Theme 4: A global perspective Flashcards

Question

What is the **Hecksher Olin** principle

Answer 1

Countries export what they can most easily and abundantly produce

Answer 2

The pattern of trade refers to how a country trades with other countries and in which direction. Trade flows refer to where the countries exports and imports go

Answer 3

1. **Comparative Advantage** e.g. deindustrilisation in UK led to moving to other places such as Poland 2. **Emerging Economies** As countries grow, likely to need more imports such as China International trade contributes 20% of LIC's economies compared to 8% of US 3. **Trading blocs and bilateral trading agreements** Leaving EU meant that the UK had a 14% fall in trade w them 4. **Relative exchange rate** UK’s trade deficit with Europe is due to the strength of the pound. China have kept their currency weak in order to increase their trade surplus by making exports more competitive.

Answer 4

* UK/USA run a persistent current account deficit * China and Germany run a consistent surpluss

Answer 5

China lower labour costs --> gives a omparative advantage in manufactured goods. * Chinese currency relatively undervalued. China has often sought to maintain an undervalued currency to make exports cheaper. * In the Euro, German exports become relatively cheaper because in the Euro, there is no appreciation within the Eurozone * It also reflects a higher marginal propensity to consume in the UK and the US. This means more willing to spend income.

Answer 6

dividing the price of the exports by the price of the import an improvement if buy more imports with the same level of exports. Detoriation if converse

Answer 7

* **Exchange rate**. depreciation cause a deterioration in the terms of trade. * **Commodity prices**. If a country produces mainly primary products, then falling commodity prices worsens their terms of trade. * **Higher inflation**. A relatively higher inflation rate will increase the price of exports relative to imports and improve the terms of trade- but depreciation on FX * **Demand for products**. rising export demand will push up export prices, causing an improvement in the terms of trade. Long-run: * Improvement in productivity will decrease terms of trade * changing incomes - Prebish Singer Hypothesis --> primary goods decline in price propotionately so those dependent on them will see fall in terms of trade

Answer 8

countries will need to export more goods to finance the same quantity of imports. * A deterioration in the terms of trade could mean higher import prices and cost-push inflation. * A long-term decline in the terms of trade can lead to lower living standards, because the country can afford relatively fewer imports * Beneficial if caused by depreciation; if demand elastic then increase in exports

Answer 9

If PED of exports and imports is inelastic, a favourable movement in terms of trade would improve the current account on the balance of payments if it is elastic, a favourable movement would worsen the current account

Answer 10

, since if it is caused by a rise in export prices, exports will fall and if it is caused by a fall in import prices, imports will rise. Both of these causes a reduction in production within the country and so a fall in jobs and output

Answer 11

suggests a long term decline in living standards as less imports can be bought.

Answer 12

1. Free Trade Area 2. Customs Union 3. Single/Common Market 4. Economic Union 5. Monetary Union 6. Fiscal Union

Answer 13

● Preferential trading areas (PTA): These are where tariff and other trade barriers are reduced on some but not all goods traded between member countries. ● Free trade areas (FTA): These occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is** able to impose its own tariffs and quotas on goods it imports from outside the trading bloc. **

Answer 14

A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. members may negotiate as a single bloc with third parties such as other trading blocs or countries. (FTA + Common External Tariff)

Answer 15

hen members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed. They impose a common external tariff on imported goods from outside the market significant level of harmonisation of micro-economic policies 'aim to create a single market'

Answer 16

A common market as well as a common external tariff but free to pursue independent macro economic policy

Answer 17

– Economic Union plus common currency and common monetary policy. (e.g. Eurozone).

Answer 18

A fiscal union is an agreement to **harmonise tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses**. The majority of EU states agreed a fiscal compact in early 2012, which is a less binding version of a full fiscal union.

Answer 19

* there should be free movement of labour, capital mobility and wage and price flexibility, fiscal transfers from one country to another when a country is performing poorly, and countries should share the same The main problem for the EU is the **lack of automatic fiscal transfers**, for example these would have helped Greece, Spain and Portugal following the financial crisis of 2007-08.

Answer 20

* prices are fixed as all currencies are the same and there are reduced exchange rate costs. * It becomes easier for prices to be compared across the union and so MNCs are less able to price discriminate. * There are financial costs in starting a new currency and with one breaking them * Loss of policy independence can be bad for countries e.g. black wednesday, greece

Answer 21

Without a unified external tariff, trade flows would become distorted A common external tariff effectively removes the possibility of arbitrage

Answer 22

Union members must negotiate collectively with non-members or organisations like the WTO as a single group of countries. While this is essential to maintain the customs union, it means that members are not free to negotiate individual trade deals. Also, it makes little sense for a particular member to impose a tariff on the import of a good that is not produced at all within a that country. e.g. banana tariff 10.9% Members that trade relatively more with countries outside the union, such as the UK, may not get their ‘fair share’ of tariff revenue.

Answer 23

* These are agreements between neighbouring countries e.g. South-East Asia, Latin America, Africa and the EU. * The WTO often calls these regional trade agreements preferential trade agreements, because they are exclusive to a certain number of countries.

Answer 24

* Most trade is with neighbours so large effect * enable more free trade --> trade --> increase economic growth * They are a potential stepping stone to more inclusive trade agreements.

Answer 25

* WTO argues they should be preferable since FTA should involve all countries * PTA can conflict with WTO global trade treaties * Leads to conflict between other trading blocs * Increasesd complexity --> NTB

Answer 26

* Greater trade and gains from comparative adv. --> EoS * Greater competition --> encourage efficiency * Increased FDI e.g. Poland * Clout for international negotiations * More flexible labour markets

Answer 27

* Regional inequality due to geographical immobilities e.g. difficult to move from Spain to Germany to get a job. * Increased specialisation --> structural unemployment * The UK experienced trade diversion when joining the EU, because agricultural tariffs to Commonwealth countries increased. * Free movement of labour may cause friction over housing and overpopulation.

Answer 28

when tariff agreements cause imports to shift from low-cost countries to higher-cost countries; concentrates production in countries with a higher opportunity cost and lower comparative advantage. typically occurs w a common external tariff

Answer 29

* decline in consumer surplus * DWL * Loss of EU efficiency in net loss area * also net loss to society

Answer 30

increase in economic welfare from joining a free trade area, such as a customs union due to a reduction in tariffs allowing for lower prices * increase in consumer surplus, equal to area 1+2+3+4 * * Domestic producers will sell less as consumers buy cheaper imports (decline in producer surplus is shown by area 1) * Government lose tax revenue (from import tariffs) (shown by area 3)

Answer 31

If demand and supply are inelastic, the effect will be much lower.

Answer 32

If you cut import tariffs, other countries are likely to reciprocate and reduce tariffs on your exports. Therefore, there will also be an extra benefit from increased exports.

Answer 33

Often domestic job losses are more visible, than the gains from cheaper prices. e.g. nafta caused rust belt 700k america and 2 million agricultural mexico

Answer 34

* responsible for trying to promote and regulate free trade and trade agreements between countries. * Forum for agreeing and resolving conflict * Help trade flow except when conflicts with other objectives

Answer 35

World Bank stats show how **world exports as a % of GDP have increased from 13% in 1970 to 30%** just before the financial crisis of 2008. In the past decade, world exports as a share of GDP have flatlined, with no rise since the peak of 2008.

Answer 36

1. Use of abdundant resources - e.g. oil in UAE 2. **Comparative Advantage** 3. Greater Choice for Consumers - Preference Similarity Theory e.g. Primark and Gucci 4. **Economies of Scale** - Apple designs their computers in the US but contract the production Asian factories 5. Global economic development - reduction in absolute poverty (90 million raised from poverty in India) 6. **Encourage FDI** - Poland 7. **Increased competition** to increase efficiency + stop domestic monopoly 8. Engine of Growth - **World Trade has increased by avg. of 7% since 1945** 9.

Answer 37

1. **Infant industry argument** - free trade leads to primary sector dependence/dumping so need to diversify 2. **Cultural homogenisation** - local brands have a cultural niche and expertise 3. **Displacement effects** - cause uncompetitive domestic industries to close down --> structural UE eval: creative destruction + new jobs in diff. industry to supplement TNC 4. Enviromental Costs

Answer 38

1. Promote free trade through **gradual reduction of tariffs** 2. Provide** legal framework for negotiation of trade disputes**. This aims to provide greater stability and predictability in trade. 3. **Trade without discrimination** - avoiding preferential trade agreements. 4. WTO is not a completely free trade body. It allows tariffs and trade restrictions under certain conditions, e.g. protection against 'dumping' of cheap surplus goods. 5. WTO is committed to protecting fair competition. There are rules on subsidies, dumping 6. WTO is committed to economic development. For example, recent rounds have put pressure on developed countries to accelerate restrictions on imports from the least-developing countries.

Answer 39

The WTO has over 160 members representing **98 per cent of world trade**. Over 20 countries are seeking to join the WTO. * Prevent trade war, according to (Bagwell and Staiger 2002) the **average tariff in 1930s was 50%. In 2000s, average tariff is 9%** the **value of WTO in preventing trade wars could be estimated at up to $340 billion per year** according to Ralph Ossa the value of WTO in preventing trade wars could be estimated at up to $340 billion per year

Answer 40

* Free Trade policies unfavourable to developing countries, Ha Joon chang argues it is ' *pulling away the ladder they used themselves to climb up* * Preventing development of infant industries * WTO still have lots of protectionism in areas such as agriculture **that favour developed countries** * 'Most favoured nation' principle - mean developing countires cannot give preference to local contractors over footloose TNCs (favour developed) * Damage to enviroment, cultural diversity * WTO structure is undemocratic +enbales rich countries to win what they desire

Answer 41

* free trade has been an important engine of growth for developing countries in Asia. Although there may be some short term pain, it is worth it in the long run. * Also the WTO has sought to give exemptions for developing countries; enabling in principle the idea **developing countries should be allowed to limit imports more than developed countries.** * Growth of world trade has reduced absolute poverty - 90 million India

Answer 42

* **Higher tariffs **(type of tax on imports). * **Non-tariff barriers** e.g. diff uk + eu regulation * Voluntary export restraint is effectively a type of quota where voluntary limits are placed on imports of goods. * **Embargo** . * Government subsidy e.g. Chaebols * Distorted exchange rate e.g. international yuan * Weakest environmental law. A way to attract certain types of business. * Administrative barriers

Answer 43

1. **Infant Industry** 2. **Job Protection** 3. Protection from dumping/unfair competition 4. Improve the terms of trade 5. Prevent over-dependence 6. Stop dangerous goods 7. Protecting **senile industries** 8. Reducing a deficit

Answer 44

· Monopoly from another country sells a good/service at or below costs temporarily, to increase market share and force out domestic firms to form a monopoly in a foreign market. · They will then increase price and exploit consumers as those firms gain a monopoly foothold. or Selling excess stock at a price that injures domestic comp e.g. chinese steel 9-14% tariff

Answer 45

* Prevent economic dumping * Need to diversify from a reliance on primary products: 1) Low YED in LR 2) Price Volatility

Answer 46

1. May **encourage firms to be inefficient** --> X-inefficiency 2. Retaliation 3. Political pressure group, may become politically difficult to remove because of vested interests. 4. Which industries to choose? 5. **Welfare loss **of tariff protection 6. May be a stronger case for subsidies

Answer 47

· By protecting against imports and promoting exports the value of M should fall and X should rise current account deficit, ceteris paribus · Makes it easier to finance an equilibrium A large C/account deficit will also likely mean that domestic multipliers are weaker, and growth can be restricted.

Answer 48

· As M decreases and X increases and as labour is a derived demand, protectionism would help to control cyclical unemployment and in the long run prevent structural unemployment. * The US uses steel tariffs as a method to protect domestic jobs in steel.

Answer 49

· Domestic control over key strategic industries is seen as favourable, for example nuclear power, and armaments. · Protects against importation of demerit goods, e.g. through embargo/law. Helps prevent over specialisation e.g. Banning Huawei

Answer 50

· Industries which may have had national significance – Jingoistic Culture/heritage E.g. Sunset industries in decline due to foreign comp/changing demand then there may be an argument to slow that decline, protect employment etc. This tends to be a weaker argument.

Answer 51

S world shifts up tariff of size (Pw + t – Pw) is introduced. That raises the price of chicken wings in the UK to Pw + t. Quantity supplied by domestic producers increases Q1 -> Q2 (extension of S domestic). · Quantity demanded contracts Q4 -> Q3. · Hence, imports shrink to (Q3 – Q2).

Answer 52

· Consumers: consumer surplus lost by area (Area 1 + Area 2 + Area 3 + Area 4) lost. · Government: gain in revenue of Area 3 · Domestic producers: domestic producers gain surplus Area 1. · Foreign producers: they lose revenue as tariff decreases the quantity of chicken wings imported. Deadweight welfare loss: due to tariff there is social surplus lost to nobody which is the DWL: Area 2 + Area 4.

Answer 53

the domestic supply curve shifts downwards by the size of the subsidy per unit: (Pw + subsidy – Pw). Domestic production increases Q1 → Q2 and the quantity imported shrinks to Q4-Q2

Answer 54

· **Government**: paying the subsidy of the green-marked area. · **Consumers**: **loss of the consumer surplus does not occur**, as the price of the rice does not change. · **Domestic Producers**: the price that they receive increases to Pw+subsidy. Their **revenue increase** from (Area 1 + Area 2) to (Area 1 + Area 2 + green-marked area). · **Foreign Producers**: their **revenue decreases** from (Area 2 + Area 3 + Area 4) to (Area 3 + Area 4) as rice imports shrank. **Deadweight welfare loss**: due to increased production by the inefficient domestic producers (over allocation of resources to those producers), Deadweight Welfare Loss (DWL) marked triangle Area 5 emerges. The green area is the size of the subsidy, everything in the green area apart from Area 5 goes to producers to increase their revenue. Hence, what is left in the green are goes to no one – that is why Area 5 is said to be a DWL

Answer 55

· Helps achieve government objective. · Can reduce imports and boost X · Tends to be more well tolerated than a tax on M from foreign countries (less likely to cause retaliation) More effective if PED’s are elastic

Answer 56

· Welfare loss · Helps to **create inefficiency** amongst domestic producers · PED may be inelastic of M therefore policy does not achieve objectives just harms domestic consumers. · Can lead to retaliation e.g. UK is a member of the WTO committed to free trade. There may also be sanctions for protectionism.

Answer 57

· This trade protection could be said to be more favourable than tariff as it does not lead to possible loss of living standards. but tariffs better for demerit goods However, consumers are affected by the government subsidising producers rather than funding more socially desirable projects. Also, to fund the subsidy, the government might have to increase taxes.

Answer 58

Same as tariff and just shifting or This leads to a fall in imports to just Q3-Q2 Domestic suppliers gain more revenue. The price rises to P quota and domestic suppliers, supply more Q1 to Q2. It can create domestic jobs.

Answer 59

Consumers pay a higher price and also total quantity falls from Q4 to Q3. Governments are not affected directly, as there is no income. There is a net welfare loss to society because the increase in producer surplus is outweighed by the decline in consumer surplus. World exporters will make less revenue – unless demand is very inelastic, meaning increase in price is greater than fall in quantity.

Answer 60

* Quotas cause a bigger fall in economic welfare because the government don’t gain any tax revenue * Quotas may be harder to enforce if it is difficult to count the amount of the good coming into the country. * Quotas could be more unfair; distribution political Quota better: * Quotas allow the country to be certain on the number of imports coming in, while tariffs depend on elasticity

Answer 61

a way to restrict trade using trade barriers in a form other than a tariff such as licenses or administrative barriers

Answer 62

A voluntary export restraint (VER) is a trade restriction on the quantity of a good that an exporting country is allowed to export to another country. This limit is self-imposed by the exporting country. Exporting countries often wish to impose their own restrictions than risk sustaining worse terms from tariffs or quotas

Answer 63

the exporting country's company can always build a manufacturing plant in the country to which exports would be directed. By doing so, the company will no longer need to export goods, and should not be bound by the country's VER.

Answer 64

a change in a country's economic and trade policy to allow for more imports, by lowering tariffs or dropping quotas. Often VIEs are part of trade agreements with another country or the result of international pressure.

Answer 65

ADV: Producers in the importing country experience an increase in well-being, though, as there is decreased competition, increased price, profits, and employment Disadv: VERs reduce national welfare, by creating negative trade effects, negative consumption distortions, and negative production distortions.

Answer 66

Japan imposed a VER on its auto exports into the U.S. as a result of American pressure in the 1980s. The VER subsequently gave the U.S. auto industry some protection against a flood of foreign competition. This relief was short-lived though, as it ultimately resulted in a rise in exports of higher-priced Japanese vehicles and a **proliferation of Japanese assembly plants in North America.**

Answer 67

During Protectionism per capita income in Latin America grew at an impressive 3.1 per cent per year. Since structural adjustment, it has been growing at a paltry 0.5 per cent

Answer 68

1. **Overvalued exchange rate**; worsens X-M 2. **Declining competitiveness**, 3. **Fast economic growth**; higher income means greater income consumption 4. **Low savings ratio.** Lower savings tends to cause higher consumer spending on imports. 5. **Capital inflows**. Large inflows of foreign capital enable the country to afford more imports and run a current account deficit. Capital inflows also increase the value of the exchange rate making exports less competitive

Answer 69

* Attracting FDI and hot money flows

Answer 70

1. **Potentially unsustainable**. borrowing can be unsustainable in the long term and countries will be burdened with high interest payments. 2. **Foreign claim on UK assets**. foreigners will have an increasing claim on UK assets, which they could require return of at any time. 3. **Depreciation** likely to cause depreciation in the exchange rate, leading to higher import prices and lower living standards. 4. **Reflection of economic weakness.**: **Declining competitiveness**, due to higher labour costs or declining productivity. * Lack of productive capacity/ infrastructure in the UK. * Declining comparative advantage in many manufactured goods.

Answer 71

1. **Used to finance investment** 2. **Inward investment can be beneficial for the economy**. If a current account deficit is financed by long-term capital flows, it can create jobs and more output 3. **Floating exchange rate will restore balance**. With a floating exchange rate, a large current account deficit should be reduced over time by a depreciation to restore competitiveness. 4. **Size of deficit**. .

Answer 72

1. **Devaluation / depreciation** lead to an improvement in net exports (X-M) and therefore improve the current account on the balance of payments. 2. **Reduce consumer spending**. Higher taxes and/or higher interest rates will reduce disposable income and cause lower spending on imports. This will improve the current account deficit. 3. Supply Side Policies: ○ Policies to raise labour productivity ○ Investment in human capital to boost productive capacity and competitiveness

Answer 73

* If (PED x + PED m > 1), then a devaluation will improve the current account while an appreciation will worsen it Essentially, if demand for exports and imports is elastic, then a depreciation will improve the current account.

Answer 74

In the** short term**, demand for imports and exports tends to be **inelastic** Therefore, after a devaluation, the current account can get worse before it gets better. However, over time, demand becomes more price elastic and the current account improves.

Answer 75

* can lead to **imported inflation**, because imports will be more expensive and we will get higher AD. **Relatively higher inflation can reduce the country’s competitiveness.** * Therefore, if we do get inflation, the improvement in the current account might only be temporary.

Answer 76

* It **represents an unbalanced economy** – dominated by exports and showing less consumer spending. * it means other countries will have a similar deficit. * In the Eurozone, current account imbalances are more of a problem because countries can’t rely on a depreciation to solve the imbalance

Answer 77

1. Allowing the exchange rate to appreciate, reducing competitiveness. 2. Encouraging consumer spending (e.g. lower income tax), leading to higher import spending.

Answer 78

Many industries rely heavily on key export industries remaining competitive – these include: * Transportation / freight / logistics businesses * Trade finance businesses e.g. Insurance and trade credit * Service businesses that operate in ports and airports Exports particularly important for regional economic performance

Answer 79

state-owned investment fund that is used to benefit the country's economy and citizens The money typically comes from a nation's budgetary surplus to funnel it into investments rather than simply keeping it in the central bank or channeling it back into the economy. to stabilize the country's economy through diversification and to generate wealth for future generations. Can be funded through **commodities** or **non-commodities**, financed by fx reserves

Answer 80

Following the mortgage crisis of 2006-2008, sovereign wealth funds helped rescue struggling Western banks CitiGroup, Merrill Lynch, UBS, and Morgan Stanley. This led critics to worry that foreign nations were gaining too much control over domestic financial institutions and that these nations could use that control for political reasons. projects that if sovereign wealth funds continue to grow at their current pace, they will exceed the annual economic output of the U.S. by 2015 and that of the European Union by 2016.

Answer 81

When the value of the currency is determined by market forces i.e. the supply and demand for currency

Answer 82

Where the value of a currency is set at a certain peg, compared to other countries

Answer 83

‘Semi fixed exchange rate’. This is a situation where there is no set exchange rate level but the Central Bank (or government) intervene, to try and influence the exchange rate. For example, if the value of the currency is falling, the Central Bank may use foreign exchange reserves to buy currency

Answer 84

This gives a measure of a currency against a tradeweighted basket of currencies. It is expressed as an index, where the value of the index will be 100 in the base year. weight given to each currency depends upon the proportion of transactions done with the country

Answer 85

This is the exchange rate after being adjusted for the effects of inflation, which more accurately reflects purchasing power.

Answer 86

This occurs when the government reduces the set level of the currency in a fixed exchange rate.

Answer 87

This occurs when the value of an exchange rate in a floating exchange falls. Caused by an increase in supply or fall in demand for the pound on the forex.

Answer 88

When the government increases the set level of the currency in a fixed exchange rate.

Answer 89

When the value of the currency in a floating exchange rate rises. Caused by an increase in supply or fall in demand for the pound on the forex.

Answer 90

· The current account will **depend on consumer spending **and the rate of economic growth. · It also depends on consumer spending in foreign countries (hence demand for exports) · It depends on Inflation (e.g. depreciation can cause imported inflation which reduces the competitiveness of exports) Firms may engage in insurance policies to hedge against exchange rate movements.

Answer 91

When an appreciation of the exchange rate initially causes the current account or trade balance to improve.

Answer 92

1. **Interest rates** will attract hot money 2. **Inflation. ** affects competitiveness 3. **Speculation**. If speculators believe the value of sterling will rise in the future, they will demand more, causing an appreciation. 4. **Economic growth** interest rates are likely to rise, to keep inflation low. This will encourage investors to buy Pounds, in anticipation of better returns. 5. **Current account**. A large deficit on the current account is likely to cause a depreciation in the value of the exchange rate. 6. **Open Market Operations** - Central Bank uses FX reserves to buy domestic currency on the forex

Answer 93

1. Use **foreign currency reserves** 2.** Change interest rates** 3. **Change money supply**. If a country wanted to depreciate its currency, it could print more money 4. **Fiscal / monetary policy**. If the government used tight fiscal policy (higher taxes), it could reduce inflation

Answer 94

* A government has only **limited foreign exchange reserves** e.g. In 1992, the UK government failed to protect the value of the Pound, because foreign currency markets had more buying power than the government. * The Central Bank could use interest rates to protect the currency but it would be at the cost of lower growth and higher unemployment. * To manage the exchange rate in the long-term requires efforts to tackle long-term competitiveness.

Answer 95

* A government has only **limited foreign exchange reserves** e.g. In 1992, the UK government failed to protect the value of the Pound, because foreign currency markets had more buying power than the government. * The Central Bank could use interest rates to protect the currency but it would be at the cost of lower growth and higher unemployment. * To manage the exchange rate in the long-term requires efforts to tackle long-term competitiveness.

Answer 96

* Export quantity falls, Import quantity increases * **Lower AD** --> cyclical UE esp in manufacturing and higher NRU if appreciation is sustaianed * Lower inflation, from cheaper imports and lower AD * Worsening of current account i.e. bigger deficit, because of decline in exports and rise in quantity of imports. * Foreign direct investment may fall. A rise in the exchange rate **may discourage FDI** (foreign direct investment), because it is now more expensive for foreign firms to invest.

Answer 97

* Marshall Lerner condition states an appreciation will only worsen current account, if PEDX + PEDM >1. * It **depends on other components of AD**, consumer bigger impact * **Inverse J Curve** * It **depends on productivity growth**. If the exchange rate appreciates because firms are becoming more productive, then they will remain competitive. * Capital Equipment + tech becomes cheaper --> inc productivity and LRAS * It **depends on the state of the economy**. If the economy is growing strongly and is near full capacity, **a rise in the exchange rate could help reduce inflationary pressure** and keep growth sustainable.

Answer 98

This is a situation where a government actively tries to reduce the value of its currency, to gain a competitive advantage by: * Selling its own foreign currency and buying foreign assets e.g. China has bought US$3.12 trillion to keep the Chinese currency undervalued against the dollar. * Pursue loose monetary policy e.g. low interest rates and quantitative easing (increasing money supply).

Answer 99

* increase exports, create employment and reduce its current account deficit, but may be at the expense of other countries * It may cause inflation: a rise in import prices + require printing money, which also causes inflation. * It doesn’t deal with the fundamental economic issues. A depreciation gives a ‘relatively easy’ improvement in competiveness but this may prove short-lived. It can avoid firms dealing with the long-term issues of productivity and competitiveness.

Answer 100

* Replacing domestic currency with Euros. * No possibility of fluctuating exchange rates within the Euro area. * A **common monetary policy**. Interest rates are set by the ECB for the whole Eurozone area. * **Rules about size of budget deficits** (3% of GDP). Fiscal stability pact though, in practice, this is often broken.

Answer 101

1. **Lower transaction costs**; Lower costs have been estimated to be worth 1% of GDP. 2. **Eliminate exchange rate fluctuations** more confidence about future export prices. 3. **Increased inward investment.** 4. **Greater price transparency/comparibility**. should hopefully lead to greater price competition and easier for firms to identify the cheapest suppliers. 5. **Lower Inflation.** The ECB has a strong tradition of keeping inflation low. Joining the Euro will help reduce inflation expectations. 6. Incentive for greater competitiveness as can't rely on devaluation

Answer 102

1. Countries will **lose the ability to set interest rates.** 2. **Lack of exchange rate flexibility.** e.g. detoriation in competitiveness 2000-07 in EU countries 3. Low inflation may conflict with other objectives. 4. **Loss of independence over fiscal policy**. e.g. growth and stability pact limits government borrowing to no more than 3% of GDP. 5. **Bond Yields** in the Eurozone, there is no Central Bank willing to print money and act as lender of last resort

Answer 103

1.**Convergence of economic cycle**, to deal with common interest rate and monetary policy. 2. **Similar inflation** rates. If inflation is much higher, a country will become uncompetitive 3. **Mobility of labour and capital** e.g. will unemployed workers find it easy to move to other areas in the monetary union? 4. Fiscal union. Similar levels of budget deficits and fiscal union to be able to offer help to depressed economies.

Answer 104

anchor currency, a currency that national governments and other instuitons are happy to hold as a key part of their foreign exchange reserves reserve currency of choice has been the US dollar

Answer 105

* An adjustable peg system is where currencies are fixed against another but the level at which they are fixed can be changed. o Crawling peg systems are a form of this but have a mechanism which allows the value to change.

Answer 106

* Central bank doesn't need to maintain a particular rate ot use reserves * Interest rates are reserved for domestic monetary policy * Partly able to auto-correct a trade deficit * Reduced risk of cuurrency speculation

Answer 107

For: * Avoids currency fluctuations --> encourage trade + investment * Reduces costs of currency hedging * Gives incentive to keep inflaiton low + helps if fixed to strong currency Against: * Govt has to intervene by rasising IR which has negative effects * Information failure; easy to set the wrong exchange rate, if too high wiill make goods uncompetitive + if too low it could cause inflation from high imports * Less flexibility to respond to temporary shocks * Cause current account imbalance * Dificult to keep at correct level; target of speculators

Answer 108

Soros made a £1 billion profit from Black Wednesday. The UK Treasury spent £27bn in buying sterling on the foreign exchange markets.

Answer 109

Uk exports to increase in value by 53% from 92-97

Answer 110

trade balance did not recover

Answer 111

Sheffield Political Economy research suggested that it was due to 'deep-rooted economic imbalances' and needs a rebalance towards maanufacturing and diversification of the export base 1) Much greater reliance on global supply chains so **higher import costs can offset impact ** 2) Impact of **protectionism** e.g. US tarifs of 11.2 billion on EU imports such as Land Rover 3) Demand for **imports are price inelastic while exports more price elastic**;UK is a net importer of Oil e.g. **2008 in dollar terms the oil price increased by 14% but in Sterling terms it rose by 42%** 4) Depressed economic growth in EU

Answer 112

when currency outflows **persistently exceed currency inflows** Normally needs capital flight too and a fall in the value of inflows

Answer 113

the number of months of imports the currency could finance

Answer 114

a nation does not have enough currency to pay for essential imports like medicine, foodstuffs, raw materials and replacement components for machinery; hamper sr economic growth e.g. Sri Lanka in 2020 ran out of fx reserves

Answer 115

1. **Relative export prices**. The relative cost of UK exports to other countries. 2. **Relative unit labour costs**. Unit labour costs are the cost of employing workers to produce one unit labour costs.

Answer 116

1. **Labour productivity** – (output per worker) 2. **Relative inflation rates**- experincing lower inflation means lower costs and prices 3. **Levels of infastructure**- if a country experiences transport bottlenecks, it will lead to higher costs and higher export prices e.g. Malwai/Zimbabwe through a single railway to Mozambique 4. **Cost of business**- levels of regulation and taxes reduce competition 5. **Exchange Rate** - undervalued exchange rate will make exports more competitive

Answer 117

1. **Education and training** - increase labour productivity 2. **Investment in Infastructure**- but susceptible to time lag +govt. failure 3. **Privatisation and Deregulation** - aim to increase efficiency 4. **Devaluation in Exchange** - but doesn't deal with issues of competitiveness 5. **Limiting Wage Growth** - reduces growth of unit labour costs 6. **Flexible Labour Markets** - help reduce labour costs

Answer 118

1. **Rising Exports** - lead to job creation + economic growth e.g. China rapid growth 2. **Improved CA** 3. **Low inflation**- competiitive exports lead to appreciation which helps with inflation 4. **Higher living standards** - with low import prices and higher export revenues 5. **Lower unemployment**

Answer 119

1. ** Appreciation in exchange rate could damage growth** and make exports less competitive 2. **Economy may become too reliant on exports**. and it will be more vulnerable to a downturn in the global economy.

Answer 120

* Variations in coporation tax rates * Low RULC * Non-wage costs such as regulation * Quality of infastructure * Avaliability of skilled labour * Ease of doing business * Macroecnomic stability

Answer 121

1. **Super-deduction tax relief** (130%) for encouraging small business investment 2. **Creation of Free Ports** 3. New UK Infastructure Bank- Bank of British Businesss 4. **Capital Financing** 100% of capital at point of purchase

Answer 122

1. HS2 2. Thames Tideway Tunnel 3. Hinkley + Sizewell Point C 4. 400 million investment in Scottish Rail

Answer 123

1. Points-Based immigration system; allow a more competitive labour market for highly inelastic skilled labour markets 2. **5 billion Levelling Up Fund** 3. Agreed trade deals with **70 countries** plus the EU trade and cooperation agreement

Answer 124

* Big rise in NTBs which add costs * Employees struggling to hire workers, vacancies>UE. Uk migration has reached new levels * High budget deficit, rising tax burden * Loss of talent + R+D funding such as Erasmus funding * Real investment has stalled since referendum

Answer 125

This measures the number of **people living below $2.15**, which is necessary to be able to afford basic goods and services.

Answer 126

when the income of a household is low compared to others e.g. when a person has income below 60 of the median household income (

Answer 127

Agraph that measures the degree of income inequality. The further the Lorenz curve is from the 45 degree line of perfect equality, the more inequality there is in society.

Answer 128

This is a measure of inequality based on the Lorenz curve: * The Gini coefficient is area a / a+b. * The bigger area a is, the more inequality exists. * A Gini coefficient of 0 = perfect equality. * A Gini coefficient of 1.00 = perfect inequality.

Answer 129

* UK had fallen through the post-war period of 1945-80 but reversed in the 80s By 1994 the top 1% of household's share of total income is 8%

Answer 130

* Absolute poverty can be reduced by economic growth, which benefits the poorest in society. * Absolute poverty could also be solved by **greater redistribution of income** in society, to provide minimal housing / food & water for the poorest. * Developed countries have very minimal levels of absolute poverty, due to the welfare state

Answer 131

1. **Inequality in wages and earnings growth**- UK deindustrilisation + globalisation 2. **SU Unemployment** - have to rely on dole 3. **Falling relative value of state benefits** 4. **Regressive Taxes** -set to hit 30 year high 5. **Decline in TU membership** - fallen to 22% 6. growth in underemployment, zero-hour contracts, part-time jobs and temporary jobs, all of which mean lower wages for workers. 7. Discrimination - 'Muslim Penalty' 8. Single Income Family- 50% of live births to single mothers 9. Poverty Cycle passes onto next generation

Answer 132

when the tax and benefits system creates a disincentive to look for work or work for longer hours. By working longer hours, individuals may find they lose income due to income tax and national insurance contributions as well as losing some income-related state benefits. but UK replacement rate is 0.22

Answer 133

The wages of the richest are now 170 times the average worker, compared to 60 times before.

Answer 134

1) Causes a self-perpetuating poverty cycle * Limited access to health care and education * Volatile incones, high debts + low savings 2) Misallocation of scarce resources * Capital investment in society is skewed towards the preferences of the rich * Low collateral - limits growth of entrepreneurship

Answer 135

1) Welfare State/Transfer Payments: * Universal Child Benefits * Public Pensions * Conditional + means tested welfare transfers e.g. Job Centre 2) State Provided Services: * Education; social mobility * Healthcare * Social Housing provided by LA * Training e.g. free A Levels for over 21

Answer 136

* Wealth is a stock concept; it is the value of assets, such as savings, housing, and shares. * Income is the amount of money a person receives per time period e.g. salary

Answer 137

* Those with low income do not have any disposable income to save to increase wealth. * Those who are wealthy (e.g. own a house) can gain rentable income, which they can use to invest in the accumulation of more assets. * Wealth can be inherited, income cannot.

Answer 138

* Gives incentives to take risks and put the effort into setting up a business. Without the prospect of higher income, enterprise would be limited. * Policies to reduce inequality may create disincentives to work e.g. higher income tax may discourage working overtime. Benefits to the unemployed / low paid can discourage taking work (unemployment trap / poverty trap).

Answer 139

* Gives incentives to take risks and put the effort into setting up a business. Without the prospect of higher income, enterprise would be limited. * Policies to reduce inequality may create disincentives to work e.g. higher income tax may discourage working overtime. Benefits to the unemployed / low paid can discourage taking work (unemployment trap / poverty trap).

Answer 140

1. **Exploitation**. e.g. landlords monopoly power in setting rents, especially in places like London. 2. **Social friction**. High levels of inequality can cause social friction and resentment in society- Gini above 0.4 3. **Diminishing marginal utility of money**- more tax from highincome earners has little impact on living standards. Taking tax from low earners has a greater impact, because they have to cut back on essentials. 4.**Difference between equality of opportunity and equality of outcome**-

Answer 141

* **Skilled labour**. Growth could lead to increased demand for skilled labour and a fall in demand for unskilled labour * **Regional inequality** - prosperous regions sucking in labour * **Monopsony power** of larger firms *** Living costs**. Economic development can lead to increased costs of living (transport / housing), which negates any rise in real wages.

Answer 142

* **Bigger Welfare State** and opportunity to pursue policy - tax revenues rise and it can be used to fund a welfare state * **Real wages**. Economic growth tends to put upward pressure on real wages, as firms compete to get workers, leading to a ‘trickle down effect’. * **More opportunities** - diversification away from producing primary products. * **Organised Labour** - growth of trade unions to enable rising real wages

Answer 143

· Drug/alcohol addiction · Mental illness · Homelessness/no fixed address To Claim benefits --> you need a bank account --> you need an address. Therefore those in homelessness are de facto in absolute poverty Living in a third world country/a country without established the benefit/welfare system.

Answer 144

1. Free Market Approach 2. Training and Education 3. Increase in Benefits 4. Increase in Progressive Tax

Answer 145

- **Trickle Down**. The spending and investment of the rich trickles down to the low income earners, reducing relative poverty. - Greater** incentive to achieve more in school**+ more tax revenue which can be spent on policies to reduce inequality such as training and education - No UE trap - The money spent on schemes such as transfer payments could be **better spent on training and education** which arguably tackle the root cause of poverty

Answer 146

- Does** little to resolve absolute poverty** as people who don’t have the skills to get a job will still not be able to find employment - Doesn’t protect those in poverty so there’s no guarantee there will be any redistribution - With less government intervention, there will be more discrimination - Relative poverty may increase in a more free market approach IMF - 'rising income share of the top 20% results in lower growth' LSE - 'tax cuts for the risk have only increase inequality, with no gains'

Answer 147

· helps tackle root cause * the qualifications gained from T+E helps increase employability + prevent structural Un * More education --> higher bargaining power and earning * Break out of poverty cycle

Answer 148

· time lag - doesn't help those currently in poverty * Even with a high level of T+E you can face discriminaiton * Standards of T+E rely on local schools which are typically better in high-Y areas e.g. Schools in the most affluent areas are more than twice as likely to be rated 'outstanding' by Ofsted * Depends on success of the actual training e.g. 42% dropout rate for apprenticeships

Answer 149

● Directly targets those in poverty * benefits **eradicate absolute poverty** + can reduce relative poverty * lower Y have higher MPC so transfer benefits cause increased AD * Increase opportunities for children --> increased LRAS LR

Answer 150

● Raising benefits may **reduce the incentive to find employment**--> strengthens the unemployment trap and the cycle of poverty * doesn’t tackle the root cause of why individuals or families are in poverty. * Opportunity cost of transfer payments

Answer 151

* allows for lower income earners to keep a greater proportion of their income, + taxes higher income earners to a greater extent so relative poverty decreases. * Redistribution leads to **greater AD** and thus **more tax revenue** * Opp. cost of not working increases as PA increased

Answer 152

* Raising PA only affects those in work; **doesn't address absolute poverty** * Decreases trickle down effects incentives to invest decrease * Doesn't tackle root cause * Laffer curve

Answer 153

* Simply **higher wages** which also allows to build up more wealth * **High wealth levels** allow a high level of income * **Chance**; buying asset at right time or lucky to inherit wealth * **Age**: older earns higher income and more assets * **Country**: developed country places you alr in top 5%

Answer 154

Kuznets hypothesis says that as society develops and moves from agriculture to industry, inequality increases as the wages of industrial workers rises faster than farmers Piketty discredited this theory by arguing that inequality rises as the country develops as the rate of return on capital grows, so the rich get richer an inequality increases.

Answer 155

● A capitalist economy leads to income inequality because of wage differentials and wages vary as they are based on demand and supply ● Individuals also own resources and thus wealth differs based on the assets they own * inequality is essential for capitalis incentives to work * but excessive inequality causes problems with efficiency and social justice.

Answer 156

· Horizontal equity is the equal treatment of equals Vertical equity is the unequal treatment of unequal’s

Answer 157

* House price inflation + income stagnation = serious intergenerational inequalities * House price inflation has outstriped average earning with the ratio increasin from 6 to 9 and 7 to 13 in London * One of the main stores of household wealth * While renting improves the posiiton of landlorders and are not subject to the wealth tax - 43% of renters in relative poverty while only 12% of homeowners are

Answer 158

**richest 10 percent accounted for over half** (52 percent) of the emissions added to the atmosphere between 1990 and 2015

Answer 159

ratio of the average income of the richest 20% of the population to the average income of the poorest 20% of the population An alternative measure is the average income of the richest 10% of the population to the average income of the poorest 10% of the population

Answer 160

This is the ratio of the richest 10% of the population's share of gross national income divided by the poorest 40%'s share

Answer 161

composite economic development index from 0-1 based on three factors: 1. Health: **life expectancy at birth** 2. Education: **expected years of schooling of a current 5-year old over their lives** 3. Income: **real GNI per capita at PPP**

Answer 162

● It takes into account three key factors which are important for the development of a country. ● It is relatively easy to calculate because governments tend to collect the statistics used in the data.

Answer 163

● However, there are some issues with the figures : health takes no notice of the quality of life that people enjoy and education doesn’t take into account the quality and success of education. ● There is **no consideration for the equality of income** - **average loss in the HDI due to inequality is about 23%** ● Also, there are other factors which affect development, for example **freedom from corruption or the environment.** * Within countries there are **regional differences**therefore one overall HDI figure can be misleading

Answer 164

adjustment of HDI which includes a fourth indicator of development: inequality. The Atkinson Index adjusts measures for education, health and income according to the level of inequality. It is broader than HDI but can still be criticised for not taking into account more measures and quality.

Answer 165

* measures the percentage of the population that is multidimensional poor * uses 10 indicators * doesn’t take into account the environment.

Answer 166

calculated from 26 different indicators grouped into three main categories: economic, environmental and social . It aims to look at economic sustainability , to ensure development does not limit the amount produced and consumed in the future. tend to show developed countries experiencing negative growth over time, due to their impact on the environment. Some argue this proves that development is unsustainable whilst others argue the index is biased and is constructed to prove the anti-growth case .

Answer 167

* **Poor Infastructure** * **Human capital inadequacy** --> low level of education and training * **Primary Product Dependency** --> low income elasticity * **Savings Gap** --> limits investment * **Foreign Exchange Gap** * **Capital/Human flight** * **Corruption** --> reduces tax revenue * **Debt** --> High debt interest payments limit investment * **Absence of property rights** --> limits investment * **Political Uncertainty** --> limits investment * **Volatility of Commodity Prices** * **Access to Credit + Banking**

Answer 168

* Comparitive adv. w/o they would be worse off * Large + elastic supply of labour willing and able to work * Doesn't require costly investment; can be managed by local workers * Important **source of export rev. + foreign currency** * **Attract FDI** - China has been investing in central Africa to improve access to raw material which has ivolved building roads and railways to have wider benefits to the economy * Stepping stone in economic development

Answer 169

* Volatile Prices * Finite Supply * Low YED * Lack of investment in other sectors * **Dutch Disease + Resource Curse** * **Prebish-Singer Hypothesis**

Answer 170

term that refers to the negative consequences arising from large increases in the value of a country's currency causing: * A **decrease in the price competitiveness for exports** of the affected country's manufactured goods. * An **increase in the quantity of imports**. In the long run this contributes to higher unemployment as manufacturing jobs are moved to lower-cost industriies

Answer 171

e.g. newfound wealth and massive exports of oil caused the Dutch guilder to rise sharply, making exports of all nonoil products less competitive on the world market. **Unemployment rose from 1.1% to 5.1%**, and capital investment in the country dropped.

Answer 172

Prebish-Singer Hypothesis suggests that countries who concentrate on primary products are vulnerable to a declining terms of trade

Answer 173

'World Bank estimates suggest that 1970-97 declining terms of trade cost non-oil-exporting countries in Africa the equivalent of 119% of their combined annual GDP in lost revenue'

Answer 174

Since 1960 theer has been a significant improvement in the terms of trade for Resource Rich countries from around 0.35 to 1.12

Answer 175

1) Expensive resources create tensions such as **corruption + war** - Angola Jose dos Santos sent 500 million to London Account 2) Monopoly power: resources are often owned by a small section of society and there is a poor distribution 3) 'Easy wealth' from resources discourages economic development in other areas

Answer 176

● These large changes in price mean that producers’ income and the country’s earnings are also rapidly fluctuating, making it **difficult to plan**and carry out long term investment as well as meaning that producers can see their income fall very rapidly, causing poverty. e.g. **collapse of oil prices in 2015 saw recession in Angola**

Answer 177

Ghana . Gold, cocoa and oil account for 75% of their total exports and they had to ask the IMF for a loan in 2014 due to their unsustainable balance of payments deficit

Answer 178

● Developing countries have lower incomes and thus they save less. This means there is less money for banks to lend, reducing borrowing and thus **reducing investment/consumption. ** A savings gap is the difference between actual savings and the level of savings needed to achieve a higher growth rate, so countries often rely on debt/external fiinance The savings rate in **Africa is around 17% of GDP compared to 31% on average for middle income countries **

Answer 179

* Rate of economic growth depends on: ○ Level of national saving (S) * The productivity of capital investment (capital-output ratio)

Answer 180

* Kenya + Rwanada savings is only 11% of GDP and thus gross capital investment as a % of GDP is only 18% * On the other Hand Bangladesh has a 32% savings of GDP and 31% of GDP is capital investment

Answer 181

* Attract FDI * External finacing: aid, remittances, debt * Nudges to rsavings. Smart opt-in pensions * Growth of E-Finance; Kenya 2013 63% bank penetration now at 98.3% 2023 * Universal Basic Income (UBI) - Alaska

Answer 182

● This is when exports are too low compared to finance the import of capital required for faster economic growth. e.g. Sri Lanka in 2020 ran out of fx reserves so couldn't import basic food and medicines

Answer 183

● **Large amounts of money are taken out of the country** , rather than being left there for people to borrow and invest. ● This can **occur because of lack of confidence in the country’s stability**, to hide it from government authorities or simply for profit repatriation. * During periods of macroeconomic change investors will likely 'rotate' or **flight to quality** from riskier assets to more secure ones 'emerging --> blue chip'

Answer 184

The Asian Crisis triggered capital flight leading **international stocks to fall as much as 60% **until the IMF intervened and provided bridge loans

Answer 185

* Governments institute **capital controls restricting flow of the currency** outside the country; eval, greater panic + bitcoin can avoid it * **Tax treaties** with other jurisdictions to make it expensive to flee * Gov can **raise IR** to increase currency valuation

Answer 186

India's capital flight amounted to billions of dollars in the 70's and 80s due to stringent currency controls. The country liberalisation of the economy in the 1990s, reversing this capital flight as foreign capital flooded into the resurgent economy

Answer 187

● Developing countries tend to have higher population growth , which **limits development**. If population grows by 5%, the economy needs to grow by 5% to even maintain living standards. high birth rates increases the number of dependents within a country but does not immediately increase those of working age. It **places strains on the education system and leads to youth unemployment** Population decline in developed countries means a greater strain on those employed for more tax revenue

Answer 188

● high levels of interest repayment ; for every dollar of aid given from rich to poor, developed countries get 7-10 dollars back * less money to spend on services for their population and they may need to raise taxes , which limits growth and development e.g. Sri Lanka's growing debt contributed to a default in 2022

Answer 189

* those in developing countries cannot access funds for investment and they struggle to save for the future to make basic investments * families may use loan sharks , who give high interest rates and leave individuals permanently in debt.

Answer 190

· In developing countries nearly half of adults do not have access to an account at a bank

Answer 191

The workers who participated in the scheme **increased their net savings by 23%** through the program spent their lump sum mostly on durable goods like home improvements; the amount of **their durable assets increased by 10%**

Answer 192

● Low levels of infrastructure make it hard for businesses to trade and set up within the country ● However, the development of infrastructure can be expensive and tends to conflict with environmental goals. e.g. In India about**half their roads are not paved**

Answer 193

● Poor education within these countries means that workers are low skilled, sometimes unable to read and write, so have low levels of productivity . e.g. Ethiopia suffers from high illiteracy rates at around only 49%. (Unesco) * Debate over type of education needed and over-education; graduates arre unable to find graduate level jobs

Answer 194

Property rights are where individuals are allowed to own and decide what happens to certain resources. A lack of rights mean that individuals and businesses cannot use the law to protect their assets, leading to reduced investment e.g. Loss of property rights in Zimbabwe led to economic collapse as FDI fell to 0 by 2001

Answer 195

well defined property rights are most important in shaping long-run economic growth and prosperity e.g. the difference in institutions set up in the colonisations of north and south america led to rapidly different economic development

Answer 196

1. **Corruption**- individuals make decisions to axmisise bribes rather than development; Jose dos Santos Angola $500 million 2. **Diseases**- effects of COVID-19 on Sri Lanka 3. **Poor Climates + Geographical Terrain** - Malawi has to export goods through a one way 800km train to Nacala, Mozambique 4. **Civil Wars**- During Saddam FDI in Iraq was near 0

Answer 197

* India has overtaken the UK making it the **5th largest economy in the world**; by 2027 it is expected to become the largest economy in the world * But India **ranks only 132 out of 191 in terms of HDI** - same par with Tuvalu and Micronesia * India is one of the most unequal; **top 10% hold 77% of total national wealth**

Answer 198

Between 2011-15 more than 90 million people we lifted out of extreme poverty

Answer 199

* Compared to China, GDP per capita is very similar at the start of the period but by the end there is a five-fold difference * Another difference in China scores much better on **infrastructure and productivity growth** * **Urbanisation took fast placer** with a **greater focus on manufacturing** compared with the less productive service sector in India

Answer 200

investment from a party in one country into a business or corporation in another country with the **intention of establishing a lasting interest.** Or when an individual/business owns at least 10% of a foreign company e.g. Amazon opening new headquarters in Vancouver, Canada

Answer 201

* Diversification * Lower labour costs * Potentially: lower tariffs, taxes and subsidies * Transfer of knowledge and human capital

Answer 202

* * Economic stimulation * Development of human capital * Increase in employment + PPF * Access to management expertise, skills and technology * Improved Captal Flow to Finance Account - easier to finance deficit * Creation of a competitive market; breaking domestic monopolies

Answer 203

* Displacement of local businesses e.g. entry of large firms like Walmart which is criticised for **driving out local businesses that cannot compete with its lower prices** * Profit Repatriation e.g. large capital outflows from the host country * Political + enviromental + cultural impact e.g. Open-Door Policy * Inequality worsens e.g. Russia 1995 * Creating local monopolies --> higher inflation e.g. OPEC * TRIPS/TRIMS mean countries have to produce certain products at a higher price through FDI * Footloose e.g. shoe making Brazil --> China 2/3 share

Answer 204

Horizontal: same activities but in a foreign country e.g. McDonalds

Answer 205

Vertical: different part of the supply chain abroad e.g. Primark Manufacturing in Bangladesh

Answer 206

Conglomerate: unrelated business in a foreign country

Answer 207

* Platform: Business expands into a foreign country but the **output from the foreign operatios is exported to a 3rd country**; often happens in low-cost locations inside free-trade areas e.g. UK manufactures moving to Poland/Ireland to export to the EU

Answer 208

→ Contribution to **valued job creation** → **Enhancing skill base** (human capital) → Facilitating **transfer of technology and knowledge** →**Boosting competitivness of domestic firms** + enabling their access to markets * Operating in a socially and environmentally responsible manner

Answer 209

1) **Open Markets to allow for FDI inflow**; providing open, transparent conditions . Improving ease of business, flexible labour markets and protection of property + intellectual 2) **Investment Promotion Agency** (IPA): targets suitable foreign investors, prompt domestic host to provide top notch infrastructure and ready access to skilled workers 3)**Put up infrastructure required for a quality investor**: such as transport, energy, education 4) **Strengthen backward linkages + spillovers from FDI** into the indigenous economy: Competitive pressure of foreign entrants + forms of direct assistance from foreign to domestic firms in the **form of training** (setting up production lines, management coaching) 7) Provide access to credit by reforming domestic financial markets 8) Set up a **vendor development programme to support the match making process between foreign customer and local supplier** - offering financing opportunities to indigenous suppliers for required investment on the basis of purchase contracts from foreign buyers e.g. Local Industry Upgrading Programme (LIUP) of Singapore Set up a secondary industrial zone for local suppliers next to the EPZ

Answer 210

* Strategic position * large population with cheap skilled labour * EU membership , economic stability * a fiscal system attractive to business with a number of **Special Economic Zones** and a **Polish Investment and Trade Agency (PAIZ)** to improve conditions for FDI

Answer 211

* Regional aid is most used for companies carrying out intial or new investment progests; can be tax exemption, grants or loans * It is only granted for investments related to: **diversification of the output of an establishment into products not previously produced, setting up a new establishment, extension of the capacity of an existing establishment** * Maximum level of aiid depends on size and where the project is located

Answer 212

* Government Grant MASP (Multi-Annaul Support Programme - MASP) dedicated to supporting large investments in 'priority sectors' such as automotive, electronics, aviation, biotech, modern centres and R+D

Answer 213

When 2 Companies work together * Useful + necessary way to enter markets * Could be w/o equity in a strategic allliance

Answer 214

* **Share technology** (increasing know;edge transfer) and complementary IP - intellectural property * For smaller organisation it allows them to enter a new market * Provide specialist knowledge of local markets * Helps to **undertake frontier research** that is considered too large for an individual company

Answer 215

1) 2008 NBC Universal Television Group (Comcast) and Walt Disney Company created HULU; product became a billion dollar success 2) Kellogg International entered to Chinese market with Wilmar to access its extensive supply chain network

Answer 216

○ For example, if £100 worth of capital equipment produces each £10 of annual output, a capital-output ratio of 10 to 1 exists. When the quality of capital resources is high and when an economy can better harness capital e.g. by using more advanced ideas, then the capital output ratio will be lower Rate of growth of GDP = Savings ratio / capital output ratio

Answer 217

* **Persistent savings gap** in some countries e.g. Thailand still experienced growth * Ignores other factors; labour productivity, tech innovations, levels of corrupption * **Small scale financial institutions** * Deep weaknesses in human capital * Risks from **unbalanced growth** (C v I) * Foreign flows can vary and their effectiveness * Risks of borrowing to fund savings gap

Answer 218

* Make up the largest source of external finance and **95% of remittances are sent to MIC**

Answer 219

* **Additional disposable income** helps to fund education & health care+save for investment * Lower risk of extreme poverty * Can be used as collateral for loans including micro-finance debt Less malnutrition which can impair brain development

Answer 220

* Lower Gini coefficient if they flow to poorest rural areas * Higher productivity from better nutrition and health care * Help absorb the impact of external economic shocks * A **key source of foreign exchange**, they **help to overcome a domestic savings gap** * Inflow on current account of balance of payments * Politiical stability

Answer 221

* Firsly needs migrational '**brain drain**' of workers * Appreciation of domestic currency * Increase non-labour income -> incentivisation to nor work as much * LR takes families away from productive activities as money is used for C rather than I

Answer 222

Research of Rodriguez and Tiongson: remittances reduce the labour supply of receiving households in the Phillipines, especially female members

Answer 223

China held **69% of the world's maize reserves, 60% of rice and 51% of wheat**

Answer 224

- Drought in Brazil, USA + horn of africa worst drought in 40 years - Floods in China; world's largest wheat producer - High temp in India; world's 2nd largest producer of wheat - Food Hoarding: since 2017 China has been stockpiling food - War: Russia Ukraine produce 28% of world wheat and **75% of the sunflower oil**; **Ukraine's food exports provide calories to feed 400 million people** * Disruption to feriliser: prices tripled between 2021-2 as Russia, Ukraine produce 40% of worlds potash.

Answer 225

**95 million additional people could be living in extreme poverty**; goal of bringing global poverty rate to less than 3% by 2030 was now beyond reach **Number of severely food insecure people has doubled in 2 years** from 135 million pre-pandemic to 276 million today

Answer 226

· Lowest income households **spend up to 50% of their income on food** · Contrasts with high income households for which the proportion is around 20% on average 1) High-income households can change their expenditure from high quality to low quality 2) They can also buy in bulk e.g. Costco wholesale 20% cheaper on average

Answer 227

* Increased expenditure on imports can lead to Sir Lanka type scenario where can't afford **basic foods such as rice sugar lentils and milk powder that tripled in price from January to April 2022**

Answer 228

* Developed countries increased IR rapidly * Hot money flows mean developing countries depreciate which means commodities cost even more

Answer 229

countries find it difficult to make the climb from being a middle-income country to achieve high-income fully-developed status. World Bank finds that **only 13 of the 101 countries deemed to be middle-income countries in 1960 had achieved high-income levels**

Answer 230

* Rising Wages/Unit Labour Costs - Lewis Turning Point, erosion of comparitive adv. * Possible failure to invest in human capital * **Institutional Failures** - doesn't support a creative economy * **Social Capital** - may not support sustained growth * **Inability to maintain macro-economic stability**- fast growing causes inflation

Answer 231

A Lewis Turning Point occurs when a **country’s surplus labour evaporates**, pushing up wages, consumption and inflation rates. Within a country the supply of migrants from the countryside might dry up causing urban wages to surge.

Answer 232

1. Sufficiently large middle class/rising incomes 2. Improving working condiitons/ welfare safety net 3. FDI to higher value industry + R/D 4. Investment in human capital --> increase productivity e.g. Korea one of highest PISA 5. Open up economy to international comp. e.g. India 6. Responsible Macro Policy e.g. independent Central Bank 7. Regional Trading Blocs e.g. ASEAN 9. Tackle income and wealth inequalities

Answer 233

Government debt as a share of GDP in emerging economies has **risen from 27% in 2008 to 55% in 2019**, especially in external debt

Answer 234

· needed to overcome the savings gap · cover the cost of mega-infrastructure projects - pay itself off in the future · Borrowing to invest will do the same * Capital market discipline can sometimes lead to governmens following better macroeconomic policies and introducing economic reforms; help with MI TRAP

Answer 235

* Growth of 2.5% over past decade not fast enough (Malaysia 6%) * Lowest Tax Level of OECD (13%) --> social welfare spending 7% of GDP * Under-developed financial economy (cash ermaind dominant) --> **1/3 of Adult Mexican have a bank account** * 138th/180 on Corruption * Crime also major barrier

Answer 236

massive recessions meant developing countries couldn’t pay higher rates and money was demanded back. Commodity prices fell so little revenue to pay back debt in 'hard' currencies Export revenue fell more and more so they couldn’t even pay interest rates **leading to places such as Mozambique declaring bankruptcy**

Answer 237

* bailouts were provided by the IMF such as the Carribean Countries;forced 'structural adjustment' policies to reablance economy * Some economist arguments these led to 'de-development' * Strict fiscal policy, austerity, free market policies, reducing protectionist measures, removing intervention in currency markets * Intervention cut in areas like education, healthcare, protectionism

Answer 238

1. Debt Relief - HIPC 2. Reschedule debt - allow it to be paid over a longer time period 3. Debt Swaps - UNICEF Debt for Child Relief 4. Cancel the Debts - many countries already serviced through interest

Answer 239

developed countries agree that debt doesn't have to be paid back immediately as long as money is spent on development outcomes **Lots of debt relief took place in the Caribbean leading ot greater healthcare, education, tech advancement**

Answer 240

Transfer debt to NGO's who can redistribute this money, instead of paying money to Western bank in hard currencies, it is paid to NGOs in soft currencies while western banks are given a tax break. e.g. **UNICEF Debt for Child Relief**

Answer 241

* 5 main stages Agriculture-->pre-conditions--> Industrilisation --> Drive to maturity with diversification --> high mass consumption oversimplified, simply shows western stages which may not be the same

Answer 242

1. **Free Trade**- exploiting comparitive adv. to increase efficiency 2. **Promotion of FDI** 3. **Removal of government subsidies** - subsidies encourage inefficiency 4. **Microfinance** - helps gain access to credit + invest 5. **Floating Exchange Rate** - increases competitiveness 6. **Privatisation**/ Deregulation 7. Fiscal Discipline 8. Tax Reform

Answer 243

● Countries can **aim for export led-growth.** ● Competitive Presssures create efficiency --> Resources will be allocated to their best use where the country has a comparative advantage. * Comparative Advantage * Attractive to FDI e.g. Countries like Singapore and South Korea and regions like Hong Kong have benefitted from this method.

Answer 244

* However, free trade may mean developing economies focus only on primary products; this may limit development in the long term. * To develop new industry, they may need tariff protection, at least in the short term. * Encourage Dumping * Footloose + Enviromental impacts * Structural UE

Answer 245

* FDI involves **transfer of knowledge** from one country to another bringing specialist management and traning techniques * Creates jobs and leads to effects of multipliers --> higher labour productivity * Helps fill savings gap * Creation of competitive monoply * Increasing employments * MNE’s will invest in infrastructure, allowing reliable finance and transport systems to exist, making banking more accessible for economic agents.

Answer 246

● **repatriation of profits** and developing countries may find the company exploits them, by offering lower wages and poorer conditions than they would in a developed country. ● The country will also lose some sovereignty and become dependent on another firm. * Local competition may find it hard to set up and compete and the best jobs often go to imported labour, leaving **only low skilled jobs for locals.** ● Environmental damage and exploitation of natural resources and tend to become problems. e.g. India benefitted greatly from FDI '*Make In India*' liberalised FDI policy and lead to a **48% increase in FDI** Samsung's investment in Vietnam has been crucial; local firms are now part of their supply chain

Answer 247

* government subsidies to support ailing firms **encourages inefficiency.** * government can use money for more productive uses. * cause problems in terms of corruption and criminality e.g. Venezuela subsidised fuel is smuggled across its borders and sold in neighbouring countries for profit Venezuela has subsidies on almost everything yet demand is still higher than supply

Answer 248

● Subsidies are placed on essential items within a country, effective way of minimising absolute poverty and ensuring a minimum standard of living * Beneficial in helping infant industry grow * Removing it is **politicall unpopular** --> bread riots, India farmers *

Answer 249

● The country **does not have to worry about their gold and foreign currency reserves** and the government does not intervene. * Acts as an auto-corrector to economic shocks * Fixed exchange rates can damage competitiveness * Government MP can focus on other policy rather than maintaining fixed FX rate

Answer 250

* It means that the currency can be volatile which makes it **difficult for exporters/importers to make decisions about the future** * Floating can cause **large changes in macroeconomic variables**, including economic growth. * If fixed to low-inflation economy; help keep costs and prices under control * Reduced costs of currency hedging

Answer 251

* Helping people on very low incomes gain access to credit t start small-scale projects and avoid excessive interest rates of moneylenders * Take little or no collateral * Enable saving + investment

Answer 252

* DFIF review 'no clear evidence of positive impacts' * Most loans are for consumption; SA **consumption accounts for 49% of microfinance use** * If used for business than it encounters a lack of demand * Interest rates can reach **200% per annum such as Banco Comparatamos**

Answer 253

● Privatisation can end the corruption within a firm who is owned by the state . ● Selling off a firm, particularly if it is loss making, will improve government finances and reduce levels of debt. * Profit Motive creates efficiency + competition * Deregulation reduces red tape

Answer 254

* deregulation may **increase inequality and cause environmental problems**. * Privatisation may lead to the**creation of private monopolies** and **inequality** (Russia 1995), which charge higher prices for consumers. * Corruption in selling the industry e.g. Water Privatisation UK 18.7 billion profit, 18.1 dividends. Bills increased by 40%. Net Debt increased by 55 billion

Answer 255

1. **Development of Human Capital** 2. **Protectionism** 3. **Managed Exchange Rate** 4. **Infastructure Development** 5. Promoting **Joint Ventures** with global companies 6. **Buffer Stock Schemes**

Answer 256

● skilled workers more productive so allow diversification * Increase in MRP, increase in wages * Increased tax revenue * Helps attract FDI e.g. Both China and South Korea have some of the highest PISA scores

Answer 257

· Money could be spent elsewhere e.g healthcare that can increase HDI · There is a **time lag** on the results of training and education. · Increased labour supply = **more pressure on wage rate** * Could lead to **increased brain drain.** * Overeducation

Answer 258

● **Protectionism allows domestic industries** to grow by keeping foreign goods out and protects them from strong competition. * Infant Industry Argument * Protection of domestic employment * Both lead to greater employment, tax revenue and consumption

Answer 259

● However, it means countries lose out from the benefits of specialisation and comparative advantage X-inefficiency , since **domestic producers suffer from a lack of competition**. * Other countries are likely to retaliate. e.g. Several Asian countries used a degree of tariff protection, when they were developing.

Answer 260

● The currency could be fixed against a number of different exchange rates . They can introduce high exchange rates for the import of essential products and lower exchange rates for others * Helps reduce poverty and encourages investment if they are capital goods * Lower FX rate for impports encourages import substitution * Confidence and planning ahead

Answer 261

* fail to work in practice ; **black markets** in foreign exchange develop which can destabilise the system * **corruption becomes an issue**, when government officials buy currency at ne exchange rate and sell it for profit at another. ● Alternatively, governments can manage a single exchange rate which will reduce volatility , but **speculation may mean that countries find it difficult to maintain** an exchange rate over a number of years.

Answer 262

● Infrastructure is **essential for development** ; a country needs roads, airports, schools, hospitals, railways etc. * Infrastructure tends to suffer from the free rider problem and has very high capital costs , making it unlikely the private sector will develop it. Moreover, it has many positive social benefits which suggests the government should provide it.

Answer 263

● government **may not have the funds** to provide the infrastructure and it is argued that they may be inefficient. * Infrastructure projects are **often associated with bribery and corruption** , cause **environmental damage** and may be poorly built and maintained. ● Some argue that **intermediate technology** , which uses local materials and can be fixed locally, is better than large scale infrastructure.

Answer 264

● reduces the exploitation of FDI --> keep some of the profits generated within the country e.g. Tata Starbucks Pvt.Ltd is a joint venture company with Starbucks in India Kellogs Wilmer Collab in China

Answer 265

* it should be self-financing : money is raised when selling the products, which allows the government to buy the next lot of stock * Reduces volatility of commodity prices --> **encourages investment** * Prevents sharp falls so **reduces absolute poverty**

Answer 266

* Requires volatility; if just goes up it will run out of stock * Huge opp. cost: start-up costs, administration costs and problems of storage e.g. **66% of EU Budget, butter mountains** * Other countries may benefit; free riders * Minimum Prices set too high and encourage inefficiency e.g. causes dumping elsewhere, East Africa milk powder * Can cause retalitation * Harms the enviroment * Not overcome poverty, fund primarily goes to large farmers

Answer 267

1. **Industrilisation** 2. Development of **Tourism** 3. Developmet of **Primary Industry** 4. **Fairtrade Schemes** 5. **Aid** 6. **Debt Relief**

Answer 268

Countries who rely on primary products face volatile income and limited prospects for growth. The Lewis model suggests that industrialisation and diversification of the economy **enables more rapid economic development** and higher growth in the future.

Answer 269

* However, although labour productivity is low for some parts of the year, during planting and harvesting vast amounts of labour is needed * migration has led to **urban poverty replacing rural poverty** as the industrial sector is unable to provide jobs for all those who have move * Industrilisation is a result of development, rather than a cause * India went from agriculture to services * Governments choose wrong time + place

Answer 270

* Tourism is a way to make use of natural resources. * Tourism creates employment and inflows of foreign capital. * Income elastic so will grow with economic growth * Encourages FDI + improvements in infastructure * Creation of Jobs with low skilled workers * Higher tax revenues

Answer 271

* Industry is **seasonal**and involves low skilled jobs so limited multiplier * Destinations can go out of fashion * TNC's repatriate profits * Large number of externalities

Answer 272

In Morocco, 7 eco-resorts are being built on the north coast where unemployment is 40%. (The Economist)

Answer 273

* Comparitive adv. w/o they would be worse off * Large + elastic supply of labour willing and able to work * Doesn't require costly investment; can be managed by local workers * Important **source of export rev. + foreign currency** * **Attract FDI** - China has been investing in central Africa to improve access to raw material which has ivolved building roads and railways to have wider benefits to the economy * Stepping stone in economic development e.g. Norway Sovreign Wealth Fund $250,000 per citizen

Answer 274

* Volatile Prices * Finite Supply * Low YED * Lack of investment in other sectors * **Dutch Disease + Resource Curse** * **Prebish-Singer Hypothesis** * Corruption

Answer 275

* give farmers a bigger share of the final market price. * A guaranteed price above the market price when the agreement was made. * This gives producers **stability and raises their income** * **Sustainable** production without child labour

Answer 276

* those under fair trade had **higher income and satisfaction**, a greater understanding of the market and a more optimistic view of the future than those not under fair trade. * They were able to save for the future and **invest or provide financial support for their children**. * However, they still did not feel their income was sufficient.

Answer 277

* system has an insignificant impact on the developing world. * It benefits the Fairtrade producers but can leave others worse off since non-Fairtrade producers see a fall in demand. * In the long term, the higher price for Fairtrade goods will increase supply and thus this could bring price back down (but low PES) * Higher income reduces the incentive to diversify or move to urban

Answer 278

* used to finance investment in infrastructure and human capital. * This can increase capital stock / aggregate supply and can enable higher growth rates. * able to reduce absolute poverty, particularly emergency relief provided after disasters such as the Haiti earthquake (2010) * Long term aid builds human capital

Answer 279

* results in a **dependency culture** where countries are unconcerned by their finances * **Corruption** means impact of aid is limited * **Politically motivated**: Israel and Egypt * May **distort market forces** * **Magnitude**; other parts of external finance are more important * **Principle Agent Problem**- failure of Millenium Villages * Helps donor; get 7-10 dollars back through interest and tied aid

Answer 280

Jeffrey Sachs' aid project that ended up costing $12,00 to lift out of poverty, 34x average income

Answer 281

* Bi-lateral aid: aid from one country to another Multi-lateral aid: channeled through international bodies

Answer 282

Project Aid: direct financing of projects improves human capital

Answer 283

funding of expertise

Answer 284

emergency disaster relief, food aid,refugee relief

Answer 285

Soft loan: a loan made to country on concessionary basis

Answer 286

projects tied to suppliers in donor country

Answer 287

1986 3.5 million cases of Guinea Worm reported --> 2015, 126 cases reported

Answer 288

2014: 534 billion remitances flow - 3X size of ODA

Answer 289

* Two sector model/surplus labour model 1) Economy starts with 2 sectors: agriculture + urban sectors 2) Labour is released for work in the **more productive, urban sectors ** 3) Industrialisaiton is possible, they make profits which can be reinvested and capital starts to accumulate 4) As more capital accumulates, further economic development can sustain itself e.g. Chinese Urban Incomes 3.5x Rural

Answer 290

* Profits may leak out; capital flight * Capital accumulation --> may reduce need for labour * Model asssumes competitive labour + Product markets * Urbanisation may create problems and trickle down may not happen e.g. Cape Town 1 billion slums

Answer 291

* **High Income Elasticity of Demand**- High YED for services, esp leisure tourism and financials services. As incomes rise and demand even more, more resources are allocated to service production e.g. **72% of UK is employed in the service sector** **Low Productivity of Labour** - Productivity in the service sector is lower because it is harder to apply new tech to services so prices rise relative to primary and secondary goods.

Answer 292

Fuchs argued that the service sector contributed to the slow-down in economic growth rates in more developed economies as productivity growth in the service sector would tend to be much slower than for the manufacturing sector

Answer 293

: all sectors to support each other, interconnectedness implies growth across economy needed, clear role for gov. in supporting those tha don't 'naturally' grow as much Govt. should do a *Big Push* to support industries that aren't growing

Answer 294

* Unbalanced growth: overall growth is faster, resource prices pick up where growth is unabalances and this will signal investors to allocate funds to open these bottlenecks, grater investment + growth due to efficient allocation of resources * Government should support industries with strong linkages to the growth industries e.g. grants, incentives

Answer 295

- Growth Rate at which all saving is absorbed into investment for example, people save 10 percent of their income, and the economy’s ratio of capital to output is four, the economy’s warranted growth rate is 2.5 percent (ten divided by four)

Answer 296

- Growth rate required to maintian full employment If the labor force grows at 2 percent per year, then to maintain full employment, the economy’s annual growth rate must be 2 percent

Answer 297

If everyone saves at once, it can cause a drop in AD and a recession

Answer 298

People save more when they think it’s a bad time to save and save less when it’s a good time

Answer 299

* Japanese government cultivated steel, aluminium, car and shipbuilding industry after WW2 and then targed semi conductors and electronics through window guidance * Malaysia has **protected its infant car building** industries through credit from the government and high tariff on imported cars * Japan and South korea **emphasised on large domestic conglomerates like Hitachi and Samsung**

Answer 300

averaged 6% in the 1970s

Answer 301

* More govt intervention --> leads to overstuffing (underemployment), bureaucracy (red-tape) and inefficiency * Political instability and a lack of transparency can also contribute to corruption * Borrowing to cover this create unsustainable debt that are not used on infrastructure * In total this can lead to capital flight e.g. India e.g. Zimbabwe, a redistribution of land, lead to the collapse of its agriculture industries

Answer 302

* smooth out consumption deficits * improve health indicators * allow people to start small businesses that are successful because they can take advantage of increased local demand

Answer 303

* Area in a country that is **subject to different economic regulations** than other regions within the same country * SEZ economic regulations tend to be conducive to and **attract FDI such as tax incentives or lower tariffs**

Answer 304

* SEZ increase export levels but countries **may abuse it to retain protectionist barriers** SEZ may **create a level of bureaucracy with possibility of corruption + regulatory capture **

Answer 305

* 4 SEZ in SE coastal region; **Shenzen**, Zhuhai and Shantou in Guandong province and Xiamen in Fujian Porvince * Enjoy benefits of power to approve investment projects, offer incentives to foreign investors, import equipment and technology tax free

Answer 306

* Shenzhen is a world leader in shipping and supply chain and has the **world's 4th busiest contianter port as of 2019** * Shenzhen's fast economic growth is characterised by shipping logistics, high technology and financial services * Has Huawei Tech City wehre R+D has created a global innovation sector and one of the leading financial sector

Answer 307

By over **30,000%**

Answer 308

* Primary aim is to stabilise exchange rate and provide loans to countries in need functions 1) International monetary cooperation 2) Promote exchange rate stability 3) To help deal with BOP adjustment 4) Help deal with economic crisis

Answer 309

1)**Economic surveillance** and monitoring; produces reports on member countries economies to suggest weaknesses 2) **Loans to countries with a financial crisis**: IMF has a $300 billion of loanable funds e.g. Greek $110 billion bailouts 3) Conditional loans/**structural adjustment**: when giving loans, the IMF usually insists on certain criteria being met 4. **Technical assistance** and economic training Financed by member contributions from 183 members

Answer 310

Combination of free market policies like privatisation, fiscal austerity, free trade and deregulation Macro: * Policies to tackle inflation or budget deficit (**tightening monetary/fiscal policy**) * **Removal of tariff barriers** * Abandoning fixed exchange rates Micro: * **Privatisation** to improve efficiency * **Ending food subsidies** * Reducing red tape (**deregulation**)

Answer 311

* spending cuts on important welfare services like education are bad in long run * Privatisation can benefit a small rich elite (Russia 1995 or Egypt's Open Door Policy) and worsen inequality * Privatisation of key utilities like water can lead to higher prices for a key commodity * Unemployment * Social development ignored * Free trade hampers diversification; focus on comparitive advantage and raw materials

Answer 312

Bolivia where the IMF forced privatisation to water as a key part leading to mass protests against the raised price. It is argued that the privatization process did **little to address water access and that the increase in water prices following such measures was met by an approximate 2% increase in levels of poverty**

Answer 313

Asian crisis of 1997 Indonesia, Malaysai and Thailand were required by IMF to pursue tight monetary policy but this **caused a serious recession**

Answer 314

IMF intervention in Kenya in the 1990s made the central bank remove outflow of capital control that made it easier for corrupt politicians to transfer money out of the country

Answer 315

* Dependent on implementation * Structural adjustment can still provide political will to take necessary and difficulty step for long term growth and stability * Places too much emphasis on macroeconomic objectives * **Crisis will always have difficulty** and the IMF is an easy target * Provides a **confidence boost** * **IMF has some successes** such as Mexico in 1982, Greece and Cyprus

Answer 316

Aid long term economic development and reduce poverty by making technical and financial support available * lends to MIC and Creditworthy LIC * offers interest free loans and grants to the world's poorest countries * finances investment, capital, mobilisation and gives advisory services to businesses and governments in economically developing nations * promotes FDI in economically developing countries

Answer 317

* Smoke screen to use conditional loans in exchange for countries to **establish neoliberal economic policy** that ultimately benefit western companies and financial insitutions * Ha Joon-Chang argues that the real point of the World Bank is to **create poliicy friendly to TNCs, deterotiating social development** * John Pilger argues that the World Bank is the agent of the richest countries in the world that offer **loans only if they privatise and give access to raw materials**

Answer 318

* * Early 1990s there was limited supply of rental properties (**the number of rental properties fell by 11% between 1975 and 1985** ) in a highly regulated market. * Rising costs and unable to raise prices due to rent control caused exodus of landlords from market * Caused **black market to emerge**, avoiding rent control and tax, and caused tenants to pay significantly more than market value for their properties’ rent

Answer 319

* Rent control was abolished in 1995 causing **rental supply to increase 45% in 1990-2000** * This caused black market to fall apart and prices to fall

Answer 320

1. Use resources creatively; 50/50 ownership, trade deal with European Economic Committee, loan from IMF 2. Upheld civil liberties and freedom of law; lowest for corruption + instability 3. Diversify and improve human capital; 90% of citizens have ana education and 65% employed in service sector

Answer 321

**12,000%** However, it places high on inequality due to diamond sector being biggest growth and exporter

Answer 322

**150 billion** of the Global Gateway funding will go to Africa

Answer 323

* Involved in estimated 35 countries, ports, power plants, railways e.g. China has estiimated to invested more than **$340 billion in Africa** e.g. important infastructure such as the Railyway line from mombasa to Nairobi or the Addis Abbada - Djibouti Railway

Answer 324

2018: **83.49%** as it has the 2nd lowest pay for production i n the world

Answer 325

* Severe infastructure gap - **only 20% of Dhaka has a sewage system** * Low complexity of imports - limited linkages to rest of economy * **Climte Change** - threatens to get rid of 30% of food production by 2050

Answer 326

initiated the Business Development Fund (BDF) which is providing guarantees and grants to accompany the ongoing financial inclusion initiatives with a deliberate effort targeting marginalised women and young girls

Answer 327

* Government- supported LTSS Long term saving scheme for basic pension benefits for half population * Supporting Ease of Business * Authorities prmoting a cashless economy; high mobile penetration, value of e-money has increased from**0 in 2011 to 34% of GDP in 2018**

Answer 328

* Constructing **3 international airports**; encourage trade + overcome landlockedness * **Carnegia Mellon Uniiversity Africa** established in 2011 to produce creative and technically capable engineers - located in Kigali Innovation City * **Kigali Special Economic Zone** to encourage manufacturing

Answer 329

* Only Low Incoome Country in the top 100 * **29th easiest place to do business in the world**

Answer 330

* Creation of first phones made in Rwanda: Mara Phones in Partnership with Google * Deal with Chinese firm Pink Mango to set up garment factory --> providing **7500 jobs** and 20 million dollars in 5 years

Answer 331

Vehicles is now the biggest single export sector Morocco overtook South Africa as Africa's largest car maker with 400,000 cars in 2018

Answer 332

* The Noor Plant in Morocco is the **world's biggest concentrated solar power farm**. It is the size of 3500 soccer fields and powers more than 1 million households.

Answer 333

* Growth of 2.5% over past decade not fast enough (Malaysia 6%) * Lowest Tax Level of OECD (13%) --> social welfare spending 7% of GDP * Under-developed financial economy (cash ermaind dominant) --> **1/3 of Adult Mexican have a bank account** * 138th/180 on Corruption * Crime also major barrier

Answer 334

Gravity Theory suggest exports should be 1/3 from Mexico to USA while the acttual figure is 72% 94% of FDI flows come from the US * Vulnerable to Protectionism of 'the Wall' and new Nafta

Answer 335

*Only half of 15-yearr olds obtain the necessary skills to participate effectivvely and productively in society and in the labour market* - World Bank

Answer 336

**95% of exports** * Oil booms cause wide swings in economic growth e.g. 2015 oil slump caused recession --> causing Angola’s external debt to treble to over 60 percent of GDP

Answer 337

Jose dos Santos took over 500 million in government funds 165/181

Answer 338

Angola had 1 physician per 10,000 people Gini Coefficient of over 0.6 149th HDI ranking

Answer 339

Trade as a share of GDP is **125%** membership of ASEAN FDI 11% of GDP

Answer 340

2017 Cambodia has the **8th fastest rate of HDI growth** 1. reduction in poverty (47.8% in 2007 to 13.5% in 2014) 2. a fall in measured inequality (Gini from 40 in 1997 to 28 in 2012)

Answer 341

Beneficial: - 75% of Annual Exports and main driver of growth to ASEAN market of 750 million Restrictive: - Parts of Garments are foreign so restricts multiplier - Infastructure not built around it -106th on infastructure - Too narrow Export base

Answer 342

* Increasing FDI: now 18% of GDP e.g. Anadarko investment of $22 billion; **double the size of its GDP** but has borrowed heavily with external debt reaching 100% of GDP

Answer 343

Enabling the buying and selling of shares on listed stock markets. Firms can use stock markets to issue more shares and raise finance.

Answer 344

This involves buying and selling government bonds, to fund public sector borrowing. As well as government bonds, there are also private sector bond markets for firms.

Answer 345

Offering firms the chance to save and borrow for investment.

Answer 346

Offering individuals the opportunity to save and borrow

Answer 347

means for lenders and borrowers to meet their short term financial needs. · Assets bought and sold usually have a maximum maturity of a year (24 hours-365 days) and are easily convertible into cash.

Answer 348

1. **Saving** - gain interest through bonds/bank to transfer spending power to future 2. **Lending** --> fund investment 3. **Facilitate the Exchange of Goods** - creation of a payments system 4. **Reducing Risk** --> enables companies to hedge (swaps, forwards, options) e.g. Forward Market in Commodities 5. **Shares** --> raising finance for investment e.g. **Eurotunnel financed by selling shares to investors**

Answer 349

money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash.

Answer 350

M0 = This is the level of notes and coins in circulation + banks operational balances at the Bank of England. (This is the most liquid form of money) · M4 = This is notes and coins in circulation plus private sector deposits in banks and building societies.

Answer 351

· Print more money · Quantitative easing – electronic creation of money by Central Banks · Increased bank lending – banks lending higher % of their deposits * Central Bank purchasing bonds from private individuals which can be spent.

Answer 352

where financial assets (eg loans) or securities (stocks/bonds/treasury bills) are traded.

Answer 353

Shares and bonds are issued to raise medium and long term financing for both firms and government divided into the primary market, newly issued, and the secondary market, second-hand securities

Answer 354

market in which different currencies are bought and sold. traded on either the spot market (immediate exchange) or the forward market.

Answer 355

there is an inverse relationship between the price of the bond and the interest, it is the coupon that remains fixed.

Answer 356

· Accepting deposits · Lending to economic agents Providing efficient means of payment (bills etc) Provide foreign currency Offer other functions-give advice, insurance etc.

Answer 357

· Need to be profitable to provide a return for shareholders · There needs to be certain level of liquidity to meet the needs of depositors · There is a balance that needs to be found between liquidity and profitability

Answer 358

Assets - cash, balances at the BofE, Loans (advances), securities (e.g. bonds), fixed assets Liabilities - customer deposits, money owed to bond holders, money owed to other banks

Answer 359

When a bank makes a loan, for example to someone taking out a mortgage to buy a house, or a business taking out a loan to finance their expansion it **credits their bank account with a bank deposit** of the size of the loan/mortgage. At that moment, **new money is created.** ' Bank making loans and consumers repaying them are the most significant ways in which bank desposits are created and destroyed in the modern ecnonomy'

Answer 360

* By attracting new deposits, the bank can increase its lending without running down its reserves. * Longer-term savings deposits therefore typically offer a higher rate of interest for savers, a reward for the inconvenience of sacrificing some of their liquidity

Answer 361

* **Market forces** – the scale of profitable lending opportunities * **Regulatory policies** e.g. capital reserve requirements * Behaviour of consumers and businesses e.g. decisions about how much debt to repay * Monetary policy - level of policy interest rates **influences the aggregate demand for loans**

Answer 362

* Banks are not the only source of finance, may turn to private investors, stock market, government grants or personal savings * In times of recession, banks may not be willing to lend e.g. 2008 * Poorest consumers often do not have access to bank account

Answer 363

* Put in after 2008, test the liqudity and capital of a bank in simulations of an ecnomic crisis Banks that fail stress test mistake steps to rebuild capital reserves EU stress tests cover 70% of banking institutions,US Banks with over 50 billion pounds or more in assets are required to undergo

Answer 364

- Stress tests are over-demanding, and require too much capital - Thus there is an **under provision of credit to the private sector**; which many argue led to the relatively slow pace of economic recovery after 2008 * Timing is hard to know making banks **overly cautious** during normal fluctuations

Answer 365

- Pool contributed to by a limited number of partners and operated by a professional managers - Only open to qualified investors ( over a million net wealth or annual income over 200,000) * Common goal is **market direction neutrality**; make money despite market fluctuations

Answer 366

- 2 and 20 fee structure: gives the hedge fund manager 2% of the assets and an incentive fee of 20% of the profits each year * But even if the hedge fund loses money, the manager get sa good amount ( moral hazard )

Answer 367

1) **Macro hedge funds** try to maximise on changes in macroeconomic variables; biggest busts and highly leveraged 2) **Equity hedge funds** is maintying 'long' positios in stocks you own and 'short' positions in stocks you don’t tha you believe will decrease 3) **Relative value arbitrage hedge fund** buy securities that are expected to appreciate while simultaneously shorting a similar security that is expected to depreciate in value 4) **Distressed hedge fund** help companies turn themselves around by buying some of the securities in hopes they will appreciate

Answer 368

a mutual organisation; all elligible customers are known as members · They have rights to vote and speak at meetings · Each member always has one vote and there is a board of directors · Societies have no shareholders requiring dividens; allowing lower costs, cheaper mortgages, better interest rates · Building societies have a limit on what proportion of their funds that building societies can raises from the wholesale money markets ( can only raise 30%)

Answer 369

Longer length of the bond makes it more risky as there can be more factors ( raising IR value, default) e.g. SVB collapse from purchasing longer length bonds for a higher yield

Answer 370

* Occurs when an issuer fails to make an interest payment or pincipal payment * usually a last resort and is often solved by restructuring * In case of coporate bands the bondowner usually recieves a compensation, in a high yield market the avergae recovery rate from 19577-2011 was **42%**

Answer 371

* When bonds default they continue to trade as sharply reduced prices, attracting distressed debt investors who believe they will be able to recover more than the disperal of the company's assets than the price of the bond reflects

Answer 372

* In the 42 year period through 2011, 100% of AAA rated municipal bonds paid alll of the epexcted interest and principal payments From 1920-2009, only 0.9% of AAA rated coporate bonds default

Answer 373

Financial securities with a value that is reliant upon an underlying assert or a group of assets * Derivatives can be used to hedge, speculate or give leverage

Answer 374

* Over the counter derivatives have counterparty risks - the danger that one of the parties involved in the transaction might default; this is private and unregulated Exchange based derivatives are standardised and heavily regulated

Answer 375

* Agreement between 2 parties for the purchase and delivery of an asset at an agreed upon price at a future date; obliged to fufill * Can undwide (sell) before expiration * **Requires Margin Payments** * Market has high liquidity; exchange based

Answer 376

* Only over the counter; greatter counterparty risk but customised * Parties in a forward contract can **offset their position with counterparties** * To reverse you have to go to **same counterparty who has monopoly over you** * **No margin required**

Answer 377

* Used to **exchange one kind of cash flow with another** e.g. interest rate swap to switch from variable to fixed * Swaps can also be used to exchange currency exchange rate risk or the risk of default on a loan * swaps on the cash flow and the potential defaults of mortgage bonds led to the counterparty risk that caused the credit crisis of 2008

Answer 378

* Similar to futures to but buyer has no obligation to exercise the agreement * Options are used to hedge or speculate on future prices * Investors buy a put ( sell ) or call (buy) option at a strike price to buy at a date in the future - the expiration date Options have time decay; value of assets decline over time and severely reduce profitability

Answer 379

* Mitigate risk * Lock prices * Hedge * Can be purchased on margin to make less expensive

Answer 380

Buffet describes them as 'financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal' * Difficult to value because based on prices of another asset * Counterparty risks that are difficult to value * Sensitive to changes in amount of time to expiration, cost of holding asset and interest rates; hard to value * Leverage can have externalities e.g. 2008 * difficult for regulators to maintain oversight to the market since they are so hard to value

Answer 381

* Money Markets - assets w a maturity of less than a year e.g. Bonds, Interbank Lending Capital Markets - assets w a maturity of more than a year

Answer 382

* Theory that links growth in money supply, to growth in inflation * Embarced by Monetarists; it is the reason for inflation 1) M (money supply) 2) V (velocity of circulation; no. of transactions given an amount of money) 3) P (Avg. Price Level - Inflation ) 4) Q (Quantity of Goods/services sold) i.e. real gdp Fischer Equation: MV (what is bought ) = PQ ( what is sold ) P = MV / Q But V and Q are fixed in the long run or their changes are negligible Therefore only M can influence price

Answer 383

- Assumptions of V and Q same - Recession - Doesn’t hold * Big increases in money supply doesn’t translate due to liquidity traps

Answer 384

* Proprietary Trading - taking any excess capital and investing it to get a better rate of return * Market Making - a place where markets can be made; where you can buy shares + bonds but also issue bonds and shares Advisory Roles: * Mergers and Acquisitions: Companies might go through an investment bank for advice: when? Structure? Due diligence? Paperwork? Media? Regulation? * New Issues and IPO's Underwriting IPO's: buying all the shares up and then charging a higher price to sell to the market

Answer 385

most banks like hsbc and barclays are nor pure commercial or investment. Thus it makes them vulnerable to black-swan events to bring down the entire financial system

Answer 386

Shareholder's Funds + Retained Profit (reserves) - since you need to pay them back to the shareholder

Answer 387

reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial instiutions

Answer 388

* If any loans go bad, capital - specifically retained profit - will take the hit * Thus banks need enough capital to offset bad loans If there isnt enough capital, there will be an **unsustainable position** on the balance sheet where the **bank owes more than they own** which is bank failure/insolvency

Answer 389

There may also be a position where the bank can't meet short-term borrowing with short term assets ( Cash, reserves at BoE, Money at Short Notice (Near Money), Short term investments) therefore they are in a liquidity crisis and there will be a run on the bank; another form of bank failure

Answer 390

There may also be a position where the bank can't meet short-term borrowing with short term assets ( Cash, reserves at BoE, Money at Short Notice (Near Money), Short term investments) therefore they are in a liquidity crisis and there will be a run on the bank; another form of bank failure

Answer 391

Insolvency - unsustainable position on the balance sheet Illiquidity- unable to meet short term borrowing with short term assets

Answer 392

* Through frational reserve banking, new money is created by loans which comes back into the bank as the form of a deposit Money Multiplier equation comes from 1/reserve ratio

Answer 393

1. **Assymetric Information** - struggle to know how reliable the loan is 2. **Moral Hazard** - bank bailouts **£45.8 billion for RBS** 3. **Speculation and Market Bubbles** 4. **Market Rigging** - Libor 5. **Externalities** - opp. cost of bailouts

Answer 394

* financial institutions often have more knowledge so they can sell them products that they do not need e.g. PPI costed over £53 billion FInancial Crisis sub-prime mortgages

Answer 395

* Bailouts are a burden on the tax payer e.g. 2008 total bailout cost of £700 Billion * Profit maximisation can be contrary to social objectives e.g. Madoff fraud estimated around £65 billion

Answer 396

* individual workers take adverse risk in order to increase their salary e.g. Mortgage brokers gained from increased risk as the burden was shifted to investors * Central Bank is lender of last resort, some banks such as Credit Suisse are categorised as of structural damage to the economy

Answer 397

all trading in financial markets is speculative and this leads to the creation of market bubbles due to herd behaviour e.g. 2008, Dot.Com Bubble, Wall Street Cash 1929

Answer 398

* Group or individual collude to fix prices - insider trading e.g. Libor Scadal of 2008

Answer 399

$1,935 million if they were to fall by 1 percentage point instantaneously

Answer 400

Irish house prices rose 30% in just two years, but fell 35% when the housing bubble ended. 100% mortgages were common

Answer 401

The reform program focused on the elimination of the city’s major problems: overregulation and the widespread practice of old-boy networks. the concentration of power was focused on the big companies that took over long-standing firms Now, companies that are “too big to fail” dominate financial cities. This characteristic has turned financial centers fragile, as seen in 2008,

Answer 402

* **Market Bubble** - When a particular market sees a rapid increase in price * **Commodity bubble** e.g. price of gold, e.g. in the 1970s and 1980. * **Credit bubbles**- a rapid growth in consumer and business credit to finance higher consumer spending * **Economic boom/bubble**- AD grows faster than LRAS *

Answer 403

* Tulip mania of the 1630s. When the price of tulips rose to over **500 times their previous price** before collapsing when buyers stopped entering the market. * Dot Com Bubble * House Price Bubbble- Between 2000 and 2006, **house prices rose 80%** and house price to earning ratios rose above long-term averages. This was partly fuelled by a growth in mortgage lending to subprime customers

Answer 404

* **Irrational exuberance** investor buy assets because of strong psychological pressures which encourage them to ignore the fundamental value of the asset * **Herding behaviour**. * **Short-termism** * **Cognitive dissonance** – filtering out of the bad news and looking for views which reinforce their beliefs. * **Financial instability hypothesis**. The theory that periods of **economic prosperity cause investors to be increasingly reckless** leading to financial instability. * **Monetary policy**. Excess liquidity can more easily lead to bubbles because people need somewhere to put their money. e.g. Low IR 2000 --> fuelled 80% rise in house prices 2000-6

Answer 405

* stock market crashes don’t always cause a recession. e.g. **1987, the stock market crash didn’t cause any slow down in economic growth** * But 1929 one was a major factor to the Great Depression * Bubble in housing market is most damaging since it affects consumers e.g. housing crash of 1991 contributed to UK recession. The house price bubbles and bust were a strong factor behind recessions in Ireland and Spain. * Breaking bubbles in oil and commodities can help net importers

Answer 406

financial crisis are endemic in capitalism because periods of economic prosperity encouraged borrowers and lender to be progressively reckless Success breeds excess which leads to crisis Or Economic stability itself breads instability.

Answer 407

* Higher asset prices --> increrase confidence --> irrational exuberance --> speculatie lending --> Ponzi Borrowing to keep asset prices rising * Regulaters + Credit rating agencies get caught in irrational exuberance * Unsustainable and cannot be maintained, until stop rising and realisation that there isnt enough credit to meet repayments

Answer 408

point where the financial system moves from stability to instability. It is that point where over-indebted borrowers start to sell off their assets to meet other repayment demands. Can lead to a **balance sheet recession**

Answer 409

occurs when the private sector is focused on paying down debt and unwilling to borrow and spend, despite 0 IR In a balance sheet recession the banking sector is unwilling to lend because it needs to improve its balance sheet and increase bank reserves. Features - Liquidity Trap - Falling Asset Prices - Deflationary Pressure; falling asset prices and stagnant economy - Higher saving rates - low bond yields

Answer 410

Irrational exuberance refers to a situation where economic agents develop overconfidence in the economy and financial markets that is misplaced - Rapid asset price inflation - Increased risk willingnesss - Tendency to ignore potential for asset to fall - Growth in Speculative or Ponzi Lending

Answer 411

1. **Monetary policy** - IR, QE, OMO, Currency 2. **Banker to the Government** 3. **Lender of Last Resort** - providing liquidity to government + financial system e.g. Liquidity Assurance Scheme, BOfE buying government bonds after Truss disaster 4. **Printing Money** 5. **Regulation of Financial System** - maintaing reserve ratios + preventing Rigging

Answer 412

When the Federal Reserve buys or sells securities from its member banks, it's engaging in what's known as Open Market Operations. When the Fed wants interest rates to rise, it sells securities to banks. This is known as contractionary monetary policy --> reduces bank credit --> higher interbank rate

Answer 413

* In extreme scenarios OMOs may not be enough, the CB can create more money by extraordinary market operations in which it buys riskier longer govt securities or assets known as QE

Answer 414

Negative interest rates are designed to: * **Get banks lending** – they will pay the central bank interest for holding money on deposit with them * Bring about a **reduction in real interest rates** – which might in turn stimulate increased business investment * Negative rates are partly designed to cause an outflow of hot money thereby depreciating the exchange rate * * Main aim of negative rates is to lower the risks to output, profits, employment & wages from deflation

Answer 415

* lower bank profitability by narrowing the interest-rate margins between savings and loans rates – threat to their long run stability * Pension and insurance companies may struggle to meet their long term liabilities if long term interest rates (yields) are close to zero or below * May become dependent on ultra-low IR and cheap money

Answer 416

doubts about the effectiveness of quantitative easing – bank lending has struggled to recover since the end of the last recession. In the summer of 2015, QE in the UK totalled £375bn

Answer 417

* Liquidity from the central bank isn't without conditions or interest. More emergency the liquidity is the more stringent these conditions and interest BUT 1) Promotion of moral hazard 2) Banks are incentivised to take more risky deals and not hold sufficient liquidity 3) Regulatory Capture 4) Why should banks have this luxury and not other firms? e.g. 85,000 of individual savings back by Gov.

Answer 418

The FPC sets the level of the UK CCyB rate. If the Committee thinks risks are growing, it sets a higher UK CCyB rate. This means that banks are required to have an additional cushion of capital to absorb potential losses e.g. Current Rate is 1%, upcoming rate from 5th July 2023 will be 2%

Answer 419

The FPC uses it recommendation power to restrict the proportion of risky mortgages banks take on. This helps us to reduce the risks to the financial system from high levels of household debt, particularly if the economy suffers a downturn. For example, we have **put a limit on the amount of new mortgages that lenders can approve that are 4.5 times or more the size of a borrower’s income**.

Answer 420

* Doesn't require agreement of management/shareholders/creditors or recourse to taxpayers money * Ensure customers have access to services they require * Costs of failures fall on the shareholders + creditors of failed bank not taxpayers * Senior Executives take blame and are replaced * Transfer most important partss of bank to another bank * If no purchaser then can be transferred to bridge bank * Insure consumer deposits returned through the Compensation Scheme or transfered to another firm

Answer 421

* repairing balance sheet using the firms own resources e.g. losses of failing firm is absorbed by the shareholders * Creditors converted to shareholders; debt for equity swap

Answer 422

* Got HSBC to buy SVB's UK unit in a rescue deal * Avoids taxpayer being needed to protect deposits of over 10 billion

Answer 423

* Insured all consumer deposits * Took it over and utilised firm's assets to repay depositors; investors will not be made whole *

Answer 424

The Federal Reserve also announced a new lending facility that other banks can draw on to help them meet demands from depositors. Fed’s lending reduces the risk that banks’ paper losses, estimated to be above $600bn at the end of 2022, will crystallise into actual losses.

Answer 425

* US dual banking system meant things were lost in co-ordination * 96% of SVB deposits were not covered by the FDIC insurance * SVB was reliant on the Federal Home Loan Bank of San Francisco * Financial policies had begun to pile up from long-term fixed bond rates

Answer 426

* US dual banking system meant things were lost in co-ordination * 96% of SVB deposits were not covered by the FDIC insurance * SVB was reliant on the Federal Home Loan Bank of San Francisco * Financial policies had begun to pile up from long-term fixed bond rates

Answer 427

* 2018 rollback of the Dodd-Frank act, the biggest deregulatory effort since the 2007-08 financial crisis, exempted some banks with assets of up to $250bn from the Fed’s toughest supervisory measures, including stress tests as well as capital and liquidity requirements. * decision was predicated on the view that large regional banks were not “systemic” and “don’t need close regulatory and supervisory scrutiny”.

Answer 428

· the **routine provision of liquidity** · the **emergency provision of liquidity** to a bank that has cash flow problems or there is a systemic issue

Answer 429

* Requires high quality collateral * Premium over Bank Rate to access emergency funds with stringent conditions

Answer 430

1) Reserve Requirements 2) Discount Rate - rate at which commercial banks borrow from the central bank to meet their liquidity needs in the short-run 3) Open-Market Operations - buying and selling of gov bonds

Answer 431

Usually, an increase in the money supply will lead to a fall in interest rates. However, in a liquidity trap, an increase in the money supply may have no effect on reducing interest rates.

Answer 432

* Tripartite regulation; 3 major organisations 2 work for BoE and one with the treasury BOfE Financial Policy Committee (Macro-Prudential Regulation) Prudential Regulation Authority (Micro-Prudential Regulation Authority) Treasury: Financial Conduct Authority (also micro-prudential authority)

Answer 433

This identifies, monitors and acts to remove risks that affect the **stability of the financial system as a whole. ** The FPC is primarily responsible for macroprudential regulation.

Answer 434

· Focuses on ensuring the **stability of individual banks and other financial institutions**. It involves identifying, monitoring and managing risks that relate to individual firms. PRA and FCA are mainly responsible for microprudential regulation.

Answer 435

primary objective is to mitigate/remove systemic risk, secondary objective is to support the economic policy of the government. · The FPC has two main powers: it can issue **mandatory directions to the PRA and the FCA, and it can make recommendations to anyone, including the government** It has the power to make comply-or-explain recommendations to the PRA and FCA e.g. 2 annual stress tests from 2017. Liquidiity Assurance Scheme

Answer 436

· It sets standards and supervises financial institutions at the level of the individual firm to enhance stability * The PRA may require individual institutions to maintain **specified capital and liquidity ratios**. * However, the PRA does not seek to operate a ‘zero-failure’ regime. Instead, the PRA tries to ensure that if a financial firm fails it does so in a way that avoids significant disruption to essential financial services.

Answer 437

- Protect consumers + increase confidence in financial institutions/products by: 1) Supervising conduct of firms being legal ( no market rigging ) 2) Promote competition so consumers get better deals - deregulate to reduce red tape 3) Banning financial products against interest of consumers - stopping PPI scandal and getting over 50 million paid back 4) Banning or changing mis-leading adverts for financial products - loan sharks e.g. mandatory APR and terms and conditions

Answer 438

The Competition and Markets Authority report on UK banking in August 2016 said that “the older and larger banks, which still account for the large majority of the retail banking market, **do not have to work hard enough to win and retain customers and it is difficult for new and smaller providers to attract customers**.”

Answer 439

The Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, every year since 2011, identified a list of G-SIBs. Any financial institution that is a SIFI is considered "too big to fail" and according to regulators poses a serious risk to the economy if it were to collapse "Both Credit Suisse and Deutsche Bank are designated as systemically important financial institutions (SIFI): i.e. they are 'too big to fail.'"

Answer 440

Instability and confidence * Negative impact on business investment and paradox of thrift * High levels of debt and falling asset prices hit consumer wealth Instability and loss of trust * Higher interest rates on loans to businesses Instability and inequality * Evidence that poorer communities and families are more vulnerable during periods of financial stress/recession * Policy response of ultra-low interest rates hits real incomes of savers

Answer 441

a framework of agreements to prevent something like the GFC ever happening again. Only recommendations so no power but every developed nation adopted them apart from US which has a strong community banking lobby

Answer 442

1. Cash Ratio 2. Liquidity Ratio 3. Reserve Requirements

Answer 443

cash assets/current liabilities

Answer 444

= short term current assets/ short term current liabilities Basel Reccomendation --> 1 Jan 2015 60% and a 10% increase each year until 2019 to reach LCR

Answer 445

100% liquidity cover to liabilities owed in 30 days or less

Answer 446

* Fraction of deposit that must be held at the BOE * Prevent liquidity crisis FED puts 10% reserve requirement

Answer 447

1. Capital Ratios 2. Leverage Ratio

Answer 448

= Capital / Loans (can be specified) * Intention is to prevent insolvency + thus bank failure/systemic risk * Basel Reccomendation is 8% * However its **possible to specify which loans are included** e.g. GFC used capital ratio that didn’t include 'safe' loans including mortgages Unfavoured

Answer 449

= Capital/ Loans + Long Term Investment **Includes all loans ** * Intention is gains to prevent insolvency and thus … Basel Recommendation of 3% minimum

Answer 450

1)** Ban Market Rigging with strong enforcement** Less market rigging/collusion which harms consumers, businesses and other financial institutions 2) **Prevent sale of unsuitable products to consumers e.g. PPI** Protect consumers from products with excessive risk, charges + limited benefits ** 3) Maximum Interest Rates** Prevent consumer exploitation whilst **preventing excessively risky lending** 4) Deregulation More competition --> lower IR on borrowing and a higher IR on savings 5) Deposit insurance - up to £85,000 Protect consumer deposits in case of Bank Run --> Increases trust 6) Ring fence commercial banking away from investment banking Lowers systemic risk e.g. Barclays split into commercial and investment 7) Set Limits on Bank Lending 8) Liquidity Assurance with conditions and punishments

Answer 451

1) Moral Hazard - liquidity assurance creates bad incentives 2) Regulatory Capture - regulation is weakened by those who see through the industry's eyes rather than the govt. 3) Assymetric Information - regulator always one step behind in product development - time lag 5) Unintended Consequences - deregulation of some can be dangerous for competition and systemic risk. Maximum interest rates; excess demand in the market, encouraging bad borrowers and discouraging lending to reduce investment 6) Administration + Enforcement costs - PRA budget of over 600 million

Answer 452

When Timothy Geithner was FED president became unusually close with the scions of Wall Street banks. Geithner engineered the New York Fed's purchase of $30 billion of credit default swaps from American International Group (AIG), which it had sold to Goldman Sachs, Merrill Lynch, Deutsche Bank and Société Générale. By purchasing these contracts, the banks received a "back-door bailout" of 100 cents on the dollar for the contracts. Had the New York Fed allowed AIG to fail, the contracts would have been worth much less, resulting in much lower costs for any taxpayer-funded bailout.

Answer 453

i) Balance needed to **protect against systemic risk but to maintain bank profitability** ii) Regulation should promote **equity without damaging efficiency** iii) Costs vs Benefits; are the **costs of regulation greater than the benefits?**

Answer 454

Clearing Banks - Llyods, RBS, HSBC, Barclays and Santander FCA reported that 77% of PCA market, 85% of business current account and 90% of business loans

Answer 455

* **Current Account Switching Service** - launched in Sept 2013 to ease barriers * Authorisation Procedures for new banks, **New Bank Start-Up Unit** * Sterling Monetary Framework for all banks in 2013- provide stability and liquidity assurance * British Business Bank- nov 2014 for finance for SME lending

Answer 456

Metro Banks now has assets of over 20 billion

Answer 457

1. **Capital Expenditure** 2. **Current Expenditure** 3. **Transfer Payments**

Answer 458

This is government spending that increases the capital stock of the economy (Increasing LRAS)

Answer 459

This is government spending on items that are recurring and only lasts a limited time e.g. spending on public sector wages

Answer 460

payments from the government to individuals, represents a redistribution of income in society e.g. pensions, welfare payments

Answer 461

1. **Real government spending** – Spending levels adjusted for inflation. 2. **Government spending as a % of GDP** – Government spending, as a share of national income.

Answer 462

Government spending as a % of GDP rose sharply from 2000 to 2022, with a peak in 2020/21 due to the Covid Pandemic.

Answer 463

government spending also correlates to UK public sector receipts (mostly tax revenue). There was a prolonged fall in tax revenues as a % of GDP from 1981 to 1993, which has since been reversed.

Answer 464

1. **More investment in education and infastructure** 2. **Redistribution** 3. **Fiscal Policy** - in rrecession can be effective to stimulate economy 4. Crowding in

Answer 465

1. **Higher taxes create disincentives** for work/investment 2. **Public Sector lacks efficiency** from no profit motive 3. **Crowding out resources** from the private sector 4. Vested interests push governments to inefficiency e.g. lobbying 5. **Kind of Spending**- welfare payments may be detrimental to efficiency 6. Spending doesn't have to be inefficient if it utilises the private sector

Answer 466

1. Healthcare (20%) 2. Pensions (17%) 3. Welfare (13%) 3. Education (10%) 4. Interest (8%) 5. Defence (6%) 6. Transport (4%)

Answer 467

* Developing: low tax revenue due to avoidance, inefficiency and little wealth to tax--> Can't provide much through spending * Developed: demand more services frrom governments ( income elastic )

Answer 468

* Huge increases for welfare payments + Bailouts * but induced 2010 austerity to rweduce debt

Answer 469

Europe and Japan will see pressure on government spending due to aging populations meaning larger pension bills and higher levels of care needed.

Answer 470

* infrastructure reduces costs for businesses * Education increases human capital --> increased productivity * Healthcare reduces the number of days sick * Crowding in on frontier * Free Market argues gov. spending is wasteful

Answer 471

Gov. fiscal multiplier of 1.5-8 according to IMF

Answer 472

* Improve social welfare (correcting mkt failure + providing public goods) * Reduce absolute poverty through benefits + Healthcare but needs funding by higher tax - debt so crowding out

Answer 473

government will be inefficient at providing goods and services and will have a negative disincentive impact on workers, meaning that output overall is reduced and so living standards fall. government principal agent problem since they make decisions on behalf of the people who may have spent that money differently. As a result, there is a loss in welfare and so a fall in living standards.

Answer 474

a process where an increase in government spending leads to a fall in private sector spending.

Answer 475

If the government increases it's spending – say through selling bonds – The demand for money will increase, which, ceteris paribus, raises interest rates. At higher interest rates, both consumer spending and investment spending are likely to fall. The aggregate effect on the economy is that financial resources are diverted from private firms to be used by the public sector.

Answer 476

Initially, via a multiplier effect, national income increases, but as a result of the government selling securities in the financial markets, the **demand for scarce loanable funds increases.** This **drives up interest rates**, which causes a contraction in the demand by the private sector for investment goods (capital) as well as reducing the demand for consumer goods. This, in turn, leads to a fall in GDP.

Answer 477

a relative increase in the public sector may push up wages in order to attract workers from the private sector. The increased demand for labour reduces unemployment and ‘tightens’ the labour market, leading to possible shortages of labour available for the private sector use as well causing upward pressure on wage levels across the economy.

Answer 478

that financial and real resources are ultimately scarce, and if one sector of the economy increases its use of these resources, fewer are available for use in other sectors.

Answer 479

This means that attempts to stimulate an economy by increasing debt-financed government spending will not be effective because investors and consumers understand that the debt will eventually have to be paid for in the form of future taxes. The theory argues that **people will save based on their expectation of** **increased future taxes** to be levied in order to pay off the debt, and that this will **offset the increase in aggregate demand** from the increased government spending.

Answer 480

an increase in government spending will lead individuals and organisations to **expect interest rates to rise** in the future, they will save more in order to pay higher interest rates.

Answer 481

it may be a weak effect, this depends on the various elasticities that exist in the relevant markets. if the supply of loanable funds is elastic and the demand for capital is inelastic, the impact of higher interest will be relatively small.

Answer 482

Government spending leads to an increase in private spending; a ‘crowding in’ effect

Answer 483

1. Frontier technology projects have **extremely high fixed** costs so by letting the public sector fund the research, it allows the private sector to realise higher profits. 2. **“Spillover effects”**, where new technologies find different applications in the private sector. GPS, for instance, was first developed to help missiles find their targets 3. **Credit constraints on the private sector**, where a project is difficult to fund without government support due to, say, an economic downturn.

Answer 484

the potential outcomes from speculative research and development are inherently unknowable, which makes a new project impossible to justify commercially.

Answer 485

a process where an increase in government spending leads to a fall in private sector spending.

Answer 486

If the government increases it's spending – say through selling bonds – The demand for money will increase, which, ceteris paribus, raises interest rates. At higher interest rates, both consumer spending and investment spending are likely to fall. The aggregate effect on the economy is that financial resources are diverted from private firms to be used by the public sector.

Answer 487

Initially, via a multiplier effect, national income increases, but as a result of the government selling securities in the financial markets, the **demand for scarce loanable funds increases.** This **drives up interest rates**, which causes a contraction in the demand by the private sector for investment goods (capital) as well as reducing the demand for consumer goods. This, in turn, leads to a fall in GDP.

Answer 488

a relative increase in the public sector may push up wages in order to attract workers from the private sector. The increased demand for labour reduces unemployment and ‘tightens’ the labour market, leading to possible shortages of labour available for the private sector use as well causing upward pressure on wage levels across the economy.

Answer 489

that financial and real resources are ultimately scarce, and if one sector of the economy increases its use of these resources, fewer are available for use in other sectors.

Answer 490

This means that attempts to stimulate an economy by increasing debt-financed government spending will not be effective because investors and consumers understand that the debt will eventually have to be paid for in the form of future taxes. The theory argues that **people will save based on their expectation of** **increased future taxes** to be levied in order to pay off the debt, and that this will **offset the increase in aggregate demand** from the increased government spending.

Answer 491

an increase in government spending will lead individuals and organisations to **expect interest rates to rise** in the future, they will save more in order to pay higher interest rates.

Answer 492

it may be a weak effect, this depends on the various elasticities that exist in the relevant markets. if the supply of loanable funds is elastic and the demand for capital is inelastic, the impact of higher interest will be relatively small.

Answer 493

Government spending leads to an increase in private spending; a ‘crowding in’ effect

Answer 494

1. Frontier technology projects have **extremely high fixed** costs so by letting the public sector fund the research, it allows the private sector to realise higher profits. 2. **“Spillover effects”**, where new technologies find different applications in the private sector. GPS, for instance, was first developed to help missiles find their targets 3. **Credit constraints on the private sector**, where a project is difficult to fund without government support due to, say, an economic downturn.

Answer 495

the potential outcomes from speculative research and development are inherently unknowable, which makes a new project impossible to justify commercially.

Answer 496

● In most cases, where government spending is high, levels of tax must be high --> disincentive effect on work + investment but. ● Oil-rich countries tend to be an exception, where revenue from oil can pay for most of government spending.

Answer 497

● Spending should increase equality as it leads to redistribution and helps to provide a minimum standard of living for the poorest in society. e.g. Northern Powerhouse, A Levels free after 18, pupil premium scheme * But can help the rich disproportionately e.g. QE which can also harm poorest through higher asset prices

Answer 498

1. Correct market failure (public goods, externalities, info failure) 2. Prove more equity

Answer 499

Inefficiency of government (gov. failure)> market failure

Answer 500

No, depends on magnitude and context e.g. Nordic Countries have high taxes + generous welfare benefits, activity rates are also very high while Nordic countries have similar rates of economic growth as the USA or the UK

Answer 501

where the level of gov spending > tax revenue

Answer 502

* Budget deficits to fund specifically current expenditure is seen as undesireable as future generations are paying for current spending * However borrowing for ccapital expenditure or transfer payments (benefitting people directly today) is seen as fair because futurre generations will benefit from this investment - **inter-generational equity**

Answer 503

1. **Incomes** 2. **Demographics** 3. **Expectations** - esp in democracy 4. **Business Cycle** 5. **Interest on debt** 6. **Inflation**- raise MNW, UE Benefits, Pensions 7. **Political Priorities** -political churn, election 8. **State of Global Economy**

Answer 504

Borrowing **should only be used to finance expenditure on infrastructure** which will benefit the UK in the longer term, and is **not to be used to finance current spending/debt**, as taxes should cover current spending.

Answer 505

· The government needs to gain better control of the budgets. · In the longer term, the increase in **economic activity gained by the infrastructure investment should pay off the extra borrowing.** · The chancellor Gordon Brown also has a sustainable investment rule. This states **national debt should always be less than 40% of GDP**.

Answer 506

* **Recession** --> rising UE * Decrease in consumer spending * Increase in **inactivity ** * Use of **expansionary fiscal policy ** * Increase in interest rates * **Ageing population**

Answer 507

* To increase AD when economy operating below PPF * **Automatic stabilisers** cushion fall in AD * Fiscal stimulus will **improve budget deficit in LR from higher growth and higher tax revenue**

Answer 508

* **Reducing debt** --> helps to keep UK taxes lower + reducing opp. cost * Shrinking state encourages private sector growth * ** increases investor confidence** in stability – attracts FDI into the UK

Answer 509

* Austerity is self-defeating --> lower tax revenue * Infrastructure investment will increase AD and LRAS * Wrong to cut spending when economy is in liquidity trap e.g. UK and USA response to GFC

Answer 510

Increased government borrowing may lead to higher demand for loanable funds and a rise in market interest rates e.g. on bonds. This might increase borrowing costs for private sector businesses.

Answer 511

fiscal multiplier measures the effect of a £1 change in spending or a £1 change in tax revenue on the level of GDP

Answer 512

IMF research report published in 2014, **“the literature finds that (government) spending multipliers tend to be larger than revenue multipliers.”** * This would be supported by Keynesian theory, which argues that tax cuts are less effective than spending increases in stimulating the economy * The IMF also found that fiscal multipliers are **generally larger in downturns** than in expansions – this supports the Keynesian view of using fiscal stimulus when conventional monetary policy is found to be ineffective

Answer 513

This occurs when **those on higher income levels pay a higher % of their income in tax ** e.g. the UK has a top rate of 45% on marginal income over £150,000.

Answer 514

This occurs when **an increase in income leads to a smaller % of their income going on the tax** e.g. excise duties and VAT take a bigger % of low income earners.

Answer 515

**takes same % of income**, whatever income band.

Answer 516

taken from people’s earnings directly e.g. income tax and NI.

Answer 517

Paid by firms selling goods e.g. VAT is included in final price consumers pay.

Answer 518

1. **Higher revenues** - but laffer curve 2. **Tax Evasion** - might go work in another country 3. **Work Incentives**- may reduce incentive to work or income effect means want to work more 4. **Redistribution** 5. Lower AD - cetirus paribus 6. **Improve X-M**- lower spending on imports 7. **FDI** - 'race to the bottom' e.g. Apple Ireland 0.005%

Answer 519

* Disincentives? economists suggest evidence is mixed. o income effect encourages them to work more * depends how tax revenue is used. If income tax revenue is invested in improved infrastructure it can the benefit long run productive capacity. If income tax revenue is needed for welfare payments, there will be no increase in productive capacity.

Answer 520

* **Cost-push inflation** However, this price rise will be a one-off increase and, **after 12 months, the price rise will no longer count toward inflation.** * **Fall in Output** - depends on other factors affecting AD and AS, unlikely to cause a fall in GDP on its own * **Social Efficiency** * Changed easily and less likely to distort work incentives

Answer 521

* Countries may seek to encourage foreign direct investment (FDI) through offering lower tax rates. e.g. Ireland 12.5% has attracted many big multinationals to invest, through low tax rates. * The problem with tax competition is that it can encourage countries to keep trying to offer lower tax rates to attract big companies. This leads to countries having to **increase tax on consumers and workers.**

Answer 522

Direct Taxes affect AD directly due to lower consumption Indirect taxes affect SRAS

Answer 523

* The standard rate of VAT has been 20% since 2011 Reduced rate of 5% is applied to these items ○ Domestic fuel and power, women’s sanitary products, children’s car seats, contraceptives, certain residential conversions and renovations Zero-rated VAT on these items: ○ Food, Construction of new dwellings, Domestic passenger transport, Books, newspapers and magazines, Children’s clothing, Water and sewerage services, Drugs and supplies on prescription, Supplies to charities, Cycle helmets

Answer 524

* **Consumer spending** Cuts in VAT or income tax to boost demand for goods and services * **Business investment** Lower corporation tax to increase investment and tax incentives for R&D * **Lower employment taxes** Reduced national insurance so that businesses create more jobs * **Lower fuel / carbon taxes** Lower costs for businesses, less inflation and higher profits

Answer 525

* **Low confidence** – tax cuts likely to be saved rather than spent * Businesses might choose to invest overseas instead * Skills shortages might limit new job creation * Possible **conflicts with environmental policies** e.g. 91p on pound for investment in oil extraction * Lower Revenue multiplier

Answer 526

tax rate cut could lead to an increase in tax revenue, or a decrease in tax revenue, depending whether you have already passed the ‘optimal tax rate’ (whatever % that may be)

Answer 527

* Many people are on fixed hours / zero hours contracts – so tax rates have little bearing on work incentives * Tax rates not the only factor affecting work incentives – we must also consider the impact of the benefits system * Where is the optimal point? Could work in either way

Answer 528

* Levy estimated to raise £8 Billion to provide funding for the Energy Price Guarantee and Energy Bill Support Scheme * BP earned record **£7.1 billion** in just 3 months during summer last year * Shell CEO said that they are not planning to stop any future projects

Answer 529

£700 million investment in Sizewell C alone will be enough electricity to power 6 million houses for over 50 years e.g. budget invested £20 billion in carbon capture

Answer 530

**firms have the ability to claim a 91p tax saving for every pound invested** in oil and dgas extraction that make expansion revenue neutral *** Shell went public to say it did not pay any windfall tax in 2022,** partly because its North Sea investments can be set against profit

Answer 531

* TotalEnergies announced that is it cutting planned investments in the North Sea by a quarter is a more explicit response

Answer 532

This is the **annual difference between net spending and net taxation**. It is the amount the government needs to borrow in a particular year. It is referred to as the **budget deficit**.

Answer 533

This is the **total (cumulative) amount of debt that the government owes the private sector; this is approximately £1,487.7 billion (80.4% of GDP)** as at April 2015.

Answer 534

During a recession, it is likely we will see a rise in government borrowing, due to cyclical factors. 1. With lower growth, **tax revenues will be lower.** 2. **Government spending will increase**. In a recession, the government will need to spend more on unemployment benefits and income support benefits.

Answer 535

If the government has a budget deficit, when the economy is growing at its long run trend rate, this shows the underlying, structural deficit

Answer 536

An automatic way to blunt off the worst extremes in the economic cycles and buy time for discretionary government policy

Answer 537

1. **Welfare Benefits** In Recession Government spending automatically increases through transfer payments, this increases AD 2. **Progressive Income Tax** in a Boom, Higher incomes makes workers be pushed into another tax band so tax regulates AD

Answer 538

* This is a **deliberate effort by the government to influence aggregate demand and the rate of economic growth.**

Answer 539

1.**State of economy** . 2. **Government spending decision/Fiscal Policy** - if government wants to spend without increasing taxes 3. Political Priorities 4. Efficiency of tax collection 3. **Demographics** an ageing population needs higher spending 4. **Rules on borrowing levels** e.g. Eurozone obliged to keep structural borrowing less than 3% of GDP. 5. **Interest Rates** --> higher increase debt

Answer 540

1) **Large budget deficits over 3% in previous years** will increase national debt as a proportion of GDP 2) If the **economy has a high growth rate, this will tend to reduce national debt as a % of GDP** 3) **Willingness to invest**. A government may decide to borrow, to fund investment decisions. 4) **Unexpected events** 5) **Willingness of private sector to buy government debt.** e.g. Japan debt over 255% of gdp

Answer 541

1. **Higher debt interest payments** 2. **Increased AD** 3. In future may have to do **austerity** to fix debt 4. May have to increase **interest rate** to attract investors to bonds 5. **Financial Crowding Out** 6. **Loss of confidence** --> struggle to attract borrowers 7. **Inflation** e.g. Hermany in 1923 8. Loss of intergenerational equity 9. Reduced Credit RRating e.g. Greece drop to CCC 10. May lead to foreign currency crisis e.g. Sri Lanka

Answer 542

1. Recession; by **borrowing, the government is compensating for the rapid rise in private sector saving**. The government is helping make use of unemployed resources. 2. Investment. If the government **borrows to increase spending on infrastructure spending**, such as better roads, this can increase productivity and enable a higher rate of economic growth and more tax revenues in the future. 3. **Bailout key industries** prevent them going bankrupt and causing a possible loss of confidence in the banking system

Answer 543

Total amount of money that the government needs to borrow in order to fufill its spending plans, the difference between spending and revenue

Answer 544

A structural surplus occurs when at the peak of the boom, there is an actual fiscal surplus whilst a structural balance occurs when at the peak of the boom, the actual fiscal balance is 0.

Answer 545

A structural surplus occurs when at the peak of the boom, there is an actual fiscal surplus whilst a structural balance occurs when at the peak of the boom, the actual fiscal balance is 0.

Answer 546

If the government has a structural deficit, it is likely that national debt will grow over time as the government has to consistently borrow money to finance spending. For this reason, it is argued that structural deficits need to be eliminated but this is difficult since it is impossible to know what part of the deficit is structural and what part of it is cyclical , just as it is impossible to know the size of the output gap.

Answer 547

But in 2013 UK had their credit rating downgraded as agencies were concerned about the impact of sluggish economic growth on the public finances, yet bond yields remained at record lows for a number of years

Answer 548

e.g. yield on 10 year UK government bonds surged from over 3% to over 4% in a matter of days

Answer 549

Lawson Boom: Gov tax cuts in 1987 led to house prices rising by 25% per year in 1988-89 and a marginal propensity to consumer greater than 1

Answer 550

vacancies are greater than those unemployed

Answer 551

In 2011, the Swiss Franc experienced a rapid rise as investors sought to buy Swiss Francs. Interest rates in Switzerland were not particularly high, but investors saw Switzerland as a safe haven from the Eurozone difficulties. Therefore, these hot money flows went from the Eurozone to Switzerland.

Answer 552

1. **Decline in TU membership** 2. **Legilsation**

Answer 553

25% from 1995-2019

Answer 554

secret ballots, result must include all eligible employees, notice period needed, outlawing of compulsory membership, right for employees to sue e.g. Stealth ban on ambualnce strikes by requiring higher minimum level of service

Answer 555

* Real Earnings for public sector workers has fallen since 2009 becaause of apy freezes continuously

Answer 556

* Real Earnings for public sector workers has fallen since 2009 becaause of apy freezes continuously

Answer 557

unpaid fiscal deficits i.e. accumulation of fiscal defeicits yet to be repaid

Answer 558

* Loss of credit rating * Crowding out * Inflation (net injection into the economy) * Lower confidence in the economy --> reduce FDI * Needd for *fiscal austerity*

Answer 559

* Low worldwide inflationary expectations * Improved tech reducing cost of manufactured goods * Weak Commodity Price Growth

Answer 560

* Rising oil and gas prices * Ukraine war disrupting gas/energy and food supplies. *** Lingering supply side issues from Covid lockdowns** and impact on the price of shipping. * Strong demand in US, with **economy close to overheating.** * Central Banks leaving **interest rates at a low level.**

Answer 561

* Banks didn’t have money to lend. * Confidence was very low, due to the banking crisis * Time lags. Cutting interest rates can** take up to 18 months to have an effect** e.g. people on fixed rate mortgages don’t notice straightaway. * Fiscal policy was tight, with governments pursuing austerity measures to reduce budget deficits. * Cost push inflation from the 2008 oil price rise made some Central Banks concerned about inflationary pressures.

Answer 562

* **Environmental laws**. regulate the amount of CO2 produced by firms. * **Monopoly power** prevent the abuse of monopoly power and promote competition. * **Treatment of workers / monopsony power** transnational companies move labour intensive industries to countries with the lowest wages and lowest degree of labour protection (“sweat shop syndrome”). * **Transfer pricing** to avoid paying tax or to reduce competitiveness in certain industries e.g. selling petrol at high prices to discourage competition in petrol retail.

Answer 563

1. **Global Co-operation**- difficult to get countries to agree on legilslation; differing carbon markets 2. **Different Standards**- hard to implement universal standards of working practices 3. **Poor Information**- difficult for governments to know how much regulation is needed or hot to regulate 4. **Individual Governments** - small countrries may earn less than TNC's e.g. Mozambique 5. **Intense Lobbying**

Answer 564

1. Inabillity to control **external shocks** 2. **Unexpected events** 3. **Inaccurate information/forecasting** 4. **Risks and uncertainities** 5. **Uncertainty how people will respond**

Answer 565

By 2015, the fiscal deficit as a percentage of GDP was similar in the US and UK. While US used expansiony fiscal policy + automatic stabilised The UK used austerity

Answer 566

1. Progressive Tax + Inheritance Tax (reduce wealth) but laffer curve/disincentives 2.Benefits and Transfer e.g. Social Security + NI make up **30% of UK G** 3. Provide access to ensure **equal opportunities**; healthcare, education, pupil premium 4. Attempt to reduce wage differential; NMW, TU

Answer 567

The law of diminishing marginal utility suggests that redistribution increases total utility and therefore is a better allocation of resources e.g. The high growth rates of Nordic countries, like Denmark, where redistribution is high suggests that it is not negative for economic growth

Answer 568

There is no simple relationship between the supply of money and inflation and it can be argued that central banks don’t have complete control over the money supply because they **cannot control the ability of the financial system to create credit.**

Answer 569

1. The growth of real output is the same as the growth of the money supply 2. Increase in bank reserve ratios (banks didnt want to lend) 3. Hard to Measure Money Supply 4. Changes in velocity of Circulation 5. Liquidity Trap

Answer 570

* Supply Side measures to improve productivity + flexiblity of labour * **Tight fiscal policy** --> low inflation * **Encourage competition** to force firms to be efficient * **Education** to enhance human capital * **Deregulation** e.g. UK 'Red Tape Challenge' to simplify regulation * **Devaluation** * Sign **FTA**

Answer 571

* The government could use expansionary policy to reduce the impact of a fall in GDP or they could use deflationary policy to reduce the impact on inflation * Invest in long term to reduce vulnerabaility * Appreciate exchange rate

Answer 572

* Expansionay fiscal policy, crowd in banks * Bailouts to restore confidence * Resolution and protecting deposits

Answer 573

* Illegal for TNCs to use bribery or corrupt practices anywhere in the world * TNCs have to set up with a joint company + local partner * Governments use import contracts with TNCs

Answer 574

● In the UK, companies which don’t allocate sufficient profits here are **challenged by HMRC and this has led to billions of pounds earnt in taxes** . ● The **Transfer Pricing Guidelines were introduced by the OECD in 1995** , providing guidelines on cross-border services, intangibles, cost contribution arrangements and advance pricing guidelines; these were modified in 2010. * They aim for the price to be the same as if the two parties were independent of each other; the ‘arm’s length’ principle .

Answer 575

the ‘Dutch sandwich’ and the ‘double Irish’ , where costs, revenues and profits are routed through Ireland, the Netherlands or Luxemburg and then sent to a tax haven like the Bahamas or the Cayman Islands. It is suggested that for **every £1 gained in extra taxes by Luxemburg, other countries are collectively losing possibly £1000 in tax revenues.**

Answer 576

* **World demand shocks**. These are associated with a rise or a decline in spending and confidence abroad. * **World supply/price shocks**. These affect the global supply and prices of goods and services. * **World financial shocks**. These occur in the global financial system, such as increased stress in the international banking system or financial markets Not all shocks are necessarily negative- can be positive ones

Answer 577

* Global commodity prices * **Inflation rates** in trading partners * **Economic cycles** of trading partners * Impact of changes in international **interest rates** * **Fluctuations in global equity** and bond markets * **Longer term shifts in competitiveness**

Answer 578

* Global Financial Crisis (GFC) * Volatile Commodity Prices * Currency volatility and policy changes e.g. devaluation * Extreme weather events Geo-political uncertainty & terrorism

Answer 579

***Floating exchange rates** (scope for a depreciation) * Freedom to set / adjust monetary policy when conditions change * Geographically and occupationally mobile / flexible labour force * Strong non price competitiveness of domestic businesses * A diversified economy (not over reliant on a few sectors) * Strong fiscal position (stabilisation funds)

Answer 580

1. Supply Shocks 2. Demand Cost 3. Financial Shocks - credit to fund normal operations 4. Policy Shocks 5. Technology Shocks; affect productivity

Answer 581

When a company is developing IP or creating IP over time—such as marketing—it needs to keep careful track of its transfer pricing, she said. The IRS’s $3.4 billion victory against Coca-Cola Co. signals that the battle with multinationals over how to account for profits from intangible property, like brand trademarks, isn’t going away.

Answer 582

Apple; few hundred people in Ireland were a real source of it's profits and it deal with **Irelands govt leading it to pay a tax amounting to 0.005% of its profit **

Answer 583

Global minimum tax rate of 15% signed by over 136 countries

Answer 584

the increase in GDP from printing money is a money illusion. – True you have more money, but **if everything is more expensive, you are not any better off**

Answer 585

* Inflation would reduce the value of bonds * People will no longer hold bonds and sell them --> lower price --> greater yields so more debt for gov. * If government print too much money, investors will not trust the government and it will be hard for the government to borrow anything at all e.g. Zimbabwe 98% daily inflation

Answer 586

1) Very **low interest rates** 2) **Low inflation** 3) Slow/**negative economic growth ** 4) **Preference for saving** rather than spending and investment 5) Monetary policy becomes ineffective in boosting demand

Answer 587

there was a large increase of 7% in M0 but it could not stop the decline in M4 e.g. at start of the credit crunch, there waas a sharp rise in the UK saving ratio from 4.2% in 2008 q1 to 7.4% 2010 q2 Inelastic demand for investment (MEC) so firms are not tempted by lower interest rates

Answer 588

* Quantitive Easing - policy to create money and reduce yields on bonds * Helicopter money - giving money directly to the people Expansionary Fiscal Policy

Answer 589

1. **Stock Market of 1929**- loss of 40 billion in 2 months 2. **Bank Failures**- 3,700 collapsed in 1930 3. **Reduction in Purchasing Across the Board** - UE rose above 25% 4. **American Protectionism** - Smoot-Hawley Tariff; world trade fell by 2/3 5. **Drought Conditions** - the Dust Bowl drought

Answer 590

Major tax evasion scheme of cum-ex trades costed governments over **over 150 billion euros from 2000-2020**

Answer 591

* HSBC hit with £64 million fine for serious weaknesses in ant-money laundering control * Santander fined 107.8m million over serious and persistent gaps in it's anti money laundering control that opened the door to financial crime

Answer 592

caused fall of Boden-Kredit Anstalt; Austria's most important bank

Answer 593

* Thus the FED instigated the rapid expansion * When the bubble burst the FED **cut money supply by a third** causing severe liquidity problem

Answer 594

* Thus Hoover resorted to the Smoot-Hawley Tariff Act 1930 that imposed huge duties on 880 foreign products causing **international trade to decline by 66% by 1934**

Answer 595

* Opened up trade routes and reversed price/wage controls * In first 12 months after private investment rose from 10.6 billion to $30.6 billion

Answer 596

2. **Housing Bubble**; prices faster than inflation and incomes; countries like Ireland and Spain experienced booms 3. Also a rise in oil prices that caused **cost-push inflation**, made Central Bank reluctant to cut interest rates 4. Fall in housing price may many cut back on spending as they couldn’t rely on mortgaging to gain equity withdrawal 5. **Euro Crisis 2010-12** a rise in bonds yield partly due to recession let to a period of austerity

Answer 597

* 2007/8 credit crunch --> negative growth and fiscal severity creating a double dip recession in EU * UK did not catch up to lost output; 2012 real GDP lower than 2008

Answer 598

1. **Balance Sheet recession**: the UK saving rate rose from 0-7% as banks focused on paying back debt 2. **Shortage of Credit**: Banks were short of cash so didn’t lend 3. Eurozone Crisis + Austerity 4. Productivity Crisis

Answer 599

· Ireland, Portugal, Italy had overspent and required bailouts to prevent default · Spain was impacted by its banks being overexposed to the real estate bubble; spain bailed them out but had to ask the EU for help · Germany wanted to enforce austeirty but this made it harder to pay the debt

Answer 600

Countries in the south ran **uncompetitive large current account deficits** had to restore this with internal devaluation as they had no central bank to avoid any liquidity shortages. Internal devaluation involved **lower wages, increased competitiveness and supply side reforms** Causing unemployment in Spain, Greece and Portugal above 20%

Answer 601

· When a country isnt able to pay its bills · when country cannot get a low IR from lenders, lenders require higher and higher yields · This causes rollover risk as costs get higher to refinance * Investors' fears become a self-fulfilling prophecy

Answer 602

* Greece 12.7% GDP more than quadruple than 3% * Greece had to accept loans from the EU with austerity * Caused Greece to default and IMF demanded a bigger austerity creating a downward spiral

Answer 603

* GDP ratio was 160% by 2012 and bondholders accepted 25 cents on dollars * UE rose to **27.9% in 2013**

Answer 604

· Dollar position and Central bank make it unlikely to default * Political positions force potential defaults as parties can refuse to raise the debt ceiling e.g. 2013 Republicans demanded Obamacare to be defunded to raise the debt ceiling, leading to US national **debt:GDP going over more than 100%**

Answer 605

· Iceland took on $62 billion of bank debt when it **nationalised the 3 largest banks despite them growing to 10x GDP** · Its **currency plummeted by 50% the next week and inflation to soar**

Answer 606

* Countries runs out of a foreign currency to pay debt * Asian Financial Crisis of 1997 where economic reliant on FDI struggled to meet debt repayments when they lacked it

Answer 607

- **Floating Exchange Rates**; avoid currency crisis by ensuring that the market is always setting the price as opposed to fixed exchange rates * **Avoid monetary policy that fights the market**, accept inevitability of currency outflows and use investment policy to attract FDI

Answer 608

· Unsustainable bop position means **countries have a large difficult in borrowing to make up the difference** · Causes a a fall in FX reserves as the country can no longer attract sufficient capital flows to finance the deficit · Can** devalue currency or slow down** imports through a recession e.g. Sri Lanka

Answer 609

**At least 40% of bakeries in the Nigerian capital of Abuja shut down** after the price of flour jumped about 200%.

Answer 610

Goldman Sachs predicts 2% it’s an anemic figure for China, down from a jaw-dropping 8.1 percent last year

Answer 611

World growth to slow to 2.2% in 2023

Answer 612

World growth to slow to 2.2% in 2023

Answer 613

* The UK companies are relatively quick to become public limited companies (PLC), where anonymous shareholders often put pressue on managers to deliver quick returns in the forms of dividends * In Germany while there are plenty of PLCs, there are far more medium to small sized family run Companies known as **Mittelstand** * German state has actively supported the Mittelstand through promoting sources of finance, KfW Development Bank; the organisation has now loaned more than **£1.3 trillion to various buisnesses**

Answer 614

* State Aid is less than 0.5% of GDP + to encourage companies to 'stand on their own feed' * State aid and spending in France is double what it is in the UK on a per capita basis and 3 times greater in Germany * 'Full Expensing' + 'Super Deduction'

Answer 615

* UK companies invest less time in training up their middle-managers, leading to the 'accidental manager' phenomenon, and do not employ as many specialist managers to oversee specific areas of the business * Family owned and run businesses are not exposed to significant international competition so are poorly productivity and is called the **'long tail' of business with low productivity and mediocre managers** * Management alone accounts for a **quarter of the difference between the UK's productivity** and that of her competitors * Access to cheap finance has kept many of these unproductive 'zombie companies' afloat

Answer 616

* Not as nearly as much vocational training * UK spends less on worker training than many other adcanced economies e.g. Capital Spending is estiamted to make up productivity gap with Germany

Answer 617

London is 34% higher than the UK average whilst Northern Ireland is around 17% lower

Answer 618

* Most dynamic sectors have seen the **biggest fall in productivity performance** * 4 dynamic sectors: manufacturing, finance + banking, ICT and professional services * 'Labour Hoarding' to protect highly skilled nature of jobs

Answer 619

Across sector productivity differs with sector; UK best at finance and utilities/extraction/info + comms - UK higher productivity even more than Germany

Answer 620

Public sector accounts 44% of GDP and employs around a quarter of the workforce but productivity dropped by 1.3% and **output per worker is now lower than its pre-pandemic level**

Answer 621

6.2% lower than before the EU referendum Lowest in G7 and 3rd lowest in OECD Brexit Investment is 11% lower than it might have been and productivity is 4% lower than it should have been

Answer 622

1. **Economic Shocks + Uncertainty** - Imperial say GFC damage to FS and Insurance caused 1/3 of productivity drop 2. **Flexible Labour Market**- UK has the **4th most flexible labour market** but encourages capital shallowing 3. **Access to Finance** 4. **Coporation Tax** e.g. Aztra Zenecachose to locate their new site Dublin where coporatiion tax is 12.5%

Answer 623

* Nearly 12 million people lack digital skills to cope with everday life, **30% of the workforce may have to change occupation** * **UK PISA score lower in reading and maths** than most countries with higher productivity * Little opportunity for life-long learning - **real spending on education same as early 2000s**

Answer 624

* Economic problems need long term solutions while political cycles are relatively short * Political decisions in the long term are influenced by concerns over government borrowing and keeping the tax burden low Policy Churn - constant changes in economic policy - have made it difficult to implement the structural changes needed to drive productivity in the long term

Answer 625

Rautomead used our Supplier Credit Financing Facility, which allows UK companies to get paid on dispatch for their exports whilst letting buyers benefit from deferred payment terms. £1 million worth of financing for Dundee-based firm to supply machinery to specialist Chinese metals manufacturing company in Xian

Answer 626

1. OBR says long term sickness; fall in health spending as % of GDP frrom 2010-20 Sickness benefits mean you have to requalify if you leave workforce again (disincentive to join workforce) 2. Institute for Fiscal Studies, used time series data and they found that **retirement was the main reason**

Answer 627

1. OBR says long term sickness; fall in health spending as % of GDP frrom 2010-20 Sickness benefits mean you have to requalify if you leave workforce again (disincentive to join workforce) 2. Institute for Fiscal Studies, used time series data and they found that **retirement was the main reason**

Answer 628

* Reduces long term GDP growth * Inactivity --> loss of self esteem + **skill** * **Makes labour supply for skilled jobs more inelastic** as a higher wage requirement * Firms are reluctant to give these which creates higher vacancies * Worsens government finances (G-T)

Answer 629

* **Older workers face discrimination** when applying to jobs; employers are less likely to take them on and retrain them * Occupation health services provide services that focus on the health of staff in the workplace * Boosting access to this may help tackle the problem * Fix the sick payments scheme * More generous immigration policy to fill in skills gap

Answer 630

0.22 when >1 it creates an UE trap

Answer 631

* Contributing to record low UE figures * 4.4% of the population has worked in the gig economy, dwaring industries like finance or the nHS **Gig economy worth over £25 billion **

Answer 632

Workers' rights are often lacking as they are classified as self-employed so no access to pensions, minimum wages, holidays, sick pays, statutory pay, NI contribution 2018 Uber lost case and had to classify as worker

Answer 633

* HMRC has suffered budget cuts and tax collection is less effective Employment tribunals to enforce employment rights has been restricted since 2013 to be replaced with charged for claimants

Answer 634

OBR made 5 sets of predictions for government borrowing, inflation and GDP growth in 2021-22, each a revision of another In January 2023, the OBR downgraded growth prospects while the Bank of England upgraded their outlook David MIles: 'should be satnav'

Answer 635

Truss failed to pass plans to OBR and this made markets uncertain (3-->4% yield) Hunt made many references, over 52 in his autumn statement

Answer 636

· Youngstown used to be a hub of American manufacturing with steel mills and General Motors employing over 13,000 · With each passing year, its population shrinks · About 38% of the population lives below the poverty line, ; making it the second poorest city in America The crime rate is double the national average

Answer 637

· In 2019 GM teamed up with LG to create Ultium Cells, an electric battery manufacture, employiong over a 1000 * Foxconn has agreed to buy the original GM plant and reconfigure it as a production facility for electric vehicles Training is being undertaken by Youngstown State University who made a test to identify who could operate its sophisticated machinery

Theme 4: A global perspective Flashcards

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