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Economics Edie > theme 4 > Flashcards

theme 4 Flashcards

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1
Q

what does the uk import?

A

crude oil, electrical goods, gas, cars, medical products, travel, transport, financial services

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2
Q

who does the uk trade with?

A

USA, netherlands, germany, ireland, france

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3
Q

what does the uk export?

A

cars, mechanical power generators, aircraft parts, oil, chemicals, electrical goods

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4
Q

what is the balance of payments?

A

inflows and outflows from the uk

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5
Q

what is the current account?

A

total expenditure on exports and imports

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6
Q

what is the financial account?

A

net balance of foreign direct investment flows, change of ownership of financial assets

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7
Q

what are structural reasons for surplus and deficit?

A

uneven distribution of natural resources, differential competitiveness, inflation, investment and LT economic growth, domestic and gov spending

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8
Q

what are cyclical reasons for surplus and deficit?

A

exchange rates, recession (deficit), volitile global prices

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9
Q

what are consequences of a deficit?

A

leakages in the circular flow, loss of jobs in export sectors, fall in foreign exchange reserves, exchange rate weakness, can be financed by hot money, lowers AD, debt

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10
Q

what is a debt burden?

A

trying to keep the financiall account in a surplus

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11
Q

what is a currency crisis as a result of the debt burden?

A

if we keep borrwoing to finance debtm eventually confidence goes and no one lends to the gov

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12
Q

what is default in terms of debt?

A

not paying it

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13
Q

eval of debt burden?

A

if the deficit is only a small proportion of the GDP, it is not as big of an issue (uk is sustainable for this reason)

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14
Q

what are specific causes of deficit in the UK?

A

elasticity of demand for imports, dceline in manufacturing, growth of emerging markets, net importer of food and fuel, lack of competitiveness (all structural)

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15
Q

what are the defecit removal policies?

A

exchange rate policy, protectionism, deflationary policies, supply-side policy

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16
Q

eval of defecit removal policies?

A

only so much you can flood the market as there isnt enough money, more imports with lower IR, inflation, time lag, liquidity trap,

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17
Q

what is the Marshall - lerner condition?

A

import or export elasticity of demand must be above 1, for ER polciy to be effective the marshall lerner condition must exist (not effective in UK as imports are inelastic)

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18
Q

what is the J curve showing?

A

when the £ depreciates we still import the same amount at first so the trade defecit will worsen in the short run (also exports are cheaper)

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19
Q

examples of protectionism?

A

tariffs, quotas, embargos, subsiding domestuc industries (duties on imports), red tape

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20
Q

evaluations of protectionism?

A

retalliation, ingoring the bans/quotas, can be inflationary as tariffs cause prices to rise, loss of efficiency

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21
Q

what happens to imports with deflationary fiscal + monetary policy?

A

decrease because there is a drop in demand

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22
Q

what happens to exports with deflationary fiscal + monetary policy?

A

increase because there is increased competition from prices being lower

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23
Q

eval of decreasing import defecit removal policies?

A

time lag, marshall lerner, j curve, brand loyalties

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24
Q

eval of export increasing defecit removal policies?

A

magnitude of drop in prices, drop in spending may not be enough because it doesnt make up a lot of AD, price is not the only determinate

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25
what is the aim of supply-side defecit removal policies?
increased productivity with more investment in domestic industries so exports increase (subsidies, privatisation, education)
26
eval of supply side deficit removal policy
time lag, opportunity cost, price isnt the only determinant, could lead to an increase in AD, conflict of objectives, current account deficit (if defecit exceeds the GDP in the long run it is not sustainable)
27
why do some countries have a surplus?
export oriented growth, FDI, under valued exchange rate, high domestic savings, closed economy, strong income from overseas investment
28
consequences of a trade surplus?
increase in trade balance, increase in AD, increase in growth, lower unemployment, appreciation of exchange rate, financial account defecit, inflation, harm international relations (retalliation), reliant on exports
29
exchange rate?
the value of one currency against another
30
spot exchange rate?
the rates for a currency at today's market prices
31
factors influencing exchange rates?
trade balances (increases demand for a currency and brings appreciation), FDI, portfolio investment, interest rate differentials
32
floating exchange rate advantages?
reduced need for currency reserves (no target rate), useful economic adjustment instrument, partial automatic correction for a trade deficit, traders are less likely yo attempt coordinated efforts to manipulate the ER for short term gains (currency speculation), shock absorber, freedom for domestic Monetary P
33
advantages of a fully fixed exchange rate?
price stability, trade confidence, reduced ER risk, forgeign investment, hedging (businesses will have ton spend less on currency of they know it will not change), discipline of domestic producers
34
countries with fixed and why?
Aruba, Bahamas, Saudi, Hong Kong - PPD
35
managed floating?
central bank may choose to intervene in the foreign exchnage markets to affect the value of a currency to meet specific macroeconomic targets
36
advantages of managed floating?
improved BofT, reduced risk of deflationary recession, rebalance the economy away from domestic consumption towards exports and investment, reduced gov debt by selling foreign currency to foreign investors, demand pull inflationary pressure curbed, reduced prices of improted capital
37
reasons for volitility of ER?
war, prices of primary products
38
limits to central bank intervention in the ER?
requires large scale foreign currency reserves, little makret power against global markets, changing interest rates, j curve, marshall lerner
39
measures of international competitiveness?
relative export prices, relative labour costs, export prices compared to import prices
40
factors influencing competitiveness
ER, productivity, wage/non-wage costs, regulation, quality, R&D, taxation (lower corporation tax)
41
benefits of being competitive?
current account surplus, international investment, employment, economic growth, wage growth, higher domestic purchasing power
42
problems of sustaining competitiveness ?
higher costs as countries develop compared to developing countries, other rising domestic costs, current account surplus leads to appreciating ER, trade barriers
43
policies for competitiveness?
supply side, tight fiscal, tight monetary, ER policy
44
eval of policies for competitiveness
time lag, debt, impact of immigration
45
what does the MPC need to be for fiscal policy to be effective in changing demand?
0.8/0.9
46
key roles for gov spending?
market failures, changing the distribution of income and wealth, stabilising and stimulating AD, improving supply side potential, responding to external shocks
47
current spending is also known as?
general government final consumption
48
macroeconomic?
development, inflation, growth, employment, structure of economy, trade, inequality, fiscal balance
48
microeconomic?
price, output, profits, structure of market, inefficiency, competition, labour market, externalities
49
what is UK gov spending as a % of GDP?
40%
50
what is the impact of gov spending on productivity?
education - highly skilled workforce minimum wage - more productive healthcare - healthy workforce infrastructure - geographical mobility reduction in benefits
51
what is the impact of gov spending on growth/ unemployment?
employment schemes, reduction in benefits, subsidies, multiplier effect
52
what is the impact of gov spending on living standards/ equality?
investment in healthcare, subsidies for housing developments, transfer payments, windfall tax
53
what is crowding out?
high interest rates to attract private investors to buy gov debt, less private sector spending
54
what is an example of supply side effects of fiscal policy?
infrastructure
55
why is UK debt sustainable?
interest rates are low so servicing is more manageable, bank of england holds most of the debt, finance available privately and abroad
56
what is crowding in?
an increase in gov spending leads to more private investments
57
why would a rise in national UK debt be a cause for concern?
crowding out, less gov investment, uncertainty, low confidence, increased taxes so lower growth, BofP
58
what are automatic stabilisers?
naturally kick in to stop overheating/ underheating of economy, e.g. fall in tax revenues from the circular flow in a recession
59
cyclical fiscal balance?
size of the fiscal defecit is influenced by the state of the economy in a boom tax revenue is higher
60
actual defecit?
cyclical + structureal defecits
61
what is structural defecit?
not related to the state of the economy, e.g. long term effects of an aging population
62
what is the difference between tax evasion and tax avoidance?
evasion - noy paying, avoidance - bending tax rules such as moving countries for lower domestic taxes)
63
primary budget defecit does not include what?
debt interest
64
factors influencing size of defecit?
structural defects (welfare payments), cyclival deficits (recessions/booms), unseen events, debt interest
65
why can the real value of debt increase if an economy experineces a period of price deflation?
because the value of other things has fallen (overpaid as you paid a high price before prices fell)
66
how does QE effect the economy (macro), Wealth effect
lower yields (interest rates) leads to higher share and bond prices
67
how does QE effect the economy (macro), borrowing cost effect
QE lowers the IRs on long term debt such as gov bonds and mortgages
68
how does QE effect the economy (macro), lending effect
QE increases the liquidity of banks and increased lifts incomes and spending in the economy
69
how does QE effect the economy (macro), currency effect
lower IRs has the side effect of causing the exchange rate to depreciate which increases exports
70
advantages of QE?
- another tool for the bank of monetary policy - increasing the size of monetary base helps to lower the threat of price deflation - lower long term IRs keep business confidence high - depreciation of ERs to imprve the price competitiveness of exports
71
disadvantages of QE?
- increase in welath inequality because of house prices increasing - inflationary pressure - low IRs can distort allocation of capital and keep alive zombie companies - low IRs has reduced annual incomes from pension funds
72
eval of QE?
- time lag and real impact (liquidity trap) - BofE now a major holder of UK debt - only lending to businesses who will fund green infrastructure - QE has helped to keep IR low but is the economy now too dependant on cheap money
73
examples of tax?
- income -property -VAT -capital gains - corporate -windfall (tax on profits made from extracting oil and gas)
74
what is fiscal drag?
scenario where the tax burden rises behind the scenes as incomes rise but tax bands don't keep up (people paying in higher taxes)
75
what are direct taxes?
levied directly on individuals and companies
76
what are indirect taxes?
levied on goods and services
77
problems with sustaining debt and borrowing?
-interest payments keep increasing with more borrowing -low confidence -opportunity cost -higher taxes -burden (who pays) -structural defecit worsens with aging population
78
how can we help gov debt issues?
- spending cuts - increase taxes - reduce tax evasion - privatisation - depreciation policies - efficiency policies in the public sector -expansionary policies
79
what are counter arguments of defending a rising fiscal and national debt?
- gov borrowing is required fro investment in critical infrastructure - rise in ineviatble in an external shock -rationalto borrow to invest when market bond yeilds are low - risk of causing crowding out are limited - modern monetary theory, a central bank can buy almost unlimited amounts of gov debt -borrowing to stimulate the economy can be partly self-financing via tax revenues
80
what are some uk supply side weaknesses?
skill shortages, labour shortages, low R+D spending, low labour mobility (house prices), economic inactivity
81
recent examples of supply side policies?
royal mail privatisation, deregulation of UK energy market, tax free childcare, kickstart scheme form unemployed
82
what is interventionist based supply side?
gov take over to make it work more effectively (reduce poverty, merit good provision)
83
what are some industries dependant on workers from overseas?
agriculture, hospitality, health and social care, construction
84
criticism of market based supply side policies?
- income inequality, tax cuts benefit rich - reduced social safety nets, public services - underinvestment in public goods, healthcare - makret failures - financial instability, deregulation
85
criticisms of interventionist based supply side policies?
- bureauracy and inefficiency, misallocation of resources - crowding out - reduced incentives, high taxes increased unemployment - ineffective redistribution - costly and inefficient state enterprises, burdensome
86
key factors influencign LRAS?
- higher productivity + labour capital - growing population + increasing labour market participation - innovation +enterprise - capital investment - stock of natural resources
87
direct controls of LRAS?
max prices, max/min wages, quotas, controlling foreign currency
88
what is transfer pricing?
a method of pricing goods and services transferred within a multi/trans national companies to reduce tax burdens
89
limits to the gov ability to control global companies?
- GDP, lots of countries have a lower gdp than tje revenue of big firms - revenue, transfer pricing - bribery corporation, corruption is fined heavily in the US - tax avoidance, transfer pricing - power of firm, requires worldwide agreement on taxes
90
what is the current account (correct definition)
the difference in total value of and total value of revenue from exports (TOTAL)
91
role of financial markets?
lenders, facilitate exchnage of goods and services, forward markets (agreeing a price to be paid later), market for equities
92
what is a moral hazard?
a situation where a party lacks the incentive to guard against a financial risk due to being protected from any potential consequences
93
what is market rigging?
illegal practice of manipulating financial markets for personal gain, e.g, insider trading, collusion
94
functions of central bank?
issue money, ensure stability of banking system, lender of last resort to government and commercial banks, monetary policy
95
how do they regulate financial markets?
1. issue rules to financial institutions, fines if broken 2. makes institutions have enough financial reserves to cover losses
96
why are regulations of the financial market needed?
prevent reckless behaviour (2008 crisis), keep financial markets working as we need them to
97
who are the bodies that regulate financial markets?
- financial policy committee - predential regulations authority - treasury
98

Economics Edie (4 decks)

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