Theme 4

Question 1

what is globalisation?

Answer 1

this is when economies of countries become very interconnected through global network of trade due to advancements in communication, technology and transport

Question 2

what factors drive globalisation?

Answer 2

containerisation
technological advancements
differences in tax systems
differences in global prices
trade deals

Question 3

what characteristics does globalisation have?

Answer 3

transnational brands
labour migration
international trade
global supply chains

Question 4

what is trade

Answer 4

trade occurs when countries take advantage of being able to specialise in goods that other countries cant produce in exchange for other goods that they cant produce

Question 5

what is absolute advantage?

Answer 5

when a country specialises in making a good so they should focus on using their resources for that good and then trade it for another good that is specialised to be made in another country

Question 6

what is comparative advantage?

Answer 6

when the opportunity cost of producing a good is lower in one country in comparison to another country so they make that good then trade for another good that has a lower opportunity cost in other country

Question 7

what are the assumptions of comparative advantage?

Answer 7

no transport cost
no trade barriers
no externalities
high mobility of capital and labour

Question 8

what are the limitations of comparative advantage

Answer 8

infrastructure
import control
exchange rate
benefits are unbalanced

Question 9

what is the pattern of trade?

Answer 9

the nature of trade between countries by considering the nature of imports and exports

Question 10

factors that influence the pattern of trade

Answer 10

comparative advantage
changes in relative exchange rates
growth of trading blocs
impact of emerging economies

Question 11

what is the terms of trade

Answer 11

measures the value of a country’s export and imports as a numerical indicator

Question 12

what is the formula for index of Term of trade

Answer 12

index of export / index of imports x100

Question 13

factors that influence term of trade

Answer 13

changes in exchange rates
relative productivity rates
relative inflation rates

Question 14

impacts of changing terms of trade

Answer 14

living standards can either better or worsen
balance of trade worsen or improve
fall or rise in GDPM

Question 15

what are Trading bloc

Answer 15

groups of countries that protect themselves from impact from non member countries. they are usually geographically close to each other and promote trade within the group by eliminating tarrifs and quotas

Question 16

What are the types of trading blocs and their definition

Answer 16

Free trade area –> two or more countries agree to trade with complete elimination of barriers on all goods

custom union –> removal of tariffs to all members but they decide on common external tariffs on non member imports

common markets –> free movement of labour and capital and also common external tariffs

monetary union –> countries share the same monetary policy , central bank, currency and all have free trade.

Question 17

what is trade creation

Answer 17

a country joins a trading bloc leads to them buying goods from a high cost to a lower cost country

Question 18

what is trade diversion

Answer 18

when a country joins the trading bloc but ends up increasing the cost of imports. this can lead to a decrease in economic efficiency

Question 19

what are types of protectionisms

Answer 19

tarrifs –> a tax on imported goods
quotas –> a physical limit on quantity of a certain good thats imported
subsidies to domestic producers –> to improve and lower their average costs to become competitive
non tarrif barriers –> embargoes, importing licenses, legal and technical standards, environment regulations

Question 20

what is a tariff diagram?

Answer 20

s global increases in price and causes a higher tax revenue which lowers the amount of imported goods from q5-q1 –> q4-q2

Question 21

what is the subsidies diagram?

Answer 21

when s domestic shifts outwards to increase the producer surplus and increase the level of goods they sell thus making them competitive

Question 22

what are the impacts of protectionism

Answer 22

consumers –> higher prices, lower choice and perhaps even quality reduction

producers/ firms –> if domestic based they increase the ability to sell to consumers but if globally based they can end up suffering the producer burden of tax

Govt –> short term leads to increase in tax revenue long term its bad since it can restrain economic growth

equality –> good = protect local jobs
bad = lower disposable income since income is spent of inelastic goods from abroad

Question 23

what are the 3 components of the balance of payment and what are they made up of

Answer 23

current account –> net balance of trade, primary income, secondary income

capital account –> capital transfers, non financial assets like patents

financial account–> net balance of FDI, net balance of portfolio investment like equity, foreign currency and gold reserve

Question 24

what is primary and secondary income

Answer 24

primary –> monetary flows of financial assets from international sources like dividends, wages and salaries

secondary income –> monetary trabsfers that dont include trading goods like grants and aids

Question 25

causes of current account deficit and surplus

Answer 25

deficit --> economic growth, inflation, international competitiveness surplus --> natural resources, exchange rate manipulation, high interest rates

Question 26

what are the ways to reduce imbalance

Answer 26

exchange rate changes deflationary policies protectionism supply side policies to increase labour productivity demand side policies like fiscal or monetary policy to reduce AD

Question 27

what is the exchange rate

Answer 27

comparison of a country currency in regards to another country's currency

Question 28

what is appreciation and depreciation

Answer 28

SPICED AND WPIDEC

Question 29

what does appreciation and depreciation look like on a diagram

Answer 29

appreciation: AS shifted inward and AD shifts outwards depreciation: AS shifts outwards and AD shifts outwards

Question 30

what are the types of exchange rates

Answer 30

free floating system --> determined by the forces of supply and demand , no intervention from central bank, currency value isnt a target of the monetary policy Fixed system --> determined by the government since they tie it to another country currency (peg) (if it falls they use their reserve and buy their own currency to appreciate it), currency are pegged and it becomes the official rate and the govt may devalue or revalue to make their currency competitive

Question 31

what is the marshall lerner condition

Answer 31

it states a depreciation/ devaluation will improve the current account position only if the sum of PED for both exports and imports are greater than 1

Question 32

what does the j curve show

Answer 32

demonstrates that the current account will worsen before it gets better after a depreciation/ devaluation. This is because there is a time lag and imports that are seen as inelastic will continue to be bought thus increasing the trade balance deficit worsening then eventually it goes better since exports star to pick up

Question 33

what is international competitiveness

Answer 33

factor that effects the current account deficit since it shows how much consumers buy a country's goods & service

Question 34

what is a measure of international competition

Answer 34

competition= average wage/ productivity

Question 35

factors that influence competitiveness

Answer 35

exchange rates ( strong pound = less exports = not competitive) productivity regulations investment taxation inflation economic stability flexibility competitiveness and demand at home factors of production openness to trade

Question 36

benefit for competitiveness

Answer 36

more export led growth economically, short run economics growth = positive multiplier effect

Question 37

drawback for competitiveness

Answer 37

current account surplus = rise in exchange rate= strong pound= expensive exports = less competitive

Question 38

what is absolute poverty

Answer 38

unable to afford basic necessities due to insufficient resources. A person in absolute poverty lacks clothing, shelters, food and water. If a person is living on less than $2.15 a day they are classified as being in absolute poverty

Question 39

what is relative poverty

Answer 39

when someones income falls under the average income of that economy. The uk declares someone may be in relative poverty if they fall below by 60% of the median income

Question 40

factors that influence the rate of poverty

Answer 40

economics growth --> if GDP RISES absolute poverty may fall trade and FDI --> when trade and globalisation increases opportunities for employment also rise thus reducing poverty since a source of income is presented taxation and wage rate government benefits

Question 41

what is income

Answer 41

income is the flow of earnings that an individual receives through sources like wages, interest received, dividend, salaries

Question 42

what is wealth

Answer 42

the value in money of assets that a person may hold. This includes land, buildings and shares this is distributed unequally this may be due to inheritance

Question 43

factors that lead to income and wealth inequality

Answer 43

access to education and training tax system trade union wage rates ownership of assets

Question 44

impact of inequality

Answer 44

-absolute & relative poverty remain high -crime and violence rise -restrict growth, peoples talents are wasted the rich get richer thus further increasing inequality

Question 45

what is the lorenz curve

Answer 45

shows the distribution of income. The line of perfect equality. the lorenze curve is below the line of perfect equality. The X axis; cumulative income earner Y axis; cumulative income earnt

Question 46

what is the gini coefficient

Answer 46

uses the lorenz curve to generate a numerical statistic of inequality within an economy

Question 47

what is the gini coefficient formula

Answer 47

a/ a+b = gini coefficient when gini is closer to 1 there is a higher inequality

Question 48

describe inequality in the free market

Answer 48

its inevitable since some possess higher skills however, it may lead to incentives to find employment, incentivise harder work to earn more encourage enterprise

Question 49

what are the measurements of economics development

Answer 49

HDI: this is the human development index which measures living standard through: - GNI --> through PPP of basket of goods approach - Education --> PISA test & years of schooling - Health --> life expectancy the higher HDI is, the greater the human development

Question 50

what are the - and + of HDI

Answer 50

_ longevity of life expectancy isn't the same as high quality of life schooling years isn't quality of education + easy to collect index can track levels of development over time gains insight

Question 51

what is primary product dependency

Answer 51

countries rely on commodities. This can influence development as these goods are very unreliable due to natural disasters and external shocks occuring. This makes it harder to encourage development

Question 52

what is the prebisch singer theory

Answer 52

overtime countries exporting commodities will get a bad deal compared to rich countries since price for raw material decreases and manufactured goods increase meaning countries selling raw materials will have to sell more to afford the same amount of manufactured goods

Question 53

what is dutch disease

Answer 53

country discovers a valuable natural resource and attracts foreign money which makes the currency stronger but also makes exports expensive and less comp causing domestic industries to struggle and then when the natural resource runs out leaves the currency extremely weak

Question 54

what is volatility of commodity prices

Answer 54

when primary products have both inelastic PED and PES meaning a small change can lead to huge fluctuations in price causes income and earnings to to also fluctuate. This leads to uncertainty from investors and development

Question 55

what is a saving gap

Answer 55

when a poor country is incapable to save and later invest in industries as their earnings are directly spent on necessities

Question 56

what is the harrod domar model

Answer 56

saving ratio/ capital output ratio = real GDP growth increasing either of these factors will ultimately lead to faster rates of economic growth

Question 57

what is the foreign currency gap

Answer 57

when a country doesnt have enough foreign money due to capital outflows being greater than capital inflows. this is due to: - dependency on exports of primary products high proportion of income serving debt

Question 58

what is debt?

Answer 58

reduces the economic growth as its a constant burden that must be repaid back to the developed country from which it was borrowed but interest payment must also be paid

Question 59

what is capital flight

Answer 59

when people move their savings abroad instead of holding them domestically.

Question 60

what are the reasons for capital flight

Answer 60

lower tax rates and or higher interest rates abroad political instability absence of property rights

Question 61

what is absence of property right

Answer 61

without clear laws and legal controls, property rights ,ownership of land and asset may be uncertain

Question 62

how is infrastructure and economic development linked?

Answer 62

allows movement of factors of production to occur more efficiently. Without infrastructure there are barriers to trade

Question 63

how is access to banking and economic development linked in both LIC and HIC?

Answer 63

high developed countries: allows systems like stock markets to increase consumption and savings. low developed countries: Banking systems aren't advanced or major sources of finance since its govt revenue is spent on necessities

Question 64

what are some non economic factors for economic development?

Answer 64

War --> disruption to international trade Disease --> HIV/ AIDS/ MALARIA geographical locations corruption--> economic policy isnt applied in the best interest of society

Question 65

what are the types of ways to fix economic growth restraints?

Answer 65

market oriented interventions interventionist strategies

Question 66

what are market oriented interventions?

Answer 66

governments removing barriers to allow market forces to create incentive for investment

Question 67

what are examples of market oriented interventions?

Answer 67

Trade liberation--> removing certain protectionist measures like tariffs and quotas removal of govt subsidies --> encourages X inefficiency thus removing it will allow more innovation floating exchange rate system--> allows chance to improve net trade but there is a risk of volatility

Question 68

what are some examples of interventionist strategies?

Answer 68

Buffer stock scheme -->govt buys excess supply when the product is in low demand and stores it. Then when there excess demand it is released and sold to the producers to help with price stability. A minimum price scheme is also set into place Joint venture with global companies--> when FDI is encouraged as well as partnership with international companies thus causing less exploitation, creating jobs and improved capital flow Protectionism--> protecting domestic jobs, tarrifs, quotas etc

Question 69

What are other strategies for economic development

Answer 69

aid and debt relief --> grants from other govts that dont need to be repaid, cancelling a country's debt so their economy can grow but in exchange a public sector is offered up for competitive tendering and becomes private the lewis model--> shows that a country can move from an agricultural based economy to an industrialised economy through splitting their economy into 2 sectors consisting both.

Question 70

what are assumptions and criticisms of the lewis model?

Answer 70

assumptions --> - excess labour meaning no opportunity cost of labour criticisms --> - transferring labour requires investment in education and training - industry may not create as many jobs as needed - agriculture is seasonal and when in high demand, there is no excessive labour thus creating opportunity cost during those times

Question 71

what are financial markets?

Answer 71

places and systems where people and businesses sell financial assets like bonds, stock, currencies and derivatives

Question 72

what are bonds, stocks and derivatives

Answer 72

bonds are loans offered to govts or firms for a period of time. During the time of the bond, the person in possession of the bond receives regular payment of a certain amount. When bond expires its repaid in full Stock is a share of a company derivative is a contract for the value of another asset. This means not actually having the product but the value of that asset through another persons possession. EG having stock in Apple but not actually having an apple product

Question 73

what are the roles of financial markets?

Answer 73

- facilitate savings - lending to businesses and individuals - facilitating the exchange of goods and services - providing forward markets in commodities and currencies - efficient allocation of capital -Economic growth

Question 74

what is a forward market? in commodities and currencies

Answer 74

this is when a producer and consumer create a contract where the consumer pays today but the goods will be sold at a later time. In commodities it may be oil and gold being bought now but provided once extracted in currencies it may be when they agree on todays currency rather than when it fluctuates (£1 =1.60 euro)

Question 75

what is market failure

Answer 75

when the free market fails to deliver an efficient or socially optimum allocation of resources

Question 76

types of market failures and explanation

Answer 76

- asymmetric information - creating negative externalities (tax payers bailing out banks during crisis rather than the financial institution) - moral hazard (banks taking bigger risks because they know govt will help and has created a safety net ) - speculation and market bubbles (buying assets at a price where its low then selling at a very high price in hope of profit only it becoems failure when asset falls in price) - market rigging (when there is information/ collusion occuring to benefit in financial markets like stock markets thus creating profit for them but for the rest involved, there isnt the same outcome) also known as insider trading which are both illegal.

Question 77

what are the roles of the central bank?

Answer 77

- setting the monetary policy - banker to government -banker to banks (lender of the last resort) - setting out recommendation on banking regulations

Question 78

how are central banks bankers to govt?

Answer 78

- make short term loans to govt -- manage national debt, - hold foreign exchange reserve

Question 79

how do central banks set out recommendations on banking regulations?

Answer 79

- Ring fence banking banks cant use deposits of personal savings on stock markets - setting reserve capital ratio banks must have a certain percentage of deposits in liquidity - regular stress testing economic stimulations are carried out to identify which banks are most vulnerable

Question 80

why does the central bank do certain measures when setting out recommendations on banking regulations

Answer 80

ring fence banking --->prevent moral hazard setting reserve on capital reserve--> prevent run on the banks regular stress testing --> prevents systematic risks like run on the banks

Question 81

what are the 3 types of public expenditure (components of fiscal policy)

Answer 81

transfer expenditures capital expenditure current expenditure

Question 82

what is the definition and an example of the 3 public expenditures

Answer 82

transfer --> gs helping improve social welfare like benefits tax helping redistribute income Capital --> investment into long term capital projects like infrastructure current --> govts day to day spending on goods and services like salaries

Question 83

what is the UKs public expenditure made up off

Answer 83

- health - defense -education -net debt interest social protection

Question 84

how do the public expenditures impact the economy

Answer 84

Growth and productivity --> infrastructure improves supply side performance Living standards --> without public expenditures there would be market failure and very high absolute poverty Level of taxation --> public expenditures need to be funded so high PE = high tax Equality= PE grants more equal opportunities

Question 85

what is the difference in fiscal deficit and national debt?

Answer 85

fiscal deficit is when tax< GS in a financial year national deficit is the total accumulation of govt borrowing

Question 86

what is an automatic stabiliser ?

Answer 86

this is when the fiscal policy moves automatically from expansionary to contractionary ( or the other way round) without the govt intervening or deciding

Question 87

what is discretionary fiscal policy

Answer 87

when the govt makes the actual decision to move from expansionary to contactionary (or the other way round )

Question 88

what is discretionary income

Answer 88

this is the income households have after paying taxes and mortgages

Question 89

what effects the size of the fiscal deficit and national debt

Answer 89

Fiscal deficit: economic cycle housing market (period of growth means more stamp duty which is a tax of house sales) political priorities and unplanned events (govt having to bail out banks during crisis or 2020 furlough scheme) National debt: high level of borrowing (may increase debt in short run but in long run can reduce it since govt can own a new asset from borrowing )

Question 90

Macroeconomic policies in global context:

Answer 90

Fiscal policy: manages demand to fix fiscal balance and therefore national debt for developed countries: reduces poverty through welfare benefit, provision of public goods and progressive tax

Question 91

factors that influence fiscal deficit and national debt

Answer 91

interest rates: high govt borrowing --> high interest rates --> low AD = high FD and ND rate of inflation: increased money supply--> high inflation = high FD and ND Debt servicing: National debt growing means more interest needed to pay = high ND credit rating : countries are given credit rating by private firms--> worsens if interest isnt paid

Question 92

what are other policies that effect the overall economy

Answer 92

Monetary policy and supply side policy

Question 93

what are the 5 transmission mechanisms of BoE reducing interest rates

Answer 93

Lowering borrowing costs --> increase wealth effect because HH will consume more so AD rises Lowering borrowing cost --> firms borrow more to invest -->business confidence increases and AD rises Reduces current repayment for HH --> increases discretionary income meaning more consumption and AD rises Lower Govt borrowing cost --> frees up money and allows GS to increase and AD rises Increases money supply --> £ depreciates and hot money outflows which causes X to increase and M to decrease so AD rises ( THIS IS THE COMPLETE OPPOSITE WHEN BOE INCREASES INTEREST RATES )

Question 94

give examples of real life trading blocs:

Answer 94

Free trade agreement: australian FTA customs union: Gulf cooperation council common market : CARICOM (caribbean community and common market) monetary union: EU