THEME 4 Flashcards

Question

Economic effects of a fall in competitiveness

Answer 1

Unemployment - fall in exports (depends on new export markets being found; elasticity of goods) Deterioration of BoP (but ER will adjust; does it really matter?) Fall in actual economic growth (depends on other AD components) Price levels fall Impact on investment

Answer 2

Record of all UK financial transactions between the UK and other countries over a year Current account; capital account; financial account

Answer 3

Trade in goods Trade in services Investment income Transfers

Answer 4

Government investment grants; purchase and sale of patents; trade marks and land for foreign embassies; debt forgiveness; currency trading

Answer 5

Portfolio investment (buying bonds and shares) and direct investment (buying land and factories)

Answer 6

High value of sterling Cheap imports - changing comparative advantage Recession in EU/Rest of World Increased UK income - economic growth Poor quality/design/reliability/availability of UK goods - R&D gap Insufficient productive capacity from UK suppliers

Answer 7

A world boom causing an increase in demand for UK exports A recession in the domestic economy causing a lower demand for imports Improved quality, design, reliability and availability of UK goods Weak pound making UK goods internationally competitive

Answer 8

Need access to finance - hard for small/medium sized firm post-2008 Need access to expertise - R&D; Labour ideas implemented by the coalition - catapult centres which bring firms together to progress in the industry and target technological research All parties had similar innovation policies Differences: Labour wanted to increase corp tax; Tories wanted to keep it the same Too much emphasis on debt: interest payments cause profits to fall, making corp tax fall Crowdfunding, shares, venture capital etc. would be better for innovation Labour proposed a small business administration like in the USA Curcial for long-term prosperity (more investment, infrastructure, education)

Answer 9

Tax incentives for firms to increase R&D expenditure (May not invest though) Education & training (better skills/occupational mobility) (Time lag) Privatisation (may be inefficient; not much left to privatise) Public spending on infrastructure (opportunity cost; time lag; can they afford it?) Deregulation; lower corp tax (Unintended consequences) Lower benefits/income tax (hurts the poor)

Answer 10

Exchange rate policies (not a free economy) Control inflation; macroeconomic stability --> encourage investment; keep prices low (difficult)

Answer 11

Higher standard of living Better quality goods BUT Negative impact on AD and a fall in growth - long term if supply-side causes? (only if deficit is big; could be consequence of strong growth, so good)

Answer 12

Increase in international competitiveness Greater confidence in the UK economy Greater FDI Exporting producers benefit --> employment BUT Inflationary pressure because injections are high relative to leakages Increase in the value of the pound --> fall in international competitiveness Living standards may fall

Answer 13

Cyclical element of the deficit tends to be self-correcting Lower ER improves the trade balance after a time lag, but this depends on the PED/PES for UK output

Answer 14

WIDEC only applies if PEDx + PEDm > 1

Answer 15

Demand-side: Strong domestic growth, overseas recession, strong pound Supply-side: low productivity, low investment, high relative inflation, high labour costs, poor quality products

Answer 16

Expenditure-reduction and expenditure-switching Caused by high demand for imports: tighten fiscal and monetary policy BUT may conflict with other objectives e.g. growth; depends on multiplier and confidence Caused by price: protectionism BUT retaliation; WTO conflicts; imported inflation; X-inefficiency Caused by strong pound: depreciation BUT Marshall-Lerner; J curve; imported inflation; floating rate; retaliation Can use supply-side policies BUT time lag; no guarantee of success; expensive

Answer 17

PED for imports/exports inelastic in the short run, so a depreciation leads to a worsening deficit until contracts expire etc.

Answer 18

The rate at which one currency is converted into another

Answer 19

GESTIC FRIG Growth relative to other countries Exports of goods/services (X up --> D£ up --> ER up) Speculation or special factors such as political events Trade performance with other countries IR differentials (hot money flows) Central bank official buying and selling FDI inflows and outflows Relative inflation (low inflation implies stability) Imports of goods/services (M down --> D£ up --> ER up) Government finances (confidence)

Answer 20

Value determined purely by supply and demand Trade flows and capital flows affect the ER No target for ER and no central bank intervention Sterling floated since UK suspended ERM membership in 1992 Bank of England not intervened to influence ER since independence in 1997

Answer 21

Value determined by market supply and demand Some market intervention Governments normally engage in managed floating if not part of a fixed ER system (pursued in the UK from 1973-1990)

Answer 22

Pegged Countries can improve competitiveness by cutting costs below other countries, knowing ER will be stable Need large currency reserves to make this work

Answer 23

Low need for foreign currency reserves Freedom to set policy IR to meet domestic objectives May help prevent imported inflation Insulates an economy after an external shock, especially if export-dependent Partial automatic correction for a current account deficit Less risk of speculative attack

Answer 24

Certainty --> confidence for inward investment Low costs of currency hedging for businesses Stability helps control inflation Can lead to lower borrowing costs (lower yields on bonds) Imposes responsibility on government policies Less speculation if the fixed ER is credible

Answer 25

Lower import prices - higher living standards Higher real purchasing power overseas Cheaper raw materials --> SRAS up Helps control inflation (tough competition for domestic producers; fall in imported input costs)

Answer 26

Cheaper imports leads to rising import penetration and larger trade deficit UK exporters lose price competitiveness and global market share - difficult to recover Damages profits/employment in sectors such as manufacturing Negative impact on growth in the medium term Some regions affected more than others - different export dependency; exposure to import competition

Answer 27

Efficiency and market failure: some markets (e.g. public goods) are allocatively inefficient. Others productively inefficient - a monopsony (e.g. NHS) can fix that Equity and equality: certain goods have unequal burdens e.g. healthcare for elderly; education for poor Macroeconomic management: Free market doesn't account for externalities

Answer 28

Income elastic (low income less revenue; high income high demand for more/better services) Ideology (USA spends 38% GDP; Finland 58%) Population (ageing e.g. Japan less productive; need more spending) Economic crises (austerity post-2008)

Answer 29

Capital expenditure: spending on long-term investment goods (infrastructure) Current expenditure: government consumption + transfer payments + debt interest Transfer payments: mainly welfare, not included in GDP because there is no corresponding output A current expenditure deficit is undesirable because the burden of borrowing will fall on future generations

Answer 30

Government efficiency: with the right controls/incentives, govt can be allocatively, productively and dynamically efficient. However, no profit motive Disincentive effects: high tax/spend discourages work, so should be small. However, Nordic countries have similar activity rates/growth as UK/USA Utility: principal-agent problem between politicians and taxpayers. However, this is because taxpayers would not make decisions in their best interests (public goods)

Answer 31

If an economy is operating on its PPF curve, an increase in public spending will crowd out the private sector Even below full employment, govt borrowing money to spend can lead to financial crowding out - higher D for finance --> higher IR --> less borrowing by firms to invest May not happen: transfer payments don't increase output; high U leads to crowding in (multiplier); could lead to growth, shifting PPF outwards, allowing for private sector growth Free market economics disagree: higher tax is discouraging; low multiplier --> crowding in unlikely; public investment inefficient

Answer 32

Spending on public services benefits people. Education is a supply side policy, increasing economic growth Extra G increases GDP --> more tax revenue Improvements in living standards

Answer 33

STOIC Spending cuts to reduce the deficit Increase tax to repay the debt - unpopular and reduce consumption Opportunity cost of higher interest repayments Danger of inflation Potential 'crowding out' effect

Answer 34

Current spending on goods & services Capital spending Transfer spending Interest on debt repayments

Answer 35

Provision of public and merit goods Redistribution of income and wealth Influencing regional resource allocation and industrial efficiency (done via regional policy) Influencing the level of economic activity

Answer 36

AD injection into the circular flow Boosts AD during slowdown Regional employment increases due to investment Improvements in LRAS from better national infrastructure/education/healthcare

Answer 37

A PIPE Wider access to public/merit goods - living standards, econ. welfare up Improved public service funding Income inequality down if real value of welfare benefits rises Relative poverty down if benefits low income families Externality effects e.g. from better public transport and healthcare

Answer 38

Level of GDP (more revenue; less demand) Size and age distribution of population (higher pop. --> more pressure on services; ageing pop?) Political priorities Redistribution of income Need for discretionary fiscal policy e.g. post-2008 Debt interest

Answer 39

A tax that is raised for a specific purpose

Answer 40

Tax to correct a negative externality (internalise it)

Answer 41

A new tax/tax rise introduced in a way that is difficult to notice it

Answer 42

When tax allowances do not rise in line with prices and incomes

Answer 43

Fairer income distribution Lower incentive to work Less economic activity More tax revenue (Laffer curve)

Answer 44

Worse income distribution Greater incentive to work - need to Tax revenue depends on elasticity Inflationary wage-price spiral Leakage --> less economic activity

Answer 45

An absence of sufficient income to access basic human needs Poverty line $1.90 a day (~800mn people) Objective measure Same standard across different locations/time periods However, minimum level of income to meet basic needs varies by time and location

Answer 46

Lower standard of living than those around you EU measure: below 60% median income Allows comparison within a country However, highly subjective; can change over time; can't compare between countries; doesn't take needs into account (pensioners have low income but low needs - mortgage paid off)

Answer 47

HPI-1 (% not expected to reach 40; % that are illiterate; % of illiterate children; % that don't have access to safe water and healthcare) HPI-2 (Probability at birth of not surviving to 60; Adult literacy rate; population in relative poverty; rate of long-term unemployment)

Answer 48

Graph showing how much the actual distribution of income differs from an equal distribution

Answer 49

Measure of inequality on a Lorenz curve. Higher = less equal A/(A+B)

Answer 50

AUSPICATE Access to capital to start businesses Unemployment Social benefits Pay differences Inheritance Corruption Assets Tax system Education

Answer 51

SASHI Social consequences e.g. high crime rate Access to capital - low for poor Savings low (poor) High poverty Imports (rich)

Answer 52

MITSC Minimum wage - MW £7.70; LW £8.21 - boosts work incentives/take-home pay BUT might cost jobs; higher prices Income tax - 45% might rise to 50% - progressive tax reduces inequality BUT risks brain drain/tax avoidance Training - apprenticeship levy since 2017 - Helps raise productivity, jobs and real wages BUT time lag; free rider problem (?) Service provision - NHS, state education - Access to merit goods not based on ability to pay BUT universal access less effective than targeted provision Child care - £2,000 a year per child - improve incentives for mothers to work BUT quality of child care needs improving

Answer 53

WASSUP P Wages (low for unskilled/casual work) Age (elderly have no income; imperfect information --> low pension investment; health) Sickness & disability (can't work as much; unemployable) Social stigma around benefits --> might not claim; paperwork Unemployment (long term --> unemployable) Poverty trap (disincentive to look for work; job --> tax) Parenthood (alone: leave child alone or no income)

Answer 54

Natural: Floods, famines, volcanoes, earthquakes, tornadoes, drought, inaccessible location, few natural resources etc. Manmade: GOBEFACEUP - Govt policies; Overpopulation; Barriers to trade; Environmental degradation; Forced migration; Advice from IMF bad; Corruption; Exploitation; Unemployment; Political strife

Answer 55

Physical/mental health issues Lower life expectancy Bad education/less likely to stay in education

Answer 56

GDP rises reduces absolute poverty, but often hurts relative poverty (depends on welfare state etc.) Relative changes because of market force impacts on wages and wealth; changes in benefits and tax levels

Answer 57

Debt/Unfair trade: unfair trade means LEDCs can never pay their debts off Debt/War: must borrow to buy weapons Disease/War: war creates dirty conditions and lack of stability for healthcare, making disease spread Education/War: schools become dangerous; learning becomes difficult; kids at war Education/status of women: Women don't get education, so they can't contribute to the economy

Answer 58

Cannot be defined precisely Takes into account the quality of growth, not just the quantity (living standards; sustainability; freedom of choices)

Answer 59

Can satisfy basic human needs Opportunity to raise standard of living Freedom to make choices Growth is sustainable

Answer 60

Focus on individual survival Basic human needs barely met Poor healthcare and sanitation Low levels of education Gender inequalities Poor and unstable governance

Answer 61

Real GDP Income equality HDI (education, life expectancy, income etc.) Access to clean water, internet; size of tertiary sector HPI? (life expectancy, wellbeing, ecological footprint)

Answer 62

UN measure of development that attempts to rank all countries. The goals of development considered are standard of living (GDP per capita); Longevity (life expectancy); knowledge (adult literacy/enrollment in primary, secondary and tertiary education)

Answer 63

Reliable/easy to obtain indicators Takes income into account, but qualified by cost of living Figures recorded with consistency With GDP and HDI, assumptions on healthcare and education can be made Can judge success of govt policies BUT Fails to take into account income equality Large disparities may exist between regions, genders or ethnicities Life expectancy doesn't tell us about quality of life Knowledge is academic only - practical knowledge? Omits important factors e.g. democratic freedom, HR abuses

Answer 64

The knowledge and skills embodied in individuals that facilitate the creation of personal, social and economic wellbeing

Answer 65

AT BAT Attractive to MNCs because of lower costs in training workers Training --> greater productivity Basic needs of the economy met e.g. lorry drivers being able to read Adaptable economy if flexible Technological change contributions

Answer 66

Government can't afford education investment Families too poor to send children to school Culture e.g. lack of education for girls AIDS/HIV (parents leave work, so children leave school; teachers leave work; MNCs pull out due to unprofitability)

Answer 67

Very expensive Long run nature of the investment (ILO: hard focus on education would cause "a protracted period, approximately 15 years, of net costs") Brain drain

Answer 68

When a country is dependent on a single finite commodity Most developing countries concentrate production on the primary sector (SSA: 95% of exports are primary products) Can be hard commodities (copper, tin, iron ore) or soft (wheat, palm oil, rice, fruit) 2010 % of exports: Angola: 97% oil Zambia: 84% copper Tanzania: 37% gold Ghana: 39% gold, 26% oil, 17% cocoa

Answer 69

P-P-P-P-PEN Price fluctuations Price naturally falls (supply naturally increases; demand falls as synthetic materials can be used) Producer incomes and foreign exchange earnings fluctuate Planning investment is difficult (uncertainty) Protectionism can destroy an economy Elasticity (Income inelastic products - Prebisch Singer) Natural disasters can cause quick jolts

Answer 70

Some countries have developed on the basis of their primary products e.g. UAE (when price is high, they can make a lot of money and reinvest it in diversification) Some countries have natural resources with growing demand e.g. Congolese cobalt used in phones/electric cars Comparative advantage Food prices likely to rise because world population is rising, so demand for agricultural products rises, benefiting farmers

Answer 71

The argument that countries exporting primary commodities will face declining terms of trade in the long run due to primary goods being income inelastic, which will trap them in a low level of development as more and more exports will need to be sold to 'pay for' the same volume of imports of secondary sector or capital goods.

Answer 72

(Export prices/Import prices)*100 Ratio between the price of goods a country exports compared to those it imports Countries export certain goods and need those earnings to fund imports If ToT improves, the country can buy more imports with money from exports, and vice versa Depends on elasticity (Elastic exports: ToT improves --> XD falls --> revenue falls)

Answer 73

Eighteenth-century English intellectual who warned that population growth threatened future generations because, in his view, population growth would always outstrip increases in agricultural production.

Answer 74

GFUCW GDP per capita falls Food Unemployment rises Crime rates rise Wages fall

Answer 75

Higher output Cheap labour attracts FDI Higher tax revenues

Answer 76

Transport - inability to transfer goods reduces trade; may reduce chances of kids getting to school; high supply costs and delays for businesses; reduces mobility of labour Public utilities - power failures disrupt production; sanitation and clean water vital for good health Public services - need for effective emergency services and adequate schooling/healthcare Communications - inability to coordinate economic activity; underdeveloped radio/TV/internet makes communities insular

Answer 77

Higher supply costs Delays for businesses Reduces labour mobility Need to invest more to deal with climate change (1901-1910 82 natural disasters; 2003-2012 >4,000)

Answer 78

India: Irrigation is bad, making food production hard to sustain, especially when there is little rain e.g. 2012 - farms had to draw more power to pump water, and hydroelectric plants had less supply, leading to a blackout which left >700mn people without power Brazil: 2011 - only 14% of roads were paved in 2011 SSA: combined power generation capacity of 48 countries is 68GW - about the same as Spain. 47 without South Africa: 28GW - about the same as Argentina. Africa only invests about 4% GDP into infrastructure

Answer 79

Dishonest exploitation of power for personal gain

Answer 80

Embezzlement, bribes, seizure of property, fraud, nepotism, spending on political aims e.g. weapons

Answer 81

Govt not accountable Large-scale capital investment projects (payoffs unnoticed) Accounting practices poorly formulated Officials not well-paid Elections not well-controlled Weak legal structure Lack of freedom of speech

Answer 82

CAMEL PITS Cost of business rises Allocation of resources unfair Monetary gains may be moved out the country Environmental impacts Legal system ineffective Public funds wasted Investment falls due to risk of contracts not being honoured Trust in the economy falls Small bribes reduce citizens' economic wellbeing Just 5 of top-25 countries in the Corruption Perceptions Index are non-OECD

Answer 83

Government failure - rulers of a country adopt policies that result in the country's resources being allocated inefficiently, restricting growth

Answer 84

A country at 'peak danger', with commodities comprising 32% of GDP, has a 22% risk of falling into civil war in a given 5-year period, which a country with no primary commodity exports has a 1% risk. It is easy to capture and control the output of a gold mine or oil field compared to a sector of garment manufacturing or hospitality services.

Answer 85

Young males (majority of combatants) are less likely to join a rebellion if they are being educated and/or have a comfortable salary, and can reasonably assume that they will prosper in the future

Answer 86

Uncertainty --> potential economic breakdown Unlikely to receive FDI, or even aid Loss of life, damage to infrastructure, displacement of population, loss of investment/aid, impact on education, impact on healthcare etc. Examples: Sudan, Iraq, Rwanda, Somalia, Turkey...

Answer 87

Legacy of colonialism (Indonesian independence in 1949 required assuming Dutch debt, much of it from fighting pro-independence rebels; Haiti paid 150mn francs for independence) Odious debt (civil wars in Guatemala, El Salvador, Colombia; apartheid regime in South Africa; Duvaliers in Haiti) - should be written off? 1973 oil crisis (LEDCs had to borrow, and banks funded by OPEC deposits lent. Much of the borrowing was odious. 1970-92: LEDC debt up 2000%) War Decisions to borrow for major investment projects when economy was strong; borrowing money speculating export prices would rise, and being wrong (Zambia); currency depreciation

Answer 88

Japan debt $2.2tn, 42% GDP Liberia debt $3.2bn (606% GDP)

Answer 89

SOURCE Servicing the debt Opportunity cost Unsustainable debt (not used to increase export earnings) Repayment ability Conditions on borrowing Expenditure on debt

Answer 90

Heavily Indebted Poor Countries Initiative 1996 Debt forgiveness if the country commits to 'good' policies for growth e.g. investing in people, free market practices, widening export base By end of 2009, 35/41 identified countries benefited; $130bn cancelled JUBILEE DEBT CAMPAIGN

Answer 91

SPUD FARM Stability --> more FDI Poverty alleviated Unfair odious debt relieved Development of infrastructure/human capital Foreign exchange gap shrinks --> more investment Aid less needed in the future Rich countries benefit (exports) Mutual gains e.g. environment better looked after

Answer 92

CAD GUM Corrupt misuse? Appropriate? May need conditions e.g. HIPC Dependency culture Govt policies needed as well to reduce poverty Unfair to countries that managed finances well Moral hazard

Answer 93

Inward looking (protectionism; subsidies; restrict MNC activity) e.g. USSR, India (ISI economics pre-1990) Outward looking (no protectionism; promote MNC activity; permit labour mobility; free trade; deregulation)

Answer 94

Self-reliance; develop while preserving culture; necessary forerunner to international trade (infant industries); preserve traditional forms of life BUT Distorts comparative advantage; Lack of competition; higher prices; consumer surplus falls

Answer 95

Welfare gains from tariff reduction; competition forces efficiency; benefit from world growth; EoS; qualify for World Bank aid BUT Infant industries can't develop; deregulation --> collusion; brain drain; no gains from MNC profit (repatriated); tax incentives for FDI --> low revenue

Answer 96

Import substitution; nationalisation; farmers forced to sell to the state at low prices; subsidies; over-valued exchange rates; encourage MNC activity BUT Slow growth; no profit motive --> inefficiency; govt failure; corruption?; fiscal deficit; BoP deficit

Answer 97

Trade liberalisation; market liberalisation; supply-side policies; SAPs BUT Asymmetric information; externalities; absence of property rights (tragedy of the commons); investment decisions

Answer 98

The voluntary transfer of resources from one country to another, or loans given on concessionary terms Bilateral, multilateral, NGO, tied aid, emergency aid

Answer 99

KID HARM Kick-start economic development Inequalities between countries shrink Develop infrastructure --> investment Human capital improvement Absolute poverty reduced Rebuilding disaster stricken areas Multiplier effect

Answer 100

ACID PIC Allocative inefficiency (distorts market forces) Crowding out of domestic investment Imperialistic uses through conditions Dependency culture Postpones economic restructuring Ineffective due to limited resources Corruption

Answer 101

A model of economic growth that emphasises the importance of savings and investment

Answer 102

The acquisition of non-financial assets of a country by foreign countries Involves a flow of capital to build a factory, buy a business, or buy land/buildings

Answer 103

Cheap labour/resources Low tax Subsidies Setting up inside a customs union Expanding market scope Weak regulation

Answer 104

HER SPASM Develops human capital Provides employment Government revenues up Spillover effects e.g. copying tech Higher labour productivity --> higher wages than from local firms Access to world class tech and management Crucial source of investment funds to encourage savings (Harrod-Domar) Regional multiplier effects

Answer 105

Flaws in job creation (not many jobs due to capital tech; expats for managers, leaving only low paying unskilled work for locals) Outcompetes local companies Exploits job-hungry workers Environmental risks taken Race to the bottom --> low tax revenue Repatriated profits Deals with repressive political regimes

Answer 106

Aims to reduce exploitation of producers, by giving them a 'fair price' for their product Workers from co-operatives to get better bargaining power with MNCs Businesses signing up to the 'fairtrade' label must treat workers well, take care of the envt etc. Pay a 'fair price' for the goods, plus a 'premium' to improve the product or the area e.g. schools Fairtrade Foundation gives these firms certification to alleviate a consumer's guilty conscience

Answer 107

Guarantees the farmer a certain income Protects farmers from price fluctuations Money can be spent on improving the product/production methods, increasing competitiveness Money can be invested into education, health, infrastructure etc. Farmers not subject to monopsony power from developed countries

Answer 108

Can be 'middle men' involved, reducing the benefit Not all farmers benefit (awareness, membership fees etc.) Market distortions - low price indicates oversupply Reduces incentives to improve quality/productivity Co-operatives discourage private enterprise Dependency trap

Answer 109

Minimum price schemes Minimum wage Subsidy Regulation Unions

Answer 110

A situation where a government intervenes to stabilise prices, often in markets for commodities (raw materials) e.g. agriculture, buy setting ceiling and floor prices. They influence these by buying/selling the needed amount to shift prices

Answer 111

Floor price too high --> constant surpluses Ceiling price too low --> insufficient stocks Costs of storage All major producers must cooperate; no cheating

Answer 112

A development approach which encourages the movement of labour from agriculture to industry (Marginal productivity in agriculture near 0 due to excess supply --> OC of moving = 0)

Answer 113

Industrial profits may not be invested locally, especially if made by TNCs Reinvestment in capital equipment would hurt Assumption of surplus labour in agriculture is unfair e.g. favelas in South America

Answer 114

Connects lenders with borrowers through bond/stock markets, or intermediaries (commercial banks, investment banks, hedge funds, mutual funds etc.)

Answer 115

When financial markets fail to allocate financial products at the socially optimum level of output. This is a misallocation of resources

Answer 116

Lower reserve requirements (abolished in the UK in 1981); allowing commercial and investment banks to be joined, leading to a higher risk of bank failure

Answer 117

Excessive risk by banks Collusion to fix loan rates for self interest (LIBOR) Monopoly pricing

Answer 118

SMEAR Speculation and market bubbles (Buy low, sell high; wrongly high predictions can create bubbles e.g. housing/bitcoin, which then bursts) Moral hazard - too big to fail Negative externalities e.g. cost to taxpayer of bailout (£27bn estimated); loss of savings; lost jobs, income and growth in the economy Asymmetric information (regulators don't know what banks are doing) Market rigging (LIBOR, FOREX)

Answer 119

Implement monetary policy Bank for the government Bank for commercial banks Regulate financial industry

THEME 4 Flashcards

(143 cards)