4. Voluntary unemployment can be reduced if tax rates are cut such that income from employment increases
52
Give four examples of supply side policy to reduce costs through improving productvitity
1. Increase labour productivity Y/L through education, training and healthcare
2. Improve capital productivity Y/K through making more RnD friendly regulation or offering subsidies -
3. Reducing a government size (expenditure) through privatisation of firms such that those business are subject to market forces and the profit motive and hence become more productive
4. Increasing competition in markets either through cutting costs through deregulation or increasing competition through demerging monopolies
53
Evaluate supply side policy, give four evaluation points
1. Spending on education and healthcare doesn't necessarily imply that it improves , money could be wasted
2. Some countries have proved productive with high government intervention in the past
3. Supply-side reform takes a long time as there is time-lag, consider education for example
4. Supply-side reform meets political opposition
54
Explain why the balance of payments must always balance
If a country is a net exporter and thus have a surplus on the current account this means that they are acquiring more of foreign capital than foreign countries are acquiring of theirs. Because capital assets must always return to their country of origin to be invested, this gives said domestic country more finance to purchase and invest in foreign assets than foreign owners finance to purchase and invest in domestic assets. Because the financial/capital account is foreign ownership of domestic assets - domestic ownership of foreign assets there is net capital outflow and a deficit on this account which balances the surplus on the current account. Pounds out = pounds in
55
Give four implications of global imbalances
1. Possibility of financial crises and contagion
2. A reduction of future productive
capacity and growth rates for nations who are running financial account deficits
3. Accumulating foreign currency reserves cost in the form of the returns foregone by holding them in the form of traditional reserve assets rather than higher-yielding assets
4. Global overproduction is carefully balanced by global over consumption, when this balance breaks a crisis ensues and growth slows down
56
Define - Dutch Disease
the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves
57
Give four factors which influence exchange rates
1. Exports and imports
2. Speculation - Speculation of an increase in the value of a currency increases its demand
3. Relative inflation rates - Low inflation makes products cheaper which encourages demand for said currency to buy products
4. Relative interest rates - High interest encourages demand for said currency
58
Give four likely effects of an decrease in the exchange rate
1. Imports get more expensive and exports are cheaper
2. More internationally competitive
3. Cheaper to purchase currency and hence investment could increase in domestic country
4. Expensive imports leads to higher domestic demand which means firms have less incentive to cut costs, leading to inflation
59
Give four benefits to the Euro
1. Transparency as producers and tourists can more easily compare the prices of international goods, services and resources
2. Lack of exchange rate fluctuations creates certainty and the ability to predict costs, which increases investment
3. Trade creation as a single currency removes the exchange rate obstacle to trade, boosting exports
4. Countries can't use devaluation which means that they can't induce inflationary pressures
60
Evaluate the benefits to the Euro
1. The easy comparison of prices and hence downward pressure on prices through making firms have to be more efficient is partly cancelled out by transport costs across the eurozone
2. Certainty and investment is the most significant benefit because it results in job creation, improved competitiveness and higher growth rates
3. Trade diversion takes place due to CET and thus trade may just be between inefficient producers inside the Eurozone
4. There is unemployment and a fall in GDP in the short-run if you can't devalue the currency to improve the balance of trade
61
Give four costs to the Euro
1. Eurozone isn't an Optimal Currency Area
2. Loss of independence of monetary policy which prevents economies from dealing with asymmetric shocks
3. Can't capitalise on a floating exchange rate to devalue a currency in response to crises
4. Loss of fiscal independence which means large budget deficits are penalised
62
Evaluate the costs to the Euro
1. Monetary policy between England and the Eurozone is similar
2. Lack of fiscal independence may be good to prevent countries from generating budget deficits which they cannot pay back
3. Benefits of devaluation are only temporary or cause inflation via the increased cost of imports
63
Define - Optimum Currency Area
A geographical region that has a fairly homogenous economy that would cope with a single currency and a single interest rate
64
What are the three key criteria for a successful currency union?
1. Labour mobility across the region
2. Capital mobility and price and wage flexibility
3. Must be cyclical convergence (all countries on same phase of business cycle)
65
Give three measures of competitiveness
1. Relative unit labour costs - Rising costs mean UK is becoming less competitive
2. Relative export prices - Rising relative export prices mean export prices in UK are rising faster or falling slower than those in other countries the UK trades with, making UK less competitive
3. Export prices to import prices - If export prices are rising significantly faster than import prices then the country is likely to be losing international competitiveness
66
Give four factors influencing competitiveness
1. Exchange rate - Rise in UK exchange rates make UK goods less price competitive abroad (depends on PED, low PED means little change) however if firms keep foreign currency prices the same, international competitiveness will not change however domestic profits will decrease
2. Productivity Rises in UK's productivity relative to main trading partners will increase competitiveness
3. If wage and nonwage costs ie. pensions and taxes go down, UK will be more internationally competitive
4. Higher regulation increases industry costs which reduce international competitiveness
67
Define - SPICEE
Strong Pound Imports Cheap Exports Expensive
68
Define - Value of Exports and Imporve
Price of Exports/Imports x Quantity of Exports/Imports
69
Define - Expenditure Reducing Policy
Government policies to reduce the level of aggregate demand in order to reduce imports and boost exports
70
Define - Expenditure Switching Policy
Government policies to switch production currently being sold domestically, to exports
71
Define - Depreciation
A natural fall in the value of the exchange rate
72
Define - Appreciation
A natural increase in the value of the exchange rate
73
Define - Currency Controls
Controls on the purchase of foreign currency by domestic citizens and firms
74
Define - Marshal-Lerner Condition
This condition states that the value of imports only falls and the value of exports only rises after the depreciation of a currency if the PED of Imports + PED of Exports is greater than one, meaning they are relatively elastic which would allow price changes of imports and exports to be easily responded to with quantity changes (PEDx + PEDm > 1)
75
Define - Absolute Poverty (World Bank)
Those living on below $1.90 at purchasing power parity per day at constant 2011 prices
76
Define - Relative Poverty
Situation obtaining if household income falls below X% of median adjusted household disposable income (X=60 in the UK)
77
Define - Gini-Coefficient
A proportion and measure of variance which shows how close to perfect equality a country is and hence how evenly its income is distributed
78
What happens to areas A and B, and the Gini-Coefficient as income is redistributed to the top of the earnings ladder?
Area A gets bigger, Area B get's smaller, and so A in proportion to A+B is bigger. The Lorenz curve moves closer to the line of perfect inequality and so gini-coefficient is greater
79
What are the x and opposite y axes on a lorenz curve diagram?
X-axis is cumulative share of people from lowest to highest incomes
Y-axis is cumulative share of income earned
80
What is Millennium Goal 1?
Half the people in extreme poverty and hunger by 2015, this was achieved in 2010. A new target was set in 2015 to eradicate poverty by 2025
81
What is Millennium Goal 2?
Universal primary education (100% children complete primary schooling)
82
What is Millennium Goal 3?
Gender equality (eliminate gender disparity)
83
What is Millennium Goal 4?
Reduce child mortality by 2/3 by 2015
84
What is Millennium Goal 5?
Reduce maternal mortality ratio by 3/4 by 2015, target still not met
85
What is Millennium Goal 6?
Combat HIV, Malaria, etc..
86
What is Millennium Goal 7?
Ensure environmental sustainability (half the amount of people without access to sustainable drinking water) some progress has been made
87
What is Millennium Goal 8?
Develop global partnership for Development (ODA, Debt Sustainability and Market Access) some progress has been made, not much though
88
Give four measurements for standard of living
1. GNI/Capita at PPP
2. HDI
3. Doctors relative to population
89
Define - GNI
GNI, Gross National Income, is GDP + Net Income from Abroad
90
What factors of standard of living does GNI not cover and hence make it unsuitable as a measurement
1. Social indicators
2. Level of inequality
3. Informal sector
91
What did Kuznets believe to be the relationship between development and inequality?
He believed that over time, the first movers would have higher incomes which would increase inequality, however over times all the others catch up and hence suggests that capitalism tends to reduce inequality over time
92
What did Picketty believe to be the relationship between development and inequality?
He suggests Kuznets looked at a specific period of time around the first world war where labor had died and thus was scarce, increasing wages for low skilled jobs and so reducing inequality. He looked at inequality after, at around 1980, and empirically it begins to increase again
93
Give four reasons why income inequality has gotten worse from 1974 in the UK
1. Changing structure of the economy led to the elimination of middle income jobs for the masses and the creation of high and low paid jobs
2. Trade unions had their power suppressed by Thatcher after 1979, meaning labour cannot bargain for higher wages
3. Skilled immigration ending up in unskilled lowers unskilled wages while raising skilled wages and hence increasing the gap
4. The welfare state means that employers don't have to pay employees as much as they would usually have to as the employee wage is topped up by the government. This increases the employer's earnings and decreases the employee's earnings (only pre-tax transfer gini-coefficient will show greater inequality)
94
30 Mark Question Breakdown
21 (4 Analysis points) - Application Inc.
9 (4 Evaluation points)
36 Minutes = 25 Minutes Analysis + 11 Minutes Evaluation
95
What are on the x and y axes on Kuznets and Picketty's displays of the relationship between capitalism and inequality
X-axis - Development
| Y-axis - Gini-coefficient
96
Define - Capitalism
Private ownership of resources and free enterprise
97
Give four reasons why inequality is an essential ingredient of capitalism
1. Private ownership of resources means those who own them will tend to become relatively richer to those who don't
2. More productive workers are paid more which gives them incentive to be productive
3. Entrepreneurship is fueled by a profit motive and hence the more innovative and successful the more profit, providing this incentive for firms to improve
4. Private ownership of property ensures inheritance which solidifies inequality
98
Give three reasons as to why inequality may not be an essential ingredient of capitalism
1. Degree of inequality could vary between different capitalist systems
2. Could be reduced by government policy
3. Capitalism is reducing global inequality through globalisation and the spread of resources + greater market access
99
Define - Low Level Equilibrium Trap
Countries with low income per capita have less savings, which in turn means low investment, limited capital which restricts growth and keeps income per capita low
100
Define - Rostow's Stages of Economic Growth
A process described by Rostow, which set out five stages through which he claimed that all developing countries would pass
101
Explain Rostow's Five Stages of Economic Growth
1. Traditional society - Low investment in agrarian economy. Income per capita is static
2. The preconditions period - Increases in agricultural productivity, allowing resources to be released. Important that resources devoted to provision of infrastructure
3. Take-off - 20/30 year period of growth, with investment rising relative to GDP. Emergence of entrepreneurs. A flow of funds for investment is most needed at this stage
4. Drive to maturity - New sectors emerge to complement leading sectors. Investment is relatively high proportion of GDP
5. Age of mass consumption - Fully diversified, consumption takes highest proportion of GDP.
102
Define - Dependency Theory
The notion that the countries of the world can be divided into core and periphery, and that countries in the core developed by exploiting those in the periphery
103
Give three reasons why growth may lead to development
1. Growth results in higher income which allows people to increase savings, which increase investment, which can then be taken by entrepreneurs and invested to improve the quality of infrastructure
2. Growth results in higher incomes and more tax revenue which results in increases in spending on health services, lowering mortality rates, which would have an impact on HDI
3. Countries lifted from absolute poverty (higher income per capita) from growth directly experience improvements in development due to lower crime and less poverty
104
Give two reasons why growth may not lead to development
1. Growth can increase inequality through the increased wealth being unevenly distributed
2. Growth that is not sustainable means that when it can no longer sustained development gains could be reversed, for example the
105
Define - Desertification
The process by which fertile land becomes desert, typically as a result of drought, deforestation, or inappropriate agriculture
106
Define - Economic Growth
A long-term expansion of the productive potential of the economy
107
Define - Economic Development (Todaro)
An improvement in the standard of living - including availability of life-sustaining goods, education, cultural and human values, more jobs, higher incomes and freedom to make economic and social choices
108
Define and explain each variable in the Harrod-Domar formula: g = s/k
g: Output growth rate which is assumed to be fixed when s and k are fixed
s: Savings ratio which due to the Harrod-Domar visualisation (Income->Saving->Investment->Capital accumulation) suggests the higher the savings ratio, the more investment and hence the more capital accumulation
k: Capital:Output ratio, which the lower it is, the more efficient capital is and hence the higher the growth rate
109
Define - HDI
Human Development Index which is used to measure human development by combining life expectancy, education, and income per capita indicators
110
Define - Savings Gaps
In many smaller low-income countries, high levels of poverty make it almost impossible to generate sufficient savings to provide the funds needed to fund investment projects
111
Give two reasons as to why poor infrastructure is a limit to growth and development
1. Poor Infrastructure causes higher supply costs and delays for businesses
2. Reduces labour mobility, a necessary characteristic of a developing labour force who could switch between industries that are structurally changing
112
Give two reasons as to why human capital inadequacies are a limit to growth and development
1. Lack of entrepreneurs means a lack of people who are able to effectively invest and take risks in order to drive growth in the Harrod-Domar model
2. In an increasingly globalised world it is hard for developing countries to sustain their human capital as it frequently goes elsewhere (Brain Drain)
3. Left to itself the free market will under-provide education and health (MSC = MPB is free market equilibrium. With healthcare MSB is higher than MPB therefore it is shifted out Ad Valorem from the top. MSB = MSC is the socially optimum equilibrium, thus the free market under provides this)
113
Evaluate the causes of globalisation
1. WTO Doha round was comparatively a failure to the GATT tariff reductions and trade blocs are taking the place of universal trade reduction
2. Technology cannot outweigh government policy because if trade barriers remained erect countries would not experience this cause of globalisation
3. Eastern Europe has not played a transformative role in the international economy, and the transition to the market in some countries has been painful and is incomplete including Russia
114
Give four reasons as to why primary product dependency is a limit to growth and development
1. Productivity in Primary Production is low and hence there is less scope for growth if a country does find itself with this dependency
2. Terms of trade move against primary product exporters. Prices for primary production tend to rise (as demand rises more slowly) more slowly than prices for manufactured goods. Hence prices for exports usually rise relatively slowly compared to prices for imports
3. Primary products are volatile. Demand is volatile for commodities because they follow the economic cycle, supply is volatile for agricultural goods because of climate. This creates uncertainty which harms investment and thus growth
4. Leads to a neglect of the broader economy because of natural resource endowments
115
Evaluate Primary Product Dependency as a constraint on growth and development
1. Countries with Primary Product Dependency may just have it because of comparative advantage
2. May be better than the alternative, industrialization, which, if agriculture isn't reformed, may have dire consequences
116
Define - Prebisch-Singer Hypothesis
There would be a long-term decline in the terms of trade of primary-commodity exporters due to a low income elasticity of demand
117
Define - Terms of Trade
The ratio of export prices to import prices (Px/Pm)
118
Define - TEA
Total early-stage Entrepreneurial Activity: percentage of 18-64 population who are either a nascent entrepreneur or owner-manager of a new business
119
Define - Primary Product Dependency
The dependence of developing countries on primary production (agricultural goods and commodity extraction)
120
Give two reasons as to why a savings gap is a limit to growth and development
1. The first issue of a savings gap is that if you lack savings you lack investment which (being the main drivers of growth in the Harrod-Domar model) mean capital accumulation is limited and hence growth
2. Savings gaps could be caused by low-incomes which means most incomes go towards consumption rather than saving. To increase GDP and hence incomes nations may attempt to lower interest rates to encourage borrowing and hence investment, however this still discourages saving
121
Give two problems associated with declining terms of trade
1. Countries have to use resources to produce more exports which could have been used to purchase more capital had the terms of trade not declined
2. It will also be more difficult to earn more foreign currency to pay external debt
122
Evaluate the problems of a declining terms of trade
1. Depends on PED also, as when export prices fall (if they fall), demand will increase by a larger amount if it is elastic
2. Short term decline is most likely temporary volatility, however a long term decline is more indicative of a fall in the standard of living
123
Give two reasons as to why a foreign exchange gap is a limit to growth and development
1. Lack of foreign exchange means inability to finance imports of consumer goods and services, raw materials and components and new capital inputs
2. Also restricts ability to repay external debt, which means that the economy is still restricted by debt agreements ('Original Sin')
124
Define - 'Original Sin'
The proposed fact that most countries are not able to borrow abroad in their domestic currency
125
Give four causes of capital flight
1. When a country's currency is under strong downward pressure because of speculative selling
2. A steep fall in asset prices
3. Weakening faith in the creditworthiness of a national government especially when they are running up large budget deficits that might be unsustainable
4. If they investors expect huge taxes on their investments
126
Define - Capital Flight
An outflow of money from one country to another as investors lose faith and confidence in their external investments
127
Give two reasons why capital flight is a constraint on growth and development
1. It suggests that investors are losing faith in the government which could have knock on effects of giving that country a bad reputation and discouraging new investors
2. Immediately it means less funds for investment are available, and less investment itself, which (as seen through Harrod-Domar) means less capital accumulation
128
Give three reasons why corruption is a constraint on growth and development
1. Willingness to invest ultimately goes down because firms and individuals have no security on their invested money (if they try to dispute bad transactions, the corrupt judge could find not in their favour)
2. Price distortion and increased costs of public projects because bribes are paid to gain contracts and those who get the contract don't have to be cost efficient, diminishing public benefit from schools and hospitals
3. A covert, upward redistribution of wealth takes place within society because those at the bottom of society who don't receive bribes are ones that are forced to pay them the most
129
Give two reasons why rapid population is a constraint on growth and development?
1. Quite simply GDP may rise, but GDP per capita, due to rapid population growth and an increase in the quantity of dependents, may be falling
2. Has environmental consequences such as deforestation as a need to keep up with population food and space demands -
130
Define - The Demographic Transition as well as the 'Window of Opportunity'
Stage 1: Population growth is slow. High birth rates + high death rates
Stage 2: Rapid population growth. High birth rates + Falling death rates
Stage 3: Population stabilises. Birth rates begin to decline
'Window of Opportunity': Early part of Stage 3 where a large work force emerges which is not only beneficial in the obvious sense but also because it is assumed the middle age save more than the elderly, which increases investment (Harrod-Domar)
131
Define - Dependency Ratio
The ratio of dependants (economically inactive people to the economically active. Dependents include children below working age and old age pensioners, students and housewives
132
Define - Malthusian Population Theory
Malthus suggested that population grows exponentially, and yet food grows arithmetic. Thus we will reach a point where population exceeds the food supply, which will result in famine and hence a fall in population beneath this line. Thus he urged population control
133
What do the Malthusian Population Theory diagrams look like and what did Boserup suggest instead?
1. Exponential from the origin at some point intersecting with a linear line that cuts the y-axis above the origin and has a positive gradient
2. Linear line with positive gradient from the origin for population and upon intersecting with another linear line of lesser gradient that represents food supply and cuts the y-axis above the origin, it curves back down across the line, and follows the line periodically in this manner
Boserup suggested that the problem wasn't the rising population that was the issue, but the war and disease which limited the food supply and the distribution of food, not the quantity
134
Give two reasons why debt is a constraint on growth and development
1. Debt overhang means that government find it harder to borrow money so external means of investment are harder to come by -
2. Internal investment done with pre-existing resources is directly limited due to the opportunity cost of having to use these resources instead to pay off debt
135
Give two reasons each why autocratic and democratic governments can be a constraint on growth and development
Autocratic
1. If the government does not fear revolutions, then it can do what it likes
2. Decision making will be inefficient if they use office for their own ends
Democratic
1. Rent seeking or seek to gain short run popularity at the expense of long run maximisation -
2. Decision making processes to respond to economic issues will be slow
136
Give two reasons each why autocratic and democratic government may NOT be a constraint on growth and development
Autocratic
1. If government fear revolution then they may be responsive to the demands of the population
2. May not be negatively correlated with bad institutions and corruption
Democracy
1. Government responds to people because of the election
2. May be positively correlated with good institutions and low levels of corruption
137
Give four reasons why conflict and civil war may be a constraint on growth and development
1. Destroys physical capital
2. Opportunity cost to labour used for fighting and investment used for military capital
3. Human capital is lost if they die while fighting
4. Lack of rule of law and conflict decreases economic investment incentives from abroad
138
Give two reasons why lack of financial institutions is a constraint on growth and development
1. Required to match savers with borrowers and hence ensure S=I leads to capital accumulation (Harrod-Domar)
2. Formal financial institutions in developing countries focus on medium to large enterprises deemed creditworthy. These institutions tend to be inefficient and provision for the poor is low (Opportunity cost)
139
Define - Fiscal Policy
The use of Government Spending and Taxation to manipulate aggregate demand, usually with the objective of stabilising output at its potential Y-Bar
140
Explain Expansionary Fiscal Policy
Expansionary Fiscal Policy is increasing the gap between G and T assuming G > T in order to increase AD either directly through G or through cutting T which increases C (and I, maybe X). Done when output is beneath Y-Bar to get the economy back to potential output
141
Explain Contractionary Fiscal Policy
Contractionary Fiscal Policy is narrowing the gap between G and T reducing the budget deficit or running a budget surplus. Done when output is above Y-Bar to get the economy back to potential output
142
Evaluate Fiscal Policy (3 Points)
1. The size of the multiplier (the ratio of a change in expenditure to the resulting change in income) 1/MPW. If MPW is high, perhaps because of savings, the multiplier will be low, and hence AD will shift out a second time less
2. Crowding out (movement along PPF upwards where x axis is private sector and y-axis is public sector). For example in the market for loanable funds, because demand shifts out when G>T, interest rates rise, which reduces private sector consumption and investment
3. The problem of fine tuning. By the time the government identifies a slump or boom, and design policy to tackle it, the time it takes for that to get through the economy could have already partially recovered or declined, exacerbating the economic cycle (upward GDP against time becomes jagged rather than smooth - potential output line still runs through the middle)
143
Explain Automatic Stabilisers
In a recession automatically the balance moves towards a budget deficit as taxes are low from less employment and spending is high on welfare, making policy automatically expansionary through increasing G and reducing T. The opposite is the case in a boom (Diagram is G,T against Output. T is exponential, G is linear and downward sloping, where they cross has output Y-Bar, beneath this is recession and above is boom with the gap between being deficit or surplus)
144
Define - Monetary Policy
The use of the money supply and interest rates to manipulate aggregate demand and thus control economic variables
145
Explain Monetary Policy (With regards to an increase in the interest rate)
The United Kingdom Central Bank uses its repo rate to alter the money supply. It supplies cash to commercial banks by buying bonds. with an agreement that they will repurchase bonds at a later date (Repo rate against quantity of bonds with supply of bonds curve exponentially decaying). A raise in the interest rate means banks will be willing to supply less bonds and hence get less liquidity and thus there is less money in the banking system. This means supply in the figurative money market falls which raises interest rates (Interest rates against quantity. Downward sloping demand and fixed quantity of money supply shifting to the left - Similarly in the market for loanable funds, r against q, where supply is upward sloping and demand is downward sloping, supply shifts in, raising interest rates
146
What is the Bank of England's mandate to use monetary policy for?
To keep inflation within 1% of 2%
147
Give the four key channels of the MTM for high base rate
1. High base rate means market rates increase i.e. mortgage rates which means domestic demand falls as borrowing for investment falls, meaning total demand falls meaning domestic inflationary pressure is downwards
2. High base rate means asset prices will fall which reduces population wealth which reduces consumption which reduces demand which means domestic inflationary pressure is downwards
3. High base rate means high interest rates, which increase demand for pounds, SPECIE, imports increase, x-m gets worse, aggregate demand falls, and hence domestic inflationary pressure is downwards
4. High base rate means high interest rates, which increase demands for pounds, SPICEE, import prices rise, which directly raises CPI
148
Define - Monetary Transmission Mechanism
The means by which interest rate changes have their effect on the macroeconomy
149
Define - Traction
The extent to which other interest follow the Bank of England base rate
150
Evaluate Monetary Policy (3 points)
1. If traction is weak then changes in the base rate won't follow through into the market and hence subsequent effects on the macroeconomy won't take place
2. If alternative determinants of investment are acting in the opposite direction, , even if interest rates were to be raised, investment increases would nullify the effect of investment (r against I, where I is downward sloping and while r increases, the I curve shifts outwards)
3. MPC suggest it takes 18 months for a change in the base rate to have a greater effect, suggesting time lag
151
Define - Supply-Side Policy
Policy which aims to increase the productive capacity of the economy by increasing the stock of the factors of production or their productivity (AD-AS with AD and LRAS, where LRAS shifts outwards)
152
Define - Red Tape
An idiom that refers to excessive regulation or rigid conformity to formal rules
153
Give four global factors influencing UK's low inflation rate
1. Rising productivity and cheap manufactured goods from China / Asia as a result of lower wages means lower inflation because cost of goods go down, which shifts out SRAS
2. Improved technology and working practices which have helped reduce costs which shifts out SRAS
3. Perhaps inflation targeting. e.g. Monetary policy geared towards keeping inflation low
4. Decreased inflation expectations making it easier to keep inflation low
154
What shifts the SRAS and why is it upward sloping?
1. Costs
2. Resources and their productivity (because this alters costs)
It is upward sloping because in the short run some prices are sticky, however in the long run prices become more flexible
155
What are two characteristics of inefficient taxes?
1. If supply is inelastic then when the tax is imposed output will fall minimally (if the tax is on a demerit good then this proves detrimental)
2. Resources firms expend to avoid tax and resources HRMC spend to catch them are wasteful, and hence complex taxes which can be avoided create issues
156
Define - Direct Taxation
A tax levied directly on individuals or companies
157
Define - Indirect Taxation
A tax (VAT) levied on goods or services
158
Define - Progressive Taxation
A tax where as incomes increase, the proportional paid in tax increases
159
Define - Proportional Taxation
A tax where as incomes increase, the proportion paid stays the same
160
Define - Regressive Taxation
A tax where as income increases, the proportion paid falls (Indirect)
161
Explain the Laffer Curve
As tax rates increase tax revenues increase, however economic activity is more and more discouraged and hence the rate of growth falls. After a point increasing tax rates reduces tax revenue because perhaps it is more effective to claim welfare benefits or perhaps it now becomes desirable for corporations to avoid tax (tax revenue against tax rate %, negative parabola)
162
Define - Taxation War
In order to attract FDI flows country may engage in competing on basis of lower tax rates in order to encourage firms to set up there. This leads to globally low tax which damages each county's reveues
163
Which two taxes in the UK are regressive?
1. VAT and Excise duties as higher-income houses spend less of their income and save more than lower-income households. Hence they pay a lower proportion of their income in tax
2. Council tax - The highest council tax payer only pays a maximum three times that of the lowest council tax payer, but may earn much more
164
Give two cases where taxes are beneficial
1. Taxation is always allocatively efficient in a perfectly competitive market and hence won't damage this but still increases government revenues
2. Taxation in markets with negative externalities can improve allocative efficiency
165
Give two cases where taxation is not beneficial
1. Taxation is distortionary and causes deadweight loss
2. Increasing taxation beyond a certain point may mean that it no longer becomes beneficial to work which means there is less labour with lower productivity
166
Define - Horizontal Equity
individuals in the same financial circumstances have the same fundamental ability to pay taxes, and, therefore, should be taxed at the same rate
167
Define - Vertical Equity
When individuals are in different circumstances and have different abilities to pay, they should not be taxed at the same rate
168
Define - Welfare State
A system whereby the state undertakes to protect the health and well-being of its citizens, especially those in financial or social need, by means of grants, pensions, and other benefits
169
Give two injections into a person's 'income flow' which improve inequality
1. Cash/Welfare benefits (Pension, Grants etc...)
| 2. Free and subsidised healthcare and education
170
Give two withdrawals from a person's 'income flow' which improve inequality
1. Direct taxation
| 2. Indirect taxation
171
Define - Non-contributory benefits
(Of a state benefit) not dependent on national insurance contributions
172
Define - Contributory benefits
(Of a state benefit) dependent on national insurance contributions
173
Define - Means tested benefits
Make (a state benefit) conditional on a means test
174
Define - Universal benefits
A benefit which everyone is eligible to receive
175
Give two disadvantages of the progressive tax and benefits system
1. It may create a disincentive effect, which occurs when individuals are discouraged from working hard because they pay more of their income in taxes.
2. It may create moral hazard, where some individuals may not look for ways to improve their own position because the state provides insurance against poverty, unemployment, and disability
176
Define - Moral Hazard
The name given to the negative behaviour that can arise from an individual being insured
177
Define - National Minimum Wage
The minimum pay per hour almost all workers are entitled to
178
Define - National Living Wage
The minimum pay per hour all workers aged 25 or over and not in the first year of an apprenticeship are entitled to receive
179
Give four policies the government can use to reduce unemployment and hence reduce inequality?
1. Government funded job creation schemes
2. Re-training schemes
3. Monetary stimulus
4. Fiscal stimulus
180
Give three benefits to public expenditure
1. Higher allocative efficiency through provision of non-rivalrous and nonexcludable goods i.e. Armed Forces, Police and Criminal Justice System and provision of merit goods such as health, education and welfare
2. Government funds research and development which will increase dynamic efficiency through innovation
3. Some goods are best provided by monopolies, the lack of need to produce at profit max could make this more productively efficient
181
Give two costs to public expenditure
1. Public sector may provide goods allocatively inefficiently
2. Public sector may provide goods productively inefficiently
3. Public sector may provide goods dynamically inefficiently
182
Define - Accelerator Theory of Investment
An economic theory that suggests that as demand or income increases in an economy, so does the investment made by firms
183
Give four characteristics of the Nordic Model
1. Universalist welfare state
2. Most labour being a part of a trade union
3. Low barriers to trade
4. Low levels of corruption
184
How do low and high income countries different in terms of government spending and why?
1. Low-income countries have little tax revenues and hence government spending is also low
2. High-income countries typically demand more higher-quality goods from government provision
185
Define - Cyclical Deficit
A deficit which occurs because government spending and revenues fluctuate through the trade cycle
186
Define - Structural Deficit
The fiscal deficit which occurs when the cyclical deficit is lowest
187
What is the effect of having a structural deficit?
If a government has one it is likely that the National Debt will grow over time because if the economy is in boom or recession it will still have to borrow money to finance its spending
188
Define - Structural Balance
Occurs when at the peak of a boom, the actual fiscal balance is 0
189
Define - Structural Surplus
Occurs when at the peak of a boom, the there is an actual fiscal surplus
190
Give four factors influencing the size of fiscal deficits and hence nominal national debt
1. If it is a structural deficit caused by planned spending and tax decisions. It may increase in aboom as the government may believe the economy will continue to do well and hence borrow extra because they can
2. If it is a cyclical deficit then the severity of the recession will dictate how large the deficit is
3. Government have to deal with unforeseen events such as floods, natural disasters or the financial crisis
4. The larger the debt interest paid (debt interest is a part of a government fiscal deficit/surplus), the larger the deficit
191
Give the two determinants of debt interest
1. Size of National debt, the amount government owers to its creditors
2. Rate of interest it has to pay on its debt
192
Give two determinants of the rate of interest paid on new debt borrowing
1. The market rate of interest at the time
| 2. The credit rating of the government
193
Give four implications of fiscal deficits
1. To borrow governments must crowd out the private sector through increasing the interest rate
2. High fiscal deficits may lower credit rating, however not always the case as US and UK have high deficits but have never defaulted
3. High fiscal deficits could prove burdensome for future generations to pay off, however national debt declines in relative value because of inflation which erodes the real value of debt
4. If a country has high deficits then it may be viewed that they could increase taxes to finance that, which discourages FDI
194
Evaluate why the crowding out implication of a fiscal deficit may not happen (four points)
1. Government borrowing increase may be relatively small
2. Central banks may be operating QE which lets government borrow money at virtually 0% interest
3. May borrow on international financial markets instead of domestically
4. If it's done in a recession private sector borrowing is likely to be falling anyway, lowering interest rates
195
Give three ways the government can reduce fiscal deficits
1. Raise taxes
2. Lower government spending
3. Do nothing and wait for automatic stabilisers
196
Define - Fiscal Deficit
When a government's total expenditures exceed the revenue that it generates
197
Define - National Debt
The total amount of money which a country's government has borrowed (accumulation of yearly deficits)
198
Give four ways to reduce the National Debt
1. Having a fiscal surplus
2. Inflation reduces real value of debt
3. More QE will reduce interest rate and hence reduce national debt held outside central bank
4. Governments can default on National Debt
199
Give two responses of a government to an oil price crisis
1. Increase AD to get economy back to full employment but bear the burden of inflation and the implication this will have on labour pushing for higher wages
2. Decrease AD to stabilise prices at their previous level how experience unemployment
200
Give four benefits to aid
1. Help overcome savings gap
2. Build capital stock by subsidising investment
3. If spent on education and health builds human capital and raises productivity
4. High growth and trade spillovers
201
Give four costs to aid
1. Aid could be expropriated due to corruption
2. Politicians pay more attention to aid donors than to their citizens
3. Aid dependency: A dependency might be generated
4. Food aid could distort markets and result in loss of economic efficiency
202
Define - Aid Paradox
Aid tends to be most effective where it is needed least
203
Give four benefits to debt relief as a way to promote growth and development
1. Allows countries to use funds that would have been spent on debt servicing on investment instead or reducing poverty
2. Debt cancellation can be tied to conditions used to encourage development
3. Breaking the cycle of debt (where countries take out more loans to pay off debt, accumulating more debt)
4. May benefit developed nations through larger export markets being available
204
Give four costs to debt relief
1. Debt cancellation may encourage irresponsible borrowing in the belief that further debt will not have to be repaid
2. It costs the firms and governments in the developed world to whom which the money was owed
3. Poverty (especially relative) should be tackled in one's own country before resources are diverted away to help in others
4. In the long term export markets may prove too competitive with the developed world, acting as unwelcomed competition to their previously monopoly power in manufacturing exports
205
Define - HIPC
Heavily Indebted Poor Countries Initiative launched in 1996 to provide debt relief with the aim of either cancelling debt or reducing it to sustainable levels
206
Give two benefits to investment in health and education as a way to promote growth and development
1. Improvements in Health and Education are ends in themselves. Health is central to well-being and education is essential for a satisfying and rewarding life
2. Improvement in health and education increase productivity of the workforce which results in further growth
207
Define - MPI
An international measure of acute poverty covering over 100 developing countries using 10 indicators in health, education and living standards - Higher it is the worse the poverty
208
Define - The Genuine Progress Indicator
A measure designed to take fuller account of the well-being of a nation, only a part of which pertains to the health of the nation's economy, by incorporating environmental and social factors which are not measured by GDP
209
Why do institutions affect economics development? (3 points)
1. They ensure the enforcement of property rights
2. They keep transaction costs to a minimum
3. They prevent coercion
210
Evaluate the effect of institutions on economic development
1. While good institutions facilitate development it may rather be the cause that development brings about good institutions
211
Give four reasons why a functioning financial system (equal as well as efficient) is important?
1. Generate and distribute information
2. Match savers with borrowers
3. Allocate credit efficiently
4. Makes it easier to sell assets and thus increases liquidity
212
Define - Development Banks
Public and private financial institutions that supply medium-and long-term funds for the creation or expansion of industrial enterprises raising capital from two major sources, bilateral and multilateral loans from USAID or World Bank and loans from their own governments
213
Give four benefits to microfinance institutions as a method to promote growth and development
1. The group lending model where groups join together create joint liability and increase the chance of repayment
2. Many MFI's focus on broader social objectives, such as education
3. NGO MFI's target female borrowers, targeting gender equality in itself
4. Provide funds for the very poorest which formal institutions might not do, relieving poverty
214
Evaluate microfinance institutions (4 points)
1. MFI's provide funds to microenterprises, however many would just prefer employment
2. Few micro entreprises actually grow into anything large
3. Funds spent on microfinance mean less funds available for other development projects
4. Not a substitute for broader formal finance reform
215
Give two reasons why infrastructure investment promotes growth and development
1. Improved labour mobility
| 2. Acts as investment in capital which can lead to capital accumulation or capital productivity which can drive growth
216
Give four benefits of agricultural reform
1. Improving the state of private ownership gives farmers an incentive to be productive and maximise output on their land, increasing total agricultural output
2. Diversification into mixed farming where stable crops are combined with cash crops lessens the problem of underemployment
3. Diversification into mixed farming can also have the benefit of increasing revenues and profits, giving a single farmer enough to make small innovations
4. Increasing credit and information farmers receive allow them to be aware of new techniques and ways of replicating them, improving productivity
217
Evaluate the benefits of agricultural reform
1. Farmers may be risk averse and hence oppose change
| 2. Governments may bow to political pressures from powerful landowning groups and fail to implement reforms
218
Give two benefits to industrialization as a way to promote growth and development
1. Helps primary product dependent countries diversify their economy and hence rid of the problems associated with PPD
2. Industry being able to get cheap labour from agriculture means that they can make profits and reinvest which increases capital accumulation
219
Define - The Lewis Model
A model which explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector
220
Explain the Lewis model
To begin with everyone is employed in agriculture, which is dominated by family farms where they share income. Thus there are members of said family who have a marginal product of zero. This means that labour can be removed from agriculture and given to industry without a fall in the production in agriculture. Assuming it produces something, output increases. This wage will be cheap (less than MPL in industry) so firms will make profit which it invests and therefore capital is accumulated
221
Define - Labour-saving capital
Capital which reduces the human input into the production process
222
Define - Labour-using capital
Capital which increases human input into the production process
223
Define - Schumacher's concept of intermediate technology
In this theory he suggests that there is a stage between highly industrialized nations and nations rife with unemployment and an agricultural base which employs intermediate technology that is simple, easy to set up, less dependent on raw materials and more affordable
224
Evaluate Industrialisation (4 points)
1. Lewis model assumes profit made in industry is reinvested. However this could be repatriated
2. Urban infrastructure will become pressured and labour would need training before entering industry
3. Cultural costs which could arise owing to a change in the system (free market system used in the industrialization process)
4. Lewis Model assumes surplus labour. If agricultural productivity is low and the government pushes industrialization this will lead to food shortages
225
Give four benefits to Tourism as a way to promote growth and development
1. The biggest assets of developing countries are their environment and cultures. Tourism generates revenue from these assets
2. Modern communication devices such as the internet have made it possible to promote tourist destinations relatively cheaply
3. Tourism generates many employment opportunities for unskilled labour
4. Tourism creates injections into the circular flow of income from two sources. These are, firstly, the expenditure of the tourists themselves and, secondly, foreign direct investment (i.e. investment by multinational hotel chains)
226
Evaluate tourism as a way to promote growth and development
1. FDI and infrastructure developments could lead to environmental damage
2. Air and noise pollution from construction or high flight volumes
3. Local cultures may suffer due to commercialisation.
4. Opportunity cost of diverting resources away from other areas of the economy
227
Give four barriers which prevent the growth of tourism
1. Climate
2. Lack of infrastructure or transportation links
3. Lack of suitable labour with language skills
4. Conflict, including civil wars
228
Define - Import Substitution
A deliberate effort to replace consumer imports by promoting the emergence and expansion of domestic industries
229
Define - Export Promotion
Governmental efforts to expand the volume of a country's exports through increasing export incentives, decreasing disincentives and other means in order to generate more foreign exchange and improve the current account of its balance of payments or achieve other objectives
230
Give four benefits of Fairtrade as a way to promote growth and development
1. Higher prices for producers limits monopsony power to suppress prices and hence improves living standards of those producers
2. Long-term contracts signed by fair trade retailers ensure less price volatility
3. Producers get premiums which they can invest in development
4. Producers are required to improve the working conditions and product quality
231
Evaluate Fairtrade (3 points)
1. By raising the supply of produce the retailer encourages greater supply of produce of which there is already excess
2. Downward pressure on prices could simply be a result of market forces
3. Protectionism in the developed world needs to be reduced instead
232
Give four benefits to FDI as a means to promote growth and development
1. FDI fills the resource gap between targeted or desired investment and locally mobilized savings
2. Exporting MNCs improve the balance of trade and fill Fx gap
3. MNCs provide employment
4. The profits of MNCs can be taxed
233
Evaluate the benefits to FDI as a means to promote growth and development (4 points)
1. Profits may be repatriated
2. Effect on balance of trade limited given MNCs import intermediate products and capital goods
3. MNCs could avoid tax and developing countries could have a taxation war to encourage them to go there
4. Capital-intensive production technologies create little employment. And they could exacerbate income inequalities through promoting interests of a small number of relatively well-paid workers
234
Give four benefits to population limitation as a method to promote growth and development
1. Family planning and education programmes can lead to knowledgeable reduction in growth without the government having to actively limit growth using crude methods
2. High reduction of maternity benefits reduces population while also reducing public expenditure
3. Fine for high numbers of children could bring in extra revenue to subsidize the cost of high population
4. Policies to improve the economic status of women increase opportunity cost of having kids and is a development objective in itself
235
Evaluate policies to restrict population growth (4 points)
1. Policies could be seen as too draconian and engender global disagreement/political tension/sanctions
2. Policies like family planning clinics cost more money, which could be used to have short term effects rather than waiting for long term
3. Internal opposition against increasing role of women in society
4. Policies may slow growth, but if issue is with current population levels then the country need to look for a way to cut population or increase food
236
Give three ways in which developed countries cause issues in developing countries
1. Colonialism. Unequal distribution goes back to the time of colonies which were forced to concentrate on the primary production of goods
2. Inappropriate advice given to developing nations from developed economists
3. There are an elite in poor economies which benefit from the current system. The World Bank and IMF rewards them for keeping wages low and prices of raw materials low and discouraging diversification into developed industries
237
Define - Zero-Sum Game
A situation in which each participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s)
238
Why is it in global interest that developing countries escape poverty? (4 points)
1. Consumer in the global market grow, increasing export potential of developed nations
2. Further famine incidents will cause mass migration
3. Poor countries with poor governance have often proved to be breeding grounds for terrorism
4. Diseases created in developing countries could spread to developed economies
239
Give four key elements of the Washington Consensus?
1. Deregulation
2. Trade regulation
3. Elimination of barriers to FDI
4. Tax reform, broadening of the tax base and cutting marginal tax rates
240
Give two assumptions of the Washington Consensus?
1. Government intervention was more likely to make things worse than better
2. Poverty would be taken care of by growth and was not a major obstacle to growth and development
241
Give four conditions imposed by the IMF
1. The reduction of protectionist barriers
2. The devaluation of the official exchange rate
3. Greater openness to foreign investment
4. Tight domestic fiscal and monetary policies
242
Give three negative effects of IMF's conditions
1. Tightening of policy lowers aggregate demand
2. Evidence suggests that the adjustments insisted on by the IMF hit poor families hardest
3. Firms in developing countries are likely to struggle to compete in international markets when protection is withdrawn
243
Give four points discussed in the Doha Development Agenda
1. Reduction of tariffs in agriculture
2. Reduction of tariffs on industrial goods
3. An improvement of the dispute settlement mechanism
4. Ensuring that patent protection does not block developing countries' access to affordable medicines
244
Evaluate the Doha Development Agenda (3 points)
1. Removing patent protection limits investment in research to develop new medicines (which is why patents are given)
2. Patent removal is only effective if firms in developing countries can produce medicines
3. Future of Doha round as of late 2013 remains uncertain
245
Define - 'Ownership' of Policy
Gathers that success is most likely if the free trade policy is owned by developing countries in the sense that it is introduced by them (With outside support as necessary), for their benefit, opposed to imposed from outside
246
Define - EU
A political and economic union that consists of 28 member states between which there is free trade, freedom of movement of factors of production and common macroeconomic policy
247
Give four costs to the UK leaving the EU
1. Subject to the CET and we export less to the EU which can lead to a decline in the current account
2. FDI is reduced (US firms looking for a gateway to Europe frequently set up in the UK)
3. UK lose out on trade deals EU are negotiating such as the Transatlantic Trade Partnership
4. Lack of free movement of capital and labour may increase employment gaps and reduce productivity growth
248
Evaluate the four costs to the UK leaving the EU
1. If Marshall-Lerner doesn't hold in the country the UK is exporting to, then their elasticity of demand for UK exports is likely to be inelastic, which suggests a change in price through tariffs won't necessarily have the effect of reducing quantity demanded by a large amount
2. FDI isn't a large portion of UK GDP in terms of net inflows and hence it is unlikely to impact that Uk extensively. Also foreign firms may be in the UK because of cultural similarities or the UK's finance centre and hence won't leave
3. UK could negotiate new trade deals with the developing economies such as BRIC and MINT countries
4. The UK could import more advanced capital from the US at a lower cost if we leave the EU, or cheaper capital from China and Japan
249
Define - Flat Tax
A tax system, which refers to a tax on household income, taxes at a uniform rate, regardless of income level
250
Give two benefits of a Flat Tax
1. Easily understandable
| 2. Everyone pays the same amount as a proportion of their income and hence this tax does not discriminate
251
Give two costs of a Flat Tax
1. Poorer people after expenditure have less money to pay taxes etc compared to high income people
2. Government get less revenue from the progressive tax of high income earners which is much needed for government expenditure
252
What are the four canons of taxation?
1. Timing of collection and amount should be clear and certain
2. Cost of collection should be low relative to yield
3. Means and timing should be convenient to the taxpayer
4. Levied according to ability to pay
253
Define - PFI Contracts
Private finance initiative contracts are where a private company builds and operates a piece of infrastructure instead of the government
254
Give and explain the two reasons why the aggregate supply curve is upward sloping?
1. Sticky costs meaning that even though price level increases, costs don't increase and so the firm increases output
2. Price Illusion described a situation where there is imperfect knowledge and so nominal price increases are mistaken for being real price increases and so firms increase their output
255
Give three examples of why there may be sticky costs in the short run?
1. Fixed contracts (i.e. labour)
2. Import price may be fixed due to the conditions of inflation in another country
3. Pre Purchased resources mean that as price of these goods increase they are not affected in terms of costs as they have already purchased their resources
256
5 Mark Question Breakdown
3 (Knowledge) inc. Definition and Answer
2 (Application)
6 Minutes
257
8 Mark Question Breakdown
6 (Analysis 2 points) (Or diagram 4 marks and 1 point of explanation)
2 (Application)
10 Minutes
258
How many times should you use application per question in Section B?
2 times
259
10 Mark Question Breakdown
4 (Analysis 3 Points)
2 (Application)
4 (Evaluation 3 Points)
12 Minutes
260
12 Mark Question Breakdown
5 (Analysis 3 Points)
2 (Application)
5 (Evaluation 3 Points)
14 Minutes
261
15 Mark Question Breakdown
7 (Analysis 3 Points)
2( Application)
6 (Evaluation 3 Points)
18 Minutes
