Theme 4 Flashcards
(131 cards)
1
Q
What is the exchange rate?
A
Price of one currency in another currency
2
Q
Why do foreign countries demand the British currency?
A
- if there’s an increase in interest rates as higher rate of return- foreigners invest more money in £s
- Speculators may anticipate a rise in the £ so value increases
- Increase in FDI which uses £ to pay for things so demand increases
- rises in incomes abroad, importing UK goods more
3
Q
What does the increase in demand for the £ do?
A
It leads to appreciation
4
Q
Why does supply for £ go up or demand fall?
A
- fall in interest rates so foreigners move money away from UK as lower rate of return
- speculators anticipate a fall in the £
- firms move away for Britain (less FDI)
- increase in income domestically as demand for imports rise so buy another currency and sell the £ for another currency)
5
Q
What does a fall in supply of £ lead to?
A
Depreciation
6
Q
What is a managed exchange rate?
A
exchange rate determined purely by the forces of demand and supply for that currency (no government intervention)
7
Q
What is a fixed exchange rate?
A
government or central bank holds a large amount of domestic currency and foreign currency reserves to sell and buy when exchange rate needs adjusting
8
Q
If the £ is strong, what will government do?
A
Government will sell £ to increase foreign supply of good to depreciate the £
9
Q
What does the government do when £ is weak?
A
Government uses foreign currency to buy £, increasing demand for it, shifting demand from D1 to D2, increasing price, causing it to appreciate
10
Q
Explain the chain of analysis in an appreciation in the exchange rate
A
Exports becoming more expensive and imports are becoming cheaper increasing demand for imports and since net exports are 2-6% of AD, AD decreases
11
Q
What does an appreciation in the exchange rate mean for firms producing using imports?
A
Cost of production decreases as imports become cheaper which shifts SRAS to the right, reducing cost push inflation
12
Q
What does appreciation in the exchange rate mean for exporting industries in the UK?
A
Since exports are more expensive relative to other countries, demand for the, decreases, reducing revenue made from them which means there may be unemployment in exporting industries
13
Q
Evaluate the effect the appreciation of the exchange rate has.
A
Inflation decreases due to lower AD and more AS, imports are cheaper which improves living standards, PED of exports(if inelastic people will still demand them regardless of price).
14
Q
Give the chain of analysis on depreciation of the exchange rate
A
Imports become more expensive so demand for them falls, exports are cheaper, more revenue. Increase in net export led growth
15
Q
What does a depreciation of the exchange rate mean for workers who get their supply from abroad?
A
Costs of production increases as imports become more expensive, shifting SRAS to the left, causing cost-push inflation
16
Q
Evaluate the points made on the depreciation of the exchange rate
A
Marshall Lerner condition, J-curve, higher inflation, depends on how much exchange rate has risen by, protectionism may limit exports
17
Q
What is the Marshall Lerner condition?
A
A currency depreciation only corrects the current account deficit if the PED of exports plus the OED of imports is greater than 1
18
Q
Why may the Marshall-Lerner condition not hold? (J curve)
A
As in the SR, consumers take time to adapt to the new rate and foreigners realise UK exports are cheaper after some time. This means net export demand is inelastic in the SR and business contracts and trade deals may still be in place. J curve shows that CA deficit worsens before it gets better,
19
Q
What’s the advantage of a floating exchange rate?
A
- there may be reduced need for currency reserves
- reduced risk of currency speculation
- can correct the CA deficit when there is a depreciation
20
Q
Evaluate the advantages of the floating rate
A
Volatility - there’s no guarantee the rate will be stable, reducing certainty meaning less FDI and less trade deals happen if lack of certainty in rates
21
Q
What are the advantages of a fixed exchange rate?
A
- reduces uncertainty as rate is stable and increases trade deals
- producers may become more competitive, increase R+D and quality of the product as they cannot rely on market forces to depreciate the pound, so have to find ways to increase demand for the product
22
Q
What are the evaluations of the advantages of a fixed exchange rate?
A
- large levels of foreign currency reserves are needed
- may be speculative attacks if rate is set too low or too high
23
Q
What is absolute poverty?
A
Where household income is below necessary level to maintain basic living standards
24
Q
What is relative poverty?
A
A condition where household income is a certain percentage below median incomes
25
What is income?
A flow of money derived from factors of production eg rents or wages
26
What is an asset?
The total amount of assets a person owns
27
What factors affect whether there is absolute poverty or not?
- the minimum wage of a country
- natural disasters
- education and skills
- corruption
- economic development
- government policies on taxation and benefits
- primary product dependency
- wage growth
- war
28
How do natural disasters lead to poverty?
floods and earthquakes can cause severe economic disruption and large numbers of fatalities so the FoP deteriorate causing negative economic growth and falling living standards
29
Evaluate natural disasters causing poverty
- depends on intensity of natural disaster
- depends on how effective country is in responding to
30
How can education and skills cause poverty?
Statistically, those with worse off families are less likely to get a high quality education as opposed to those that do
31
How can corruption cause poverty?
Living standards tend to be lower in countries with high levels of corruption, business owners may collude to keep prices high and limit spending on R+D and they may even bribe officials into the agreement and keeps profit high for these businesses and wont maximise social welfare and interest
32
Evaluate corruption causing poverty.
Depends on strength of government, eg China has endemic corruption problems but has lifted millions out of poverty through export-led growth
33
Give application for corruption causing poverty
Norway and Russia have a similar percentage of GDP dependent on oil but poverty is far worse in Russia due to higher levels of corruption
34
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35
How can government policies on taxation benefits cause poverty?
Reductions in disability or single parent benefits can push household income
36
How can wage growth cause poverty?
Wages for high-skilled professions have risen but wages for medium skill work barely rise and those at the bottom have faced wage stagnation
37
How can war cause poverty?
Destruction and death resulting from war reduces the capital stock and labour force, causing factors of production to deteriorate resulting in negative economic growth and falling living standards. War related injuries will restrict or prevent some people from working leaving them vulnerable to poverty
38
What does the Kuznets curve explain?
- Industrialisation leads to economic development and the main beneficiaries are capitalists
- Large numbers of workers move from rural to urban areas for increased employment opportunities
- The state develops the capacity to provide public services and is put under political pressure to redistribute the gains from economic development
- Mass education improves the skill level of workers. Redistributive tax and spend policies are implemented
39
What is international competitiveness?
The ability of a country to produce goods and services of quality and price attractive consumers from abroad
40
What are measures of international competitiveness?
Unit labour costs, export prices, GCI(global competitiveness index), and the current account of the balance of payments
41
Does a devaluation/depreciation make a country more internationally competitive?
Currency is less costly so yes
42
What are non-wage costs?
Pecuniary benefits such as gym membership or company events/outings
43
What are the measures of inequality?
Transfer payments, social benefits
44
Which country has the highest income inequality before taxes and transfers have taken place?
Italy
45
Which country has had the largest fall in inequality?
france
46
Which country has the highest inequality after taxes and transfers have taken place?
USA
47
What is HDI?
Human development index compiled by the UN, measures country's economic development
48
What is HDI made up of?
Education(mean years of schooling for 25 year old)
Health (life expectancy at birth)
Living standards
49
What does HDI not take into account?
Inequality or poverty, the health indices do not measure quality, corruption and enironment
50
What is the IHDI
The inequality adjusted HDI for inequality. The IHDI will be equal to HDI when there is no inequality but falls below the HDI value as inequality rises
51
What is the multi dimensional poverty index?
Uses health, education and standard of living indicators to determine the degree of poverty experienced by a population. The index covers the degree of poverty experienced and considers both the proportion of the population that is deemed poor and the breadth of poverty experienced by these poor households
52
What is globalisation?
Increased interdependence between countries, it moves towards free trade of goods and services, free movement of labour and capital and interchange of tech.
53
What are the factors contributing to globalisation?
-TNCs
-trade liberalisation, if trade is free, easy trade
-improvement of IT and tech
-Improvement in infrastructure, quick reliable and cheap transport
54
What is the impact of globalisation on consumers?
-more choice as wider range of products available
-can lead to lower prices as firms exploit comparative advantage for low costs
55
What is the impact of globalisation on workers?
-more migration could lower wages but high skilled workers boost AD
-fall in wages for low skilled workers due to competition
-wages for high-skilled workers rise since there is more demand for their work, increasing inequality
-TNCs provide training and create more employment opportunities
56
What is the impact of globalisation on producers?
-collapse in one country does not affect company as much due to it operating in other countries
-increased profits due to comparative advantage and larger markets
-firms unable to compete internationally lose out
57
What is the impact of globalisation on government?
-receive higher tax revenue since TNCs pay tax
-however, they could lose out on that revenue due to tax evasion or avoidance
58
What is the impact of globalisation on the environment?
- demand for raw materials rise
- increased production and trade leads to more emissions
- but more countries working together can have a bigger impact to tackle it
59
What is the impact of globalisation on economic growth?
- investment of TNCs adds to injections and multiplier
- TNCs may bring in high quality tech
- trade also increases output
60
What is the classical economist view?
In the LR, the economy will always self heal
Has LRAS vertical curve where economy will be at full employment level of output
In the SR, wages are fixed but in LR they are variable
At LRAS all FoP are being fully utilised
61
In the classical view, what happens when LRAS causes output to fall?
could involve a rightward shift of SRAS by cutting costs by lowering wages
But workers may fight back and have trade unions backing them
But wages are variable and workers will eventually accept the wage fall as unemployment rises, moving SRAS to the right
62
What do classical economists say about the economy not being at fullemployment level?
it will always be at full employment in the long run but the only way to reduce unemployment in the short run is through use of supply side policies, shifting LRAS to the right
63
What do Keynesian economists say?
-production cannot move past full employment level of output sustainably
-output can increase without inflationary pressures
-wages are sticky downwards meaning workers are resistant to pay cuts
- economy cannot self heal
64
What do Keynesian economists say to boost AD?
demand side policies, through reducing tax and more gov spending, if government has to borrow then so be it, they can pay off debt in times of boom where income and corporation tax are higher
65
Explain the philips curve?
Inflation rate and unemployment are inversely proportional, when unemployment is low workers have more bargaining power to push up wages so inflation rises
66
What is stagflation?
High unemployment and high inflation
67
What is absolute advantage?
When a country can produce more goods/services compared to another when using the same resources
68
What is comparative advantage?
a country specialises in rpoducing goods and services where they have a lower opportunity cost compared to another country and then trade
69
What are the limitations of comparative advantage?
assumes there are no transport costs, perfect information, no economies or scale and R+D/innovation
70
What do the terms of trade explain?
Explains the quantity of exports that need to be sold in order to purchase a given level of imports
71
When is a movement in the terms of trade favourable?
If TOT increase as country buys more imports with the same level of exports
72
What is the equation for terms of trade?
Export price divided by import price
73
What are the factors influencing the terms of trade?
- improvement in productivity leads to a deterioration as it boosts supply, decreasing prices
- changning incomes
- demand and supply of imports and exports
- exchange rate
- inflation
74
If incomes rise, what happens to the terms of trade?
Demand for things like tourism and holidays rise so places with a good tourism industry such as Spain have an improvement of their terms of trade as demand for their tourism rises
75
What is the double Irish?
When a corporation sends profits to one Irish company, and then back again as they have the lowest corporation tax (12.5%)
76
What is the problem with schemes like the double Irish?
Other countries find it harder to compete and get TNCs up in their countries and their governments also miss out on that revenue that could be earned
77
How can joint ventures help LEDCs to extract more benefits from TNCs?
Joint ventures are two separate entities working together on a project so when this occurs, LEDCs gain from tech, more employment, training, rising incomes, more spending and AD growth
78
How can governments in LEDCs require TNCs to help them overcome the foreign currency gap?
Goods sold from foreign currency can be given to government via tax revenue increasing foreign currency reserves
79
How do local content requirements increase the amount of domestic economic activity TNCs create?
TNCs may have to use local production so supply chain stays within the economy
80
Why is the use of local content requirements less frequent nowadays?
There may be cheaper supply elsewhere and contracts in place that TNCs are already committed to, preventing that from happening
81
What is trade creation?
High cost domestic producer to a low cost partner producer
82
What is trade diversion?
When a country goes from a lower cost producer outside the bloc to a higher cost producer within the bloc, this may be done as a tariff may be placed by the bloc on the low cost producer
83
What is the aim of the WTO?
To bring about trade liberalisation and ensure members act according to trade agreements. All countries must agree to an agreement to go through, if not a veto can occur and this could be politically moved making it hard to come to a ruling
84
Why are infant industries a reason to limit free trade?
Infant industries need to cover a lot of sunk costs and build reputation and customer base and may be unable to compete
85
Why are job losses a reason to limit free trade?
Firms lose out to international firms as imports have no limits, firms may make losses, leading to redundancies
86
Why is dumping a reason to limit free trade?
Dumping is when a firm has extra of a good so sells them at an incredibly low price, harming domestic producers, they will end up making losses
87
Why is unfair competition a reason to limit free trade?
Different regulations are placed over the world, like different labour and health+safety costs, government may be heavily subsidising firms which gives them a competitive advantage
88
Why is danger of overspecialisation a reason to limit free trade?
Some believe no country should become totally reliant on another for important materials so protectionism should be in place to prevent this
89
What is a tariff?
a tax on imports
90
What are quotas?
limits placed on imports allowed into the country
91
What are the non-tariff restrictions?
embargo(ban on imports)
voluntary export restraint agreement
92
What is a voluntary export restraint agreement?
when countries agree to limit imports to allow growth for domestic producers over a period of time
93
What is the impact of protectionism on consumers?
higher prices, less choice
94
What is the impact of protectionism on producers
benefit as they sell more goods at a higher price
95
What is the impact of protectionism on government?
get more revenue but it could lead to inefficiency in the economy which stifles growth
96
What is the impact of protectionism on living standards?
decrease as result is deadweight loss and can lead to retaliation
97
What are the components of the balance of payments?
financial account(FDI and portfolio investments), capital account (records foreign transfer of money), current account
98
What is FDI?
flow of money to purchase part of a foreign firm but has to be 10%+ of shares
99
What is portfolio investments?
Same as FDI but can be less than 10%
100
What are the causes of CA deficits?
- rising incomes lead to more demand so mpm rise
- high exchange rate which reduces price of imports
- high inflation decreases exports as they are expensive
- lack of capital investment means firms use out of date tech, causing a lack of productivity so less supply to export
101
What are the demand side ways to fix a deficit?
monetary and fiscal policy to reduce AD and income, lowering MPM
this is short term though and could limit output
102
What are the supply-side ways to fix a deficit?
improves productivity and efficiency through infrastructure and labour
103
What are the long term ways to reduce a current account deficit?
- tariffs and quotas, but can cause trade wars and hard to put in place due to laws of WTO
- could control inflation so exports become more attractive
- devalue the pound as it makes exports cheaper, ML condition and J curve
104
What is a developed country?
higher gdp, education, safe infrastructure, productivity
104
What is HDI?
measure of economic development, measures health(life expectancy), education, income
105
Developing country?
lower GDP, physical and human capital, unemployment, lower health and mortality rates
106
What does the BoP include?
Financial account(FDI), capital account (transfer payments) and current account
107
What is FDI?
Flow of money to purchase part of a foreign firm
108
What are the causes of deficits?
rising incomes
high exchange rates
high inflation
countries may have a higher amount of natural resources to sell
109
What are the two main ways of fixing a current account deficit?
demand side- monetary and fiscal can reduce AD, income and MPM, but is short term and can limit output
Supply-side policy - improve productivity and efficiency through infrastructure, labour and tech
110
What are the longer term ways of fixing a current account deficit?
-tariffs and quotas reduce attractiveness of imports
-could control inflation so exports become more attractive
-devalue £ as it makes exports cheaper
111
What are the factors influencing growth and development?
-primary product dependency
-savings gap
-debt
education and skills
volatility of commodity prices
foreign currency gap
capital flight
demographics
infrastructure
corruption
diseases
112
What is capital flight?
When money is taken out fo the economy as investors lose confidence in the country's economy so people cannot borrow or invest
113
What are market based strategies influencing growth and development?
trade liberalisation, removal of government subsidies, floating exchange rates, privatisation, microfinance and promotion of FDI
114
What are the interventionist strategies influencing growth and development?
development of human capital
managed exchange rates
protectionism
infrastructure development
buffer stock schemes
115
What are the other strategies influencing growth and development?
Development of tourism, industrialisation, development of primary industries, fairtrade schemes, aid, debt relief, IMF, world bank and NGOs
116
What is the lewis model?
Assumes developing countries have dual economies with manufacturing sector and agricultural sector so savings can be achieved by industrialisation as rural workers are attracted to urban areas, get higher income and save more
117
What is progressive tax?
Where those on higher income pay higher tax than those on lower incomes. Direct tax such as income tax tend to be progressive as well as inheritance tax
118
What is regressive tax?
Those on higher incomes pay a smaller percentage of their income on tax than those on lower incomes. VAT is an example of this
119
What is proportional tax?
Where the proportion of income paid on tax remains the same while the income of the tax payer changes
120
What are the three types of expenditure?
Capital, transfer payments and current government exp
121
What is capital government expenditure?
spending on investment goods such as new roads, schools and hospitals
122
What are transfer payments?
gov payments for which their is no corresponding output, money is taken from one group and given to another eg benefits and pensions
123
What is current government expenditure?
general government final consumption
124
What are the top three major areas of spending in government?
Pensions (20%), healthcare (18%) and welfare (15%)
125
What is crowding out?
When government have to borrow money from individuals and businesses but the amount of money available to borrow does not increase, so they compete with private sector firms, drawing private sector away from investing and borrowing money
126
What is the role of the financial market?
- facilitate exchange of goods and services
- provide forward markets
- provide a market for equities
- lend to businesses and individuals
127
What are the types of market failure in the financial sector?
- asymmetric info
- moral hazard
- externalities
- market rigging
128
What is the role of the central bank?
- control monetary policy through interest rates
- acts as as banker to the government
- acts as a bank to other banks
- regulates the financial system
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