theme four Flashcards
(161 cards)
1
Q
globalisation
A
process of increasing integration of markets and economies around the world
2
Q
biggest causes of globalisation
A
- improvements to communications technology
- improvements to transport technology
- increase in multinational companies
- reductions in legal barriers and integration
- increase in migration
3
Q
globalisation has resulted in more…
A
- multinational companies
- migration
- international trade
- international financial flows
- foreign owned companies
4
Q
arbitrage
A
buying something in a market with a low price, and selling it in a market with a high price
5
Q
why might costs of production vary between economies?
A
- climate
- natural resource
- technology
- capital/ labour ratio
- labour productivity
- infrastructure
6
Q
absolute advantage
A
when someone can manufacture a product at a higher quality and a faster rate for a greater profit
7
Q
comparative advantage
A
takes into consideration the opportunity costs involved when choosing to produce multiple goods
8
Q
comparative advantage assumptions
at least 4!
A
- no transport costs
- assumes perfect mobility
- fixed MC
- homogeneous goods
- costs are consistent across firms and regions within countries
- factors of production are mobile between industries
- no protectionism
9
Q
opportunity cost formula (output)
A
sacrifice/ gain
10
Q
opportunity cost formula (cost per unit)
A
gain/ sacrifice
11
Q
tariffs
A
taxes on imported goods
12
Q
quotas
A
physical restriction on the amount of goods that can be imported
13
Q
embargoes
A
a complete ban on the import of a particular good
14
Q
reasons for quotas
A
- domestic supply increases
- new suppliers enter the market
- protecting domestic consumers from cheap/ harmful goods
- infant industry argument
- retaliation
15
Q
reasons against quotas
A
- government does not gain revenue
- domestic consumers bear higher prices
- net efficiency loss
- enforcement/ compliance costs
16
Q
Arguments against free trade
A
-infant industry argument
-the senile industry argument
-to diversify the economy
-raise revenue for the government
-help the balance of payment
-cultural identity
-protection against dumping
-environmental
17
Q
Economists against free trade
A
-friedrich list
-Joseph stiglitz
-ha-joon chan
18
Q
Infant industry argument
A
-new industries struggle against international competition
-investment in the industry = may gain comparative advantage in the future
19
Q
Senile industry argument
A
-if industries are declining and inefficient = require significant investment to make them efficient again
-protectionism = incentive to invest and reinvent themselves
-EVAL = could also be an excuse for protecting inefficient firms
20
Q
Arguments against protectionism
A
- higher prices and less choice for consumers
-inefficient resource allocation
-regressive nature
-production inefficiencies
-trade wars
-difficulty of removing barriers
21
Q
Trade wars
A
- one country imposing import controls will lead to “retaliatory action” -> leading to a decrease in the world trade
22
Q
Advantages of trading blocs
A
- increased economic growth
- more dynamic business climate
- lower government spending
- foreign direct investment
- expertise
- technology transfer
- movement of labour
23
Q
Disadvantages of trading blocs
A
- trade diversion
- increased economic dependence -> economic performance between member countries = interconnected
- eurozone 2007 crisis Greek & Cypriot recession = affected everyone else
24
Q
NAFTA CASE STUDY
A
- high level of intra-regional trade for North America is largely explained by the impact of NAFTA (North American Free Trade Agreement) between Canada, Mexico and the USA
25
Levels of integration
- free trade areas
- customs unions
- common markets
- economic and monetary union
26
Free trade agreements
EXAMPLES
- there are no tariffs or taxes ≠ have common external tariff
- NAFTA, SAFTA, EFTA
27
Advantages of trading blocs
- increased economic growth
- more dynamic business climate
- lower government spending
- FDI
- expertise
- technology transfer
28
govt. disadvantage of trading blocs
reduced govt. revenue
29
Trade diversion
- movement from a low cost forge in producer to a high producer within a customs union
- refers to the decrease in economic welfare from joining a free trade area, such as a customs union
30
Terms of trade: define
Measures a countries relative competitiveness
-reflects the number of units of exports that are needed to buy a single unit of imports
31
Terms of trade: formula
(£ of exports / £ of imports ) x 100
32
Improvement in the terms of trade
- exports have risen relative to import prices
- one unit of exports buys more imports
- generally leads to an improvement in living standards
-> imported goods seem cheaper to consumers
33
Deterioration in the terms of trade
- import prices have risen relative to export prices
- leads to a decline in living standards
- imported consumer goods are more expensive
34
Factors that influence the terms of trade
- exchange rates
- competitiveness of firms
- relative inflation rates in different countries
- profit margins
35
Free market factors influencing exchange rates
- inflation
- speculation (future predictions)
- other currencies
- government finances (debt)
- balance of payments
- international competitiveness
36
Governmental influences on exchange rates
- interest rates -> hot money inflows (try explaining)
- quantitive easing
37
FDI define
- net transfer of funds to purchase and acquire physical capital
38
Portfolio investments define
- moving of financial capital to foreign bank accounts
39
Benefits of FDI
- higher output
- higher employment
40
Cons of FDI
- doesn’t always benefit recipient countries
- results in demand pull inflation
- developing countries may be tempted to compete on reducing environment laws to attract the most FDI
41
Neo-classical Solow Growth Model
- exponential graph -> shows output per worker against capital per worker
42
Why can a trade surplus be a problem
- retaliation -> protectionism
- inflation -> demand-pull
- poor quality goods/ services -> volume driven growth
- over-reliance on exports -> japan
- environmental damage
- poor working conditions
43
Free market oriented supply-side policies
- privatisation
- deregulation
-income tax cuts
- flexible labour markets
- free trade agreements
- reduce welfare benefits
44
Interventionist supply side polices
- public sector investment
- education
- vocational training
- housing supply
- health spending
45
Supply side policy purpose
- improve quality and competitiveness of exports
- aim to boost export demand, rather than reduce import demand
46
Three main reasons why a currency is bought and sold
- international trade
- long term capital movement
- speculation
47
three types of exchange rates
- floating
- managed exchange rate
- fixed
48
floating exchange rate
- when demand supply affect the currency
49
main arguments for a floating exchange rate
- reduced need for currency
- less risk of government failure
- partial automatic correction for trade deficit
- freedom for domestic monetary policy
50
arguments against floating exchange rate system
- increase volatility
- Dutch disease
- fluctuations in exchange rate
51
lorenz curve
- represents the difference between perfect equality, and actual inequality in a country
52
gini coefficient
- A/(A+B)
- represents a country’s inequality levels in ‘number’ form
- allows for you to compare between countries
- the bigger the coefficient (closer to one), the more unequal the society
53
what determines whether X or M will increase when trade barriers are reduced?
international competitiveness
54
tax avoidance (transfer pricing)
- selling intermediate goods between different branches of the same firm
- artificial prices
- to pay the lowest possible tariff
55
intermediate goods define:
- manufactured goods -> are not sold to consumers directly, but are used to produce consumer goods
56
how to MNC’s avoid tax?
- transfer pricing
- tax havens
57
benefits of globalisation
- increased world output -> improves living standards
- reduction in absolute poverty
- consumers = lower prices, wider choice
- firms = larger markets, benefits of economies of scale
- increased tax revenues
58
costs of globalisation
- over-dependence on imports/ exports
- exploitation of labour
- negative externalities from increased trade eg. pollution
- increased inequality between countries
- TNC’s may engage in tax avoidance policies = decreased tax revenues
59
characteristics of globalisation (8)
- trade to GDP ratios = increasing for most countries
- expansion of financial capital flows between countries
- FDI
- rising number of global brands
- increasing connectivity between people and businesses
- increasing levels of (inter)national labour migration
- global supply chains
- deeper specialisation of labour
60
key drivers of globalisation
- containerisation
- technological change
- economies of scale
- differences in tax systems
- less protectionism
61
characteristics of deglobalisation
- decline in world trade
- fall in capital movements
- decrease in FDI
- decrease in tourism
62
factors influencing competiveness
- exchange rates
- productivity
- wages/ costs
- regulation
- inflation
- research & development / investment -> link to quality of goods
- taxation
63
three main reasons why currency is bought and sold on the foreign exchange markets
- international trade
- long term capital movements
- speculation
64
managed exchanged rate ‘types’
- dirty float
- crawling peg
- adjustable peg
65
adjustable peg system
= currencies are fixed in the short term, but can be devalued or revalued in the longer term
66
crawling peg system
- buying and selling your currency within a range
67
dirty float
- determined by free market forces
- governments intervene to alter free market price
68
revaluation
- when a government or central bank fixes a new higher exchange for the currency
- in a fixed or pegged system
69
gold/ foreign currency reserves
- owned by central bank
- mainly used to change the foreign exchange value of the domestic currency
- by buying and selling currency on foreign exchanges
70
transfer payments (MNC’s tax avoidance) EXAMPLE
- say there’s two starbucks’ -> one in england, one in ireland
- ireland has corporation tax rate of 10%, england has 25%
- you will sell your goods at inflated prices, to transfer your profit (40million) to ireland
- pay lower tax now
71
tax haven
- literally just transferring your headquarters and production sites to countries with lower corporation tax
72
dependency ratio
- the rate of which people who are dependent on the govt.
- our income is dependent on govt. until we are 18
73
why does the type of sector you work in cause income inequality between countries
- with manufacturing jobs -> labour is easier to buy and sell, low skill set required
- so low demand for labour = lower wages
74
absoloute poverty
absence of sufficient income to access basic human needs
75
UN declaration absolute poverty factors
severe deprivation of basic human needs:
- food
- safe drinking water
- sanitation facilities
- health
- shelter
- education
- information
76
relative poverty
- an individual has a lower standard of living than the other people around him or her
- one measure is when households earn less than 60% of the median earnings
77
relative poverty usefulness
- allows comparison within a country
78
relative poverty flaws
- highly subjective
- subject to change over time
- not comparable between countries
- doesn’t take into account what you actually need
79
causes of poverty
- high unemployment
- lack of human capital
- health issues
- low welfare payments
- low NMW
- high dependency ratio
80
why has relative poverty been growing
- inequality in wages growth
- de-industrialisation
- growth in underemployment, zero hour contracts, part time/ temporary jobs
- decline of trade unions
- state benefits falling
- long term and structural unemployment has risen
81
the poverty trap
- tax and benefits systems creates a disincentive to look for work or work for longer hours
82
policies to help w absolute poverty
- food banks
- social housing
- free education
- free healthcare
83
policies to help with relative poverty
- NMW
- reduction in regressive tax
- inheritance tax
84
robert lucas development definition
development = rates of growth of capita per income
85
amartya sen
development = removal of various types of unfreedoms that leave people with little choice and oppurtunity
86
characteristics of developing countries
- lower per capita incomes
- low investment in physical capita
- low levels of human capital
- health issues and high mortality rates
- high levels of population growth
- high levels of unemployment & underemployment
- structure of the economy
- institutional structures (corruption)
-degradation of the environment
87
HDI
- UN calculates measure of economic development
- based on health, education, income etc.
- given a score between 0-1. the higher, the better
88
2022 Norway HDI
0.961
89
2022 South Sudan HDI
0.385
90
2022 Norway GDP
$368 billion
91
2022 south sudan GDP
$4.78 billion
92
2022 Luxembourg GDP vs HDI
1st GDP per capita
18th HDI
93
2022 Burundi GDP vs HDI
- lowest GDP per capita in the world ($308)
- HDI = 0.426
94
limits of HDI
- doesnt take into account qualitiative factors (cultural identity/ political freedoms)
- income distribution?
- if income in unevenly distributed GDP per capita ≠ accurate
- inequitable development is not human development
- 2010 saw a launch of new equality adjusted measures -> (Gender)
95
savings =
disposable income - consumption
96
income inequality
how unevenly income is distributed throughout a population
the less equal the distribution, the higher income inequality is
97
wealth inequality
the uneven distribution of wealth
98
norway gini coefficient
0.272
99
south sudan gini coefficient
0.441
100
south africa gini coefficient
0.63
101
slovakia gini coefficient
0.232
102
alternative measures of HDI
GPI
IHDI
HPI
MPI
103
GPI
what is it, and why/ when was it made?
- genuine progress indicator
- as economies grew in the late 1900's -> became clear that economic growth alone didn't equate to improved quality of life
- created in 1995 by non-profit called 'redefining progress'
104
GPI factors
- family structure
- benefits from higher education
- crime
- pollution
105
why is GPI better than HDI
- accounts for negative externalities, such as crime, or pollution
- perspective of 'green' or 'social' economics
106
IHDI
- adjusts HDI for inequality, as HDI assumes perfect equality.
- HDI = can be viewed as “potential” human development that could be obtained if achievements were distributed equally
- the IHDI is the actual level of human development
107
Norway HDI vs IHDI
HDI: 0.95
IHDI: 0.90
= very low income inequality
108
Israel HDI vs IHDI
HDI: 0.90
IHDI: 0.78
= very high income inequality
109
COVID-19 impact on interest rates
0.75% -> 0.1%
110
COVID-19 impact on 2021 mortgage repayment rates
2.96% -> lowest ever
111
Harrod - Domar model
Investment, savings and technological changes are key variables in detaining economic growth
112
Capital flight
- when a large number of people in a country move capital and assets from one country to another
- usually in response to a political and/or political crisis
113
Causes of capital flight
- the threat of hyperinflation (which could wipe out the value of assets)
- the threat of compulsory nationalisation
- fear of rising income and capital gains tax
- uncertainty and fear about the future of the economy (speculation)
114
Harrod-Domar Model formula
Rate of growth = savings / capital: output ratio
115
Capital: output ratio
How much capital needed per output
116
How much of Saudi’s GDP is reliant on oil exports?
46% (2023)
117
When would you use Marshall-Lerner condition?
- to show that a depreciation in the currency may not always lead to a improvement in the trade balance
118
Foreign currency reserves
- Money or other assets held by a central bank, so that they can influence the value of their own currency
- For a country using a managed or fixed exchange rate -> they would need to have supply of other currencies, so that they can either sell, or buy more of their own currency
119
For a depreciation -> how would we use foreign currency reserves?
- Using an example: lets say I’m England, and that England uses a fixed exchange rate (hypothetically speaking). The pound depreciates, but we want to bring it back up. We want our currency to be a certain value. So, if we want the value of the pound to increase, we need to buy more of it. So we’ll use the currency reserves we have (eg. $) and go to a currency exchange rate place, and buy as much £ as we can, to increase demand of the pound -> (see diagram), and therefore, appreciate the pound.
120
For an appreciation -> how would we use foreign currency reserves?
- So say England found a bunch of oil, and suddenly everyone starting demanding the £ -> appreciation. So to decrease the value of the £, we need to sell it in exchange for $. So you take a bunch of £ and swap it for $ (adding to the reserves). -> see diagram. Now that we’ve supplied the pound (for it to be sold) we’ve made it less valuable.
- The reason the Dutch disease happened, was because Switzerland uses the Euro - which is not a fixed exchange rate -> so they couldn’t influence the way the Euro reacted to the sudden increase in demand.
121
Factors influencing growth and development
- primary product dependency
- volatility of commodity prices
- savings gap
- foreign currency gap
- capital flight
- demographic factors
- debt
- access to credit and banking
- infrastructure
- education/ skills
- absence of property rights
122
Foreign currency gap
- the amount of foreign currency flowing into an economy from its exports = insufficient to pay for its imports
123
To fill in the foreign currency gap
- sell your currency for the other currency = depreciation = capital is more expensive to import = higher capital to output ratio = unsuccessful investment
124
Based on Harrod - Domar model, the rate of growth in an economy can be creased in one of two ways
- increased level of savings
- reducing the capital : output ratio
125
Savings gap
- the amount of savings needed to invest, and the amount of savings there is
126
Prebisch-Singer hypothesis
YED = elastic for manufactured goods
YED = inelastic for for primary products
- as incomes rise, the the demand for manufactured goods will increase at a faster rate than the demand for primary products = price will also rise as a faster rate
127
Prebisch - Singer hypothesis for developing countries
Manufactured vs primary goods
Manufactured goods (elastic YED - luxury)
- as incomes increase = more than proportional increase in the demand for manufactured goods
- demand = increases the price
- price of imports = increases fast
Primary goods (inelastic YED - necessity)
- as incomes increase = smaller increase in demand (relative to manufactured goods) -> price increases too, but less than manufactured goods
128
when was brexit decided/ voted on? what did this cause?
23rd june 2016
depreciation in currency
129
Primary product dependency
•Primary products = raw materials -> eg. South africa relies on mining exports to pay foreign debts and imports.
•A fall in the price leads to a fall in export incomes, can make it hard for developing countries to fund their infrastructure and education
•Relying on primary products is not necessarily sustainable, since they could be over extracted and run out.
130
Volatility of commodity prices
•makes it hard for workers to plan for the future, and it means incomes of farmers are fickle, and hard to predict
•for example -> right now w russia X ukraine -> petrol prices on a madness -> might make it difficult for smaller business to predict future.
131
Savings gap: Harrod - Domar model (COA)
•Developing countries = limited wealth -> not much saving -> only afford to spend in short run -> consumers focus on immediate needs (food, water, shelter -> insufficient savings -> inadequate capital accumulation -> less take off -> low economic growth (growth measured using savings ratio/ capital output ratio)
•growth increases with more saving, or a small capital: output.
•Barbados = only 4.5% of GDP is savings
132
Foreign currency gap
•Happens when the country is not attracting sufficient capital flows to make up for a deficit in the capital account
•Value of the current account deficit is larger than the value of capital inflows
•Eg, in Venezuela a shortage of foreign currency has led to a shortage of essential imports and hyperinflation
133
Capital flight
•Money and capital leave the economy through investment in foreign economies
•Triggered by economic threat -> war, hyperinflation, rising in tax rates
•Can cause economic crisis, cause a currency to depreciate.
•French tax on wealth -> guy who was expected to pay €1.2 million on paper assets he couldn’t cash in – had to leave, was being asked to pay money he didn’t have.
134
Demographic factors
•Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa.
•Current population of 1.1 billion expected to double by 2050 = 2050 unsustainable
135
Access to credit and banking
•Without a safe, secure and stable banking system, there is unlikely to be a lot of saving in a country -> link to Harrod-Domar model
136
Debt
•The debt crisis emerging in the developing world threatens the fight against poverty and inequality
•Sudan = national debt of 200% of GDP
137
Infrastructure
•Poor infrastructure -> discourages MNC’s from setting up premises in the country - production costs increase if things such as supply of electricity are not available -> stable means of production not available
•Equador = lack of government control over resources: 45% of water resources are privatised
•Transport in Afghanistan -> roads were built during 1960’s, but left to during during the 1990’s wars
138
Education/ skills
•Important for human capital -> ensures productivity and produce goods of a high quality -> helps generate employment -> more tax revenue for govt. -> raise standards of living
•Niger = only 29% of human capital potential reached -> in comparison to Singapore (88%)
139
Absence of property rights
•Means that entrepreneurs cannot protect their ideas, so no incentive to innovate -> distorts
•Worst property rights countires -> south sudan, central african republic, afghanistan. (CPIA property right score of 1.5 each -> scale of 1-6)
140
corruption in UK govt
- favourable contracts -> subsidies to firms that didn’t need it -> x-inefficient (NO INCENTIVE TO LOWER COSTS)
141
subsidies drawbacks
- subsidies= poorly subsidised
- firms may become inefficient
- opportunity cost
- corruption
142
removal of subsidies EVAL -> (why we need to keep them)
- countries cannot free themselves from primary product dependency
- allowing for long run fluctuating commodity prices.
-infant industry
-certain necessities needed to be subsidised to eliminate absolute poverty.
143
why do financial markets need to be regulated?
- create stable financial system
- prevent customer exploitation by dominant firms
- prevent them from engaging in risky behaviour for short term profits (causing them to collapse in future)
144
evals for financial market regulation
- shadow banking
- regulatory capture
145
types of regulation
- fines
- capital ratio
- liquidity ratio
146
disadvantages of regulation
- austrain school of thought = financial markets fail bc of excessive meddling by bureaucrats
- stingent rules = increase costs for banks
- if done in isolation, internationally uncompetitive
147
micro-prudential regulation
- focuses on stability of individual financial institutions
- PRA
148
macro-prudential regulation
- stability of the economy as a whole
- FPC = prevent systemic risk
- stress tests
149
PRA and FPC are apart of…
the central bank
150
housing market bubble
- rise in house prices fuelled by demand, speculation etc.
- characterised by high demand, low supply
151
pros of the central bank acting as a lender of last resort
- protects the savers
- retains the publics confidence in the country’s financial system
- prevents financial panics
- prevents the spread of liquidity shortage
152
cons of the central bank acting as a lender of last resort
- moral hazard ! causes banks to take risks, know they can be bailed out
- long-term impacts on overall economy -> inflation
153
banks bailed out in the midst of the 2008 crisis
- bear stearns
- american international group inc.
154
market rigging
- group of individuals or institutions collude to fix prices, or exchange information
- leads to gains for themselves at the expense of others
- eg. insider trading, fixing the LIBOR rate
155
market failures in financial market
asymmetric info
moral hazard
externality -> future tax payer burden
156
types of asymmetric info in financial markets
- PPI
- sub-prime mortgages
- CDO
157
types of moral hazard in financial markets
- mortgage broker
- ‘too big to fail’
158
PPI
- payment protection insurance
- UK banks in 1990’s & 2000’s sold tens of millions of insurance contracts to customers who were taking out a loan, mortgage or credit care
- if they couldn’t pay back the loan, they had been paying insurance to cover for it
- didn’t understand what was being sold, couldn’t bought same product for a fraction of the price
159
credit crunch
any of the three:
- reduction in the availability of credit
- decline in lending activity by financials institutions
- sudden shortage of funds = increase interest rates
160
disadvantages of currency controls
- halts FDI
- opp cost to government (excessive administration costs)
- lower consumer choice (cannot import as much
- firms will see a rise in COP -> less internationally competitive -> importing raw materials more expensive
- foreign income earnt abroad more expensive
161
ten principles stated by John Williamson (best policies for a country)
try get 5 :)
- low government borrowing
- redirection of public spending from subsidies -> LRAS shifters
- tax reform
- interest rates that are market determined
- competitive exchange rates
- trade liberalisation
- liberalisation of inward FDI
- privatisation of state enterprises
- deregulation
- legal security for property rights
