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Economics Edexcel > theme 4 > Flashcards

theme 4 Flashcards

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1
Q

Define globalisation

A

The increasing interconnectedness of countries and people across the world, driven by factors like trade, technology, and cultural exchange

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2
Q

What is FDI and give 3 main reasons for it

A

Foreign Direct Investment
Market seeking-want to sell their goods in market
Resource seeking-labour, cheap oil etc
efficiency seeking-more efficient production chain

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3
Q

What factors contribute to globalisation

A

Improvements in transportation and communication costs-instant communication across the world
Reduction of trade barriers-WTO, particularly since China joined in 2001, has made huge efforts to reduce tariffs
Deregulation of financial markets
migration

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4
Q

What are the impacts of globalisation

A

Standard of living increase via trade and specialisation
Structural change-deindustrialisation, specialisation-job losses and gains, exporting of labour intensive industry in developed countries
Economic interdependence-oil prices and financial markets affect all countries-2008

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5
Q

Absolute vs comparative advantage

A

Absolute-it is cheaper to produce in country x than y
Comparative-There is a lower opportunity cost to produce in country x than y

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6
Q

What is the law of comparative advantage

A

Overall output can be increased in producers specialise in producing the goods they hold a comparative advantage in

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7
Q

What are the terms of trade

A

The ratio of export prices to import prices
In other words, the amount of imports an amount of exports will purchase

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8
Q

What affects the terms of trade

A

Short run-Changes in prices of goods e.g. chiles terms of trade worsen if copper prices decrease-hard for
Long run-income elasticity-demand for agricultural products falls as a proportion of demand as a country develops
inflation rates-high inflation-export prices rise faster than import-improvement in ToT

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9
Q

What are primary factor endowments

A

The resources a country can use for economic activity, such as land, minerals, capital, and labor.

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10
Q

Can comparative advantages shift over time

A

Yes-as different things become more and less expensive e.g. labour, different things cost different amounts to produce
Global Manufacturing by high income countries has fallen, as they have lost the comparative advantage compared to other countries such as China

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11
Q

What factors influence the pattern of trade

A

Comaprative advantages-different countreis have different ones
Emerging economies-BRICS-moved into sectors previously only operated in by HICs
Trading blocs and agreements e.g. EU
Exchange rates-affecting prices and costs

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12
Q

What replaced the GATT in 1995

A

world trade organisation

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13
Q

How many cases has the WTO settled

A

350

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14
Q

What are trading blocs and name some

A

Groups of countries within which free trade is encouraged-generally geographical
ASEAN
MERCOSUR
NAFTA
EU

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15
Q

What is the difference between a free trade area, a customs union and a common market

A

Free trade area-Agreement to trade without barriers within a certain group-nafta
Customs union-This as well as a common external tariff to all non members SACU
Common market-common tax rates and regulations, freedom of movement, common procurement policies-EU

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16
Q

Trade diversion vs trade creation

A

Diversion-Replacement of cheaper imported goods by those from a customs union or free trade association member
Creation-Replacement of a more expensive imported or domestically produced good by those from a customs union or free trade association member

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17
Q

What benefits has the EU brought

A

Economies of scale as firms are operating in a larger market, so become larger as a result-more efficient
More competition due to firms from other EU countries-managers will seek more efficient production techniques(However-national champions can happed-e.g. airbus-heavily subsidised in order to comepete internationally)
Countries with high comparative advantage-germany and france-high capital endowmennt and eastern-high labour endowment-will result in more goods overal-law of comparative advantage

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18
Q

What is ann optimal currency area

A

When a group of countrys are better off using a single currency-e.g. europe-due to strong travel and business links-not worth the effort of currency conversion each time

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19
Q

WHat are the costs and benenfits of a single currency area

A

Monetary efficiency gain-Encourages trade between member countries due to ease(Reduction in transaction costs and uncertainty-no risk of devalutaion)-more Econnomies of scale and competition etc
Costs-Countries can no longer use their own monetary policy to fix things-effects responsiveness to external shocks and flexibility
Krugman-Benefits rise as closer integration increases
Structural changes-Western economies specialised in tertiary sector-cost of manufacturing

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20
Q

What are the three groups of industry

A

Primary-Resource extraction
Secondary-Manufacturing
Tertiary-Services

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21
Q

What are the reasons for protectionism

A

National security-steel, agriculture-dont want owned by china
Fledgling industries-until they have the economies of scale to compete internationally-S.K. in the 60s had high tariffs
Sunset industries-protected for labour concerns-manufacturing

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22
Q

What are the criticisms of Ricardos comparative advantage

A

Rests on the assumption that factors of production are immobile-less true now thenn in the 1800s-so local specialisation isnt as needed
When Britiain was the workshop of the world, it heavily tariffed manufactured goods in order to keep its own textile mills competitive
WOrld Bannk and IMF advice for developing countries embracing free ttrade hasnt always worked

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23
Q

Name some prottectionist policies

A

Tariffs
Quotas or Voluntary Export Restraints
Production Subsidys
Non-tariff barriers-stringent rulles and regulations imports

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24
Q

p424-TARIFFS

A

Learn

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25
What are the impacts of protectionism
Consumers are worse off, as uncompetitive goods mean lower consumer surplus Producers-Domestically benefit in the short run, but can become uncompetitive, x inefficient and complacent then if forced to compete globally Govt-Can protect key industries and benefits from tariff revenue-esp. developing as its an easy way to raise money-However, citizens poorer-less motivated-loss of tax revenue long term Living standards fall Redistribution of wealth from consumers to producers
26
Visible vs invisble trade
Visible-goods invisible-services
27
What are the solutions to a current account deficit
Expenditure switch-Make domesitc goods more competitive/productive than imports, or tariff Reduce inflation-this leads to higher exports and lower imports as the pound becomes worth less relative to other countries Stifle Economic growth-high mpi means extra money is spend on imports
28
How long did bretton woods fixed exchange rate system last
Until the 1970s
29
What straetgy did china take with its exchange rate
Pegged it to the US dollar at a very low rate-this lead to very competitivve exports-ended up owning large amount of us govt stock-however, growth has to be maintained otherwise inflationary pressure will build- as China has to increase its money supply to replace what is being bought by the US
30
What is the J Curve
When a devaluation intially worsens a current account deficit, but it then improves as exports become more competitive
31
What is the Marshall Lerner condition
The J Curve effect will only happen if the sum of elasticities for exportts and imports is negative and greater than 1 Quantity of exports will then increase, and the price of exports will decrease-ML condition ensures quantity change outweighs price change
32
What is a competitive devaluation
When a govt devalues a currency on purporse in order to increase exports-May work(ML condition) but other countries may also devalue, leading to an overall decrease in trade
33
What factors affect the value of the currency in a floating exchange rate
Interest rates and monetary policy-High interest rates lead to hot money inflow, raising the exchange rate Inflation-High inflation leads to a weaker currency-bigger currrent account deficit so ER needs to shift Investment-increase in FDI-more demands for pounds-however profits may leave the country Speculation-If exchange rate fall is expected-foreign money will not flow in and vice versa-caused 1997 asian financial crisis
34
What is the purchasing power parity theory of exchange rates
That in the long run exchange rates just represent the inflattion rates in different countries
35
What is the impossible trinity in the Mundell Fleming model
Exchange Rate Stability – Maintaining a fixed exchange rate. Monetary Policy Autonomy – The ability to set domestic interest rates. Free Capital Mobility – Allowing unrestricted flows of capital in and out of the country. Countries can only have two out of 3
36
What is a dirty float
A managed floating exchnage rate, where the govt can use tools like interest rates
37
What are the costs and benefits of a fixed or floating exchange rate
Adjustment to shocks-Floating-happens automatically- fixed-requires intervention-can be negative-e.g. UK stop go in the 60s Stability-Floating-Unstable, liable to speculation-futures market can offset this Fixed-Strong-investors know the govt will commit to keeping exchange at a certain value-reduce costs-e.g.no hedging bets in the market Fixed exchange rate can also be manipulated better-encourage fdi/imports-china in the 90s and 2000s Floating can lead to a lack of financial discipline as govts know the exchange rate will bear the costs of inflationary policy-latin america
38
How much does the ILO estimate the informa sector is of the worlds workforce
50%
39
What does a gini coefficiennt of 100 mean
The country is very unequal
40
What is the Uks Gini coefficient
0.326
41
Whhat do equvalence values allow for in relation to GINI
Households are judged relative to a standardised hosuehold e.g. nnumber of kids
42
Why has it been argued that Consumption may be a bettter measurement than INcome for GINI
It is smoothed over their lifetime in anticipation of future earnings and costs, whereas earning are concentrated in the 50s
43
What is persistant poverty
When a household is in relative poverty and has been in it for 2 of the 3 preceding years
44
What are the causes of inequality
Distribution of wealth-via inheritance-generational aspect-home ownership vs renting Labour market-occupations and skills command different wages-UK premium on skilled workers-structural unemployment and inequality Wage gap-male and female-16% lower wages for females Underdeveloped labour markets-E.g. north of the UK post Thatcher-systemic unemployment-migration from north to south-reinforcing wage differentials as south becomes more crowded Demographic change-kill all old people-save money-high taxation to provide pensions
45
How can the govt intervene to reduce inequality in the short term
Benefits-cash benefit income support, child benefit, working tax credit Benefits in kind-healthcare, education Taxation-redistributive-reduce top earners incomes, fund benefits-income progressive taxes, corporation, or windfall taxes However, indirect taxes can be regressive unless only on superior goods-e.g. 2nd homes
46
How can the govt intervene to reduce inequality in the long term
Abolish capitalism-inequality is inherent-however, kuznets curve suggest long run it will improve Education and other supply side investment to ensure all are employed in good jobs More effective redistributive policies-keynsian investment in efficient areas of the economy
47
What are the three components of HDI and how are they measured
Resources-GNI per capita PPP, Knowledge-Mean and expected years of school, Life span-life expectancy
48
What alternatives to HDI are there
Inequality adjusted HDI-South Africa loses 34% of its HDI rating with this Gender-Seperate male and female HDI Multidimensional poverty index-identifies sectors of key poverty-schooling, nutrition, resources
49
What is primary product dependency
a situation where a country's economy relies heavily on the export of primary products, like agricultural goods, minerals, or raw materials, as its main source of income and foreign exchange This is unstable as the entire economy is predicated on the price of a single good the country likely doesnt have much control over-e.g. an asteroid made of copper crashing intto earth would bankrupt chile
50
What is the Prebisch Singer Hypothesis
That primary products have a low income elasticity of demand compared to manufactured goods-so terms of trade of PPD countries will deteriorate if the world gets richer
51
What is a low level equilibrium trap
Capital shortage-Low incomes-low savings-no money for investment A positive feedback loop prevennting development
52
What is the Harrod Domar model
That savings gaps need to be minimised to encourage economic growth. Saving resultts in investment-more capital-higher wages-more saving Positive feedback loop Saw success in S.K. where despite having similar incomes to sudan or afghanistan it built up savings ratio and became an HIC
53
What is a savings gap
When a country does not have enough savings to meet investment requirements
54
What are the issues witth savings mobilisation
Even if saved-hard to then use them against investtment if not trustworthy financial institutions exist-cash in a pot doesnt help. 3.5% of people in NIger have an account w a financial institution Low interest rates to encourage borrowing and investment lead to low savings-no money to borrow or invest with
55
WHat is a foreign currency gap
When a country needs to import, particularly capital goods, but cannott do so due to a lack of foreign currency-makes capital accumulation much harder
56
What is capital flight
Rich people in developing country would rather invest in foreign, stable assets e.g. london properties tthan their own countries financial instruments FDI also results in profit outflows despite inital inflow repatriation occurs
57
What ways can developing countries attempt to supplement its domestic savings
Attract overseas aid or assistance-generally only attainable w strings attatched Encourage FDI-profit repatriation will occur-domestic firm could be better in the long run Borrow on international capital markets-results in debt
58
Why is lack of access to credit and banking an issue in developing countries
Rural areas-hard to centralise Informal lending-high interest rates information gaps Lack of property rights-collateral hard All leads to lack of investment
59
Why is education underprovided for in developing countries
More pressing short term commitments e.g. servicing debt No free market incentive Requires foresight and care about the future Value in education not seen-policy makers not educated themselves
60
What are the benefits of TNCs setting up in a country
Workers-Posititve externality-training and high wage jobs provided Provide investment-harrod domar model improvement Govt can collect revenues from TNC and the workers pay Good working practices get shared
61
What are the costs of TNCs setting up in a country
MIght not use local labour-import skilled foreigners May attract best labour from local firms Country may need to offer tax concessions-or transfer pricing means they dont get any anyway Foreign exchange-if profits are repatriated capital outflow will lead to fall in value of currency TNC may abuse market power against domestic companies May increase inequality
62
Who pioneered microfinance
The grameen bank in bangladesh-launched by muhuammed Yunus-gave loans to women to fund small scale projects
63
What are ROSCAS
Rotating savings and credit schemes-households come together to pool mmoney to launch a scheme, the money then being paid back Much harder to scale than microfinance and less sustainbale more for the puchase of white goods
64
What is an import subsitution policy
Where the govt try to get goods previously imported to be produced domestically-generally via tariff However, local firms are unlikely to benefit from economies of scale and will have less competition so less efficent
65
What are buffer stock schemes
Excess supply of a primary product, particularly agricultural, is bought up in good harvest years, and then released when harvest are low in order to maintain a stable price for producers and consumers Careful knowledge is needed to set the price right
66
What negative consequences did the Lewis model result in
Focus on industry led growth-neglection of agriculture Migration to urban areas-shanty towns as urban infrastructure can't adapt Structural issues-agriculture workers not instantly good at manufacturing
67
Bilateral vs multilateral aid
Bilateral-one country to another Multilateral-Channeled theough the UN or world bank
68
What is the dutch disease
Currency appreciation-exchange rate rise-exports uncompetitive-deindustrialisation accelerated-relevant with foreign aid if it is nott beinng used effectively but still impacts the currency
69
What are the conditions for an imf loan
Fix the structural reasons ffor why the deficit occured-generally a current account deficit
70
What is the issue with world bank debt forgivenes for countries like mexico and sub saharan africa
Moral hazard-in the futture, they may be even more reckless expecting to be forgiven
71
What was the HIPC intiative and its 4 steps
Heavily Indebted Poor Countries 1.Policies to nehannce economic growth 2.Development of a poverty reduction strategy 3.Encourage private enterprise 4.Diversify the export base
72
What is the Washington Consensus
World Bank and IMF led consensus that developing countries should Have fiscal discipline Trade liberalisation Privatisation Deregulation Property rights Tax reform Basically justt a market orientated view of development-also happens to benefit american the most-propjects like china undermine american hegemony
73
What are the limitations to NGOs
There is not a one size fits all way to foster economic growth and development
74
What benefits does the financial sector provide
Facilitates saving-Harrod Domar Facilitate Borrowing-also harrod domar All dependent on interest rates Facilitate the exchange of goods annd service Forward or futures markets-provvide stability by allowing hedging to "LOCK IN" a price Market for equity-stock exchange
75
What are financial intermediaries
Firms, such as banks, that funnel money from lenders to borrowers
76
Retail vs wholesale
Retail-high street services to depositors Wholesale-Only deal with companies and banks on a large scale Universal banks do both
77
What is a banks liquidity ratio
The amount of cash or liquid assets a bank has relative to its total assets
78
What is LIBOR
London Interbank Offered Rate it was discovered in 2012 that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were Big problem as it underpins 350 billion inn derivatives
79
Whatt forms of borrowing from a bank are their
Mortgage=Loan secured against value of property Unsecured borrowing-No collateral-higher interest rate-could be a payday loan Overdrafts-borrowing extra than the current deposits at a pre arrannged interest rate
80
What new financial instruments have neem developed to faciliate the financial sector
Bonds-Pay a fixed amount a year and at maturity provide a return Certificates of deposit-these are made when money is deposited, and can then be sold on a secondary market if the firm needs liquid cash, knowing that the depositor does not have to be paid until a point in the future Securitisation-future cash flows e.g. mortgages get turned in to bonds then sold-minimising need for the firms lqiuidity ratio-however 2008-iinsecure assets securitised and sold-bad
81
What factors lead to 2008
Information gap-assets were toxic but this was not realised-regulatory capture Speculation-bubble-growth forever Moral hazard-too big to fail Externalitys-CDO meant all banks affected by one banks risky lending
82
What role does the central bank play in the economy
Banker to the govt Banker for commerical banks-base rate regulator of the finnancial system May be the arbiter of the FX system Ensure an adequate supply of money to banks and financial participants Issuing currency
83
Monetary vs financial stability
Monettary-low inflation-govts target Financial-flow of money around the economy
84
What is the lender of last resort
Central bank will lend to banks if no one else will-albeit at a penalty rate
85
List all tthe financial regulative authorities
p.558
86
What is the BIS
Bank for International Settlements-set up in 30 for weimar reperations-has now become a forum for EU monetary cooperation The basel committte later established a credit risk measurement framework
87
What countries have recently got IMF loans
Ireland, Hungary and Latvia
88
What are the types of government expenditure
Consumption expenditure-spennding on goods and services Capital expenditure-infrastructure, hospitals Transfer payments-cash to citizens-food stamps, benefitts
89
What is crowding out
If economy is at full capacitty, govt spending can only come at the cost of the private sector
90
What does the laaffer curve show
There is an optimal point of tax revenue and going aboce or below will result in less tax revenues
91
What is a liquidity trap
when monetary policy becomes ineffective at stimulating economic growth, even with near-zero interest rates-either no demand for investment or no money to be loaned
92
Cyclical deficit vs structural deficit`
Cyclical-only deifcit in business downturn Structural-ever presentt
93
Automatic vs discretionary fiscal measures
Automatic-happens naturally e.g. unemploymennt benefits Discretionary-chosen to-hs2
94
What was the labour govts "golden rule" of fiscal policy
Borrowing should only be used to invest for the future-never to meet the needs of today-also maintained lower then 40% debtt to gdp
95
What is a "good" piece of regulattion the uk has adopted to improve the econnomic situation
CMA-prevents monopoly and anti competitive practices
96
What are the risks to macro policy
Information inaccuracy-informal economy, lying, transfer pricing Risk/uncerttainnty calculations Conflict between different objectives-the environment and growth

Economics Edexcel (4 decks)

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