Theory Flashcards

Question

secondary macro objectives

Answer 1

- balanced govt budget (debt to GDP lower than 60%) - protection of env (less carbon emissions, more renewable energy) - greater income ineq (gini coefficient)

Answer 2

- increased cost of borrowing, so saving more attractive (Cons. down, invest down) - due to less borrowing, less demand for stocks, shares and govt bonds. so fall in prices of assets (-ve wealth effect) - consumers less confident, so decreased C and I, so AD down. mortgages more expensive, so less disposable income. - higher interest = incentive for others to hold money in British banks, as higher RoR. leads to increased demand for £, so value of £ rises. therefore imports cheaper, exports more expensive, so net trade worsens, AD down.

Answer 3

- exchange rate may be affected so much, exports fall too much and imports rise too much = balance of trade deficit - changes take up to 2 years, small changes may not affect consumer choices - lack of confidence in the economy may mean that no matter what the int. rate is, consumers don't want to borrow/banks don't want to lend (AD stays down) - high int rates for long time will discourage investment, and decrease LRAS

Answer 4

BoE can 'buy assets' by increasing the size of bank accounts at the Bank of England (reserves), which encourages banks to lend as they have more money available. (**EV**: However, after financial crisis, BoE found many banks preferred to keep money in reserves instead of lending out so 'buying assets' from banks didn't have desired effect. as a result, Bank bought securities/bonds from priv sector institutions e.g. insurance companies, pension funds and banks) - since bank buying assets, rise in demand so asset prices rise. +ve wealth effect as shares/houses etc worth more, so people have more disposable income, so spend more (C ↑). - **money supply increases**. priv sector companies more money, which can spend on goods + services / other financial assets. (C and I ↑, so AD ↑)

Answer 5

- risky and if not controlled can = hyperinflation - only lead to ↑ demand for second hand goods (e.g. new houses wld be built, but demand ↑ for alr existing 2nd hand houses) - no guarantee that ↑ asset prices = ↑ consumption (wealth effect) - can lead to geographical immobility from increased house prices - potential too dependant on QE? (eurozone)

Answer 6

- keep inflation at 2%, ± 1%. if falls outside this, have to explain why its happened and explain targets to restore this. use CPI to see if target has been met. - MPC (monetary policy committee) make all important decisions, e.g. BoE base rate and actions over QE

Answer 7

- income tax (25% of all tax rev) - national insurance - VAT - corporation tax

Answer 8

- govt spending also impacts LRAS, e.g. decreased govt spending to reduce AD, govt may be reducing quality of education, or spending on research and tech. - taxes have impact on inequality, so some taxes to increase/decrease demand may lead to income inequality. - political issues, e.g. may be unwilling to raise taxes to reduce demand as may lead to being voted out. - impact of fiscal depends on multiplier. bigger the multiplier, bigger the AD impact is.

Answer 9

- classical economists, any demand management has no effect on LR output. so supply side policies shld be used. believe that increasing AD will only increase prices. - on Keynesian LRAS, impact of AD changes depend where economy operating. if at full employment, then rise in AD only higher prices. but if high unemployment, rise in AD only higher output. - time lags with both - expansionary brings inflationary, deflationary brings unemployment

Answer 10

- monetary useful as govt able to ↑ demand without increasing spending (wld = fiscal deficit) - fiscal significant impacts on supply side, e.g. more spending on education = ↑ AD, ↑ LRAS more effective for specific groups and reducing poverty, e.g. more benefits = ↑ AD, reduced inequality.

Answer 11

- any govt decision will have **micro** impacts - e.g. a reduction in tax allows firms to have higher post tax profits, so ↑ investment, ↑ efficiency

Answer 12

- Wall street crash 1929, sharp fall share prices so loss of money - loss of consumer and business confidence led to decreased Investment, so downward spiral of AD (multiplier effect) - US banking system... lent too much in 1920s, so unsustainable boom. govt allowed banks to fail after crash, decreasing confidence further, so less loans to businesses and consumers, fall in AD - reduction of world trade, decreased AD lowered confidence.

Answer 13

- increased incentive = ↑ size of workforce so greater production of goods/services - ↓ benefits/taxes will increase opportunity cost of being out of work, so ppl always better in work. - ↓ benefits may prevent poverty/unemployment trap, where low income workers end up in same/worse position after new job because of lost benefits - reduction/removal of minimum wage would increase incentive for firms to employ HOWEVER, tax reduction from 25% to 20% not enough to change ppl working incentive. reducing tax on high income earners will worsen income inequality, and govt will have less tax rev.

Answer 14

- subsidise new firms - deregulation: reducing restrictions on businesses which restrict entry to the market - comp necessary to make firms efficient, as have to offer cheaper/better service if comp. HOWEVER, deregulation may lead to poorer quality service, or env issues.

Answer 15

- increasing retirement age, more ppl working so more goods and services produced - businesses more flexible, e.g. zero hour contracts - if minimum wage set above equilibrium level, will cause unemployment, so some say minimum wage shld be scrapped, which would increase workers so more quantity

Answer 16

- spending on education and training, so more educated workforce, more efficient and more skilled jobs. - free uni/spending on secondary etc - increase in high-skilled migrants, so relax rules for skilled immigration? fills skill shortages in UK - improvements = more efficient so more output HOWEVER, may have no effect if skills not relevant to workforce. increasing education will have opportunity costs. time lag as well.

Answer 17

- tax incentives / subsidies on investment, e.g. govt could reduce corp tax - govt could spend to improve infra (HS2) - investment = new tech = more efficient, so less resources needed to make same goods, and more tech so more can be produced - HOWEVER tax breaks etc can harm govt budget, lost tax rev, not all investment successful.

Answer 18

- balanced govt budget meant UK didnt have to borrow from abroad, so helped exchange rate. - forced to leave gold standard, so value of £ fell 25% compared to other countries. allowed **interest rates to be cut** by 2.5%, so AD ↑

Answer 19

- same view initially as uk (balanced budget) - Roosevelt promised public sector investment, and work schemes for unemployed. Keynesian expansionary fiscal policy, had large impact as US unemployment was very high

Answer 20

- mortgage lending: poor people encouraged to take mortgages, given low interest so workers could get bonuses for selling more mortgages. paid for first few years, then couldn't, so houses repossessed, demand fell, and prices fell, so houses value lower than the mortgage. - same time, bank grouping 'prime' mortgages (likely to pay back) and 'sub-prime (unlikely to pay back), and selling to other banks as if all prime. led to many having negative assets - fall in confidence, panic in society as thought banks would collapse, losses for savers

Answer 21

- nationalise banks and building societies, guarantee savers their money. - expansionary monetary policies w/ record low int rates and QE. lead to lower unemp, higher growth. - USA more expansionary fiscal policy, maybe why expanded faster. UK prioritised reducing national debt.

Answer 22

- can both increase output and decrease prices (unlike demand) - more long-term policies for LR economic growth - can be directed @ exports to improve BoP - HOWEVER, Keynesian LRAS shows they have no impact when LRAS is elastic, so need demand side first to fix problem in SR - often leads to budget deficit if investing - time lags (infra and education etc)

Answer 23

as economy grows, expect more resources to be used. as resources are used and goods are produced, more pollution and habitats destroyed. - econ growth in China rapid, but v.high levels of pollution.

Answer 24

India massive econ growth, but country so large that industry mainly producing for own ppl. wealth of ppl ↑ so more demand for imported goods, so BoP worsens China massive growth, but from producing goods for exports so BoP surplus

Answer 25

rate of change in money wages increases as rate of unemployment fell - firms pass on increases in wages to the consumer (increased price) - firms know if high unemployment, firms can attract workers for low wages. if low unemployment, competing for best workers so offer high wages. SRPC - short-run Phillips curve

Answer 26

- expansionary increase AD, to increase output employment and econ growth, but will increase inflation and maybe worsen BoP as increased demand for goods/services = ↑ imports - deflationary decrease AD to improve inflation, but decrease employment and econ growth

Answer 27

- increased IR will decrease inflation. continuously high rates will damage long-term investment as fewer businesses will want to, so decrease LR growth - also value of £ will rise, decrease X increase M, worsening BoP. - low IR increase income inequality, richest thokd larger proportion of wealth in non-money assets e.g stocks and shares, so arent affected by int rates. middle and working class more likely to have savings in bank

Answer 28

- often increase AS, and therefore LR econ growth. can also decrease LR inflation, but may increase SR if encouraged investment as will increase AD. - policies which decrease trade union power (reduce wages, lower benefits, change tax etc) may increase income ineq. as will -ve affect poorest in country. - some supply-side have bad effect on budget/environment

Answer 29

- to reduce fiscal deficit, govt may reduce spending and ↑ taxes. will reduce AD and decrease SR econ growth and higher unemployment - higher the fall in output as result of measures, higher fall in tax rev, so therefore more ineffective policy

Answer 30

- improvements in transport infra: allows quick cheap and reliable methods to allow prod to be located globally - improvements in IT and comms: co-operate globally - trade liberalisation: cheaper and more feasible to trade - international financial markets: ability to raise money and move it around the world - TNCs: act to max profit, seek cheapest labour globally. produce and sell globally

Answer 31

- more choice - lower prices, firms advantage of comparative advantage and produce in country with lowest cost - rise in price as income is rising so higher demand for goods and services

Answer 32

- job losses in western world as jobs go to cheaper countries - increased int migration, lowers wages for some but provides skills which increase AD which increase # of jobs - increased inequality of wages (high skilled wages increasing) - poor working conditions in sweatshops

Answer 33

- firms can source from more places and sell in more places. reduces risk as a shock in one market will have smaller impact - low skilled workers much cheaper in LEDC, exploit comp advantage, increased profits - firms unable to compete internationally will lose out

Answer 34

- higher taxes received, but may lose out as tax avoidance - TNC have pwr to lobby govt, lead to corruption

Answer 35

- increased demand for raw materials, bad for env - more emissions from increased trade and production - world can work together to tackle climate change and share ideas/tech

Answer 36

- increases investment, TNCs investing is injection - TNCs bring world class management techniques, can knock on benefit all industries - trade increases output - TNCs can cause political instability - comparative advantage changes over time, companies may leave when country no longer offers advantage. = lots of unemployment, reduces growth

Answer 37

- comp advantage assumes no transport costs, wld lower any comparative advantage - assumes costs are constants, no econ of scale. - goods assumed to be homogenous - assumes factors of production (CELL) are perfectly mobile (no trade barriers etc)

Answer 38

- comp advantage shows world advantage can be increased if countries specialise what they best in - trading and specialising allows benefit from Econ of scale - diff countries have diff FoP, trade allows maximum benefit from that - trade means greater choice, greater comp (incentive to innovate)

Answer 39

- trade can lead to over-dependence on other countries exports/imports - structural unemployment, jobs lost to foreign firms who are more efficient and competitive - env will suffer due to problems of transport as well as increased demand for resources (deforestation) - loss of culture

Answer 40

**comp advantage** - countries will trade where there is a comp advantage. a change in comp advantage will change trade pattern **emerging economies** - when countries grow, likely to need to import more goods and services before, asw as exporting more to pay for it. - shift trade pattern by taking up larger proportion of country's imports + exports than previously - trade important for developing countries, 8% of US economy, 20% LEDC economies **relative exchange rates** - affects relative prices of goods between countries - determines whether consumers buy goods, so change in price will affect pattern of trade **trading blocs/bilateral trading agreements** - increase the lvl of trade between certain countries, so influence pattern of trade

Answer 41

improvement in terms of trade caused by rise in X prices, or fall in M prices. deterioration caused by fall in X prices or rise in M prices - in SR, exchange rates, inflation, and supply/demand of X or M affect terms of trade (as affect prices) - in LR, improvement in productivity compared to trading partners leads to worseing of terms of trade (due to more productive, price of exports down as more supply of it) - changing incomes. rise in world income = increased demand for tourism, so country with strong tourist like spain will see increased Terms of trade, as their exports (holidays) will go up in value anything which affects price of country's imports/exports

Answer 42

- improved terms of trade likely fall in GDP and unemployment, as export prices rise so exports fall so AD in, import prices fall so more imports, so AD in. both cause decreased production (fall in jobs/output) - long term decline in ToT suggests long-term decline in living standards - if PED of X/M inelastic, favourable movement of ToT would improve current acct on BoP, if elastic, favourable movement wld worsen current acct

Answer 43

- use diagram negatives: - same as against tariff - loss of consumer surplus - loss of dom and EU efficiency - likelihood of retaliation, foreign countries against EU - regressive nature, price up, low income ppl likely to suffer

Answer 44

- economies of scale for domestic producers, large market (27 countries in EU), greater export potential - better tech transfer - lower prices for consumers - greater consumer surplus

Answer 45

- 2 main aims: bring about trade liberalisation, ensure countries act according to trade agreements - if country fails to agreements, a country can file a complaint, WTO will attempt to solve issue through negs. - one problem is for any agreement to take place all countries must agree

Answer 46

- regional trade agreements contradict WTO principles (customs unions and FTA violating as not all trading partners treated equally)

Answer 47

- infant industry argument: new industries just being established in a country need to build up reputation and customer base, so lots of sunk costs, AC higher. unable to compete in international market - job protection: govt worried allowing imports may mean domestic producers lose jobs to international firms - protection from dumping (selling for very cheap) of surplus goods (would harm local producers)

Answer 48

**consumers:** - higher prices as unable to buy imports at cheaper prices - less choice **producers:** - benefit as less comp, so can sell more goods at higher price - may suffer from high costs if controls on imports they need for production - foreign producers lose out as limited in what they can sell and where. inefficient domestic producers kept in production, efficient foreign lose out. **workers** - little diff in employment - protects jobs as domestic quantity increase **living standards** - DWL - retaliation by other countries, so imposing tariffs on everyone else's goods, = reduced trade, = reduced growth **equity** - - regressive effect (tariff)

Answer 49

- caused by unemployment, lack of skills, health problems, and income dependency - absolute pov falls as GDP increases - causes of relative pov: if those on high salaries see larger growth than those on low salaries changes in govt spending and taxation

Answer 50

- inequlity in wages growth - underemployment, zero hour contracts, part time jobs, temp jobs - decline of trade unions, so workers unable to bargain for higher wages - state benefits fallen in relative values, while taxes more regressive - LR and structural unemployment risen

Answer 51

- income is flow of earnings, wealth is stock of asset - income ineq is extent to which income distributed unevenly - wealth likely to be more unequally distributed as assets that can increase in value over time. wealthy ppl with those assets can generate income over time, LR income exceeds expenditure. - accumulation of wealth over generations (inheritance)

Answer 52

- lorenz curve shows cumulative % of pop plotted against cumulative % of income those ppl have. - gini coefficient calculated on Lorenz curve, A/(A+B) (ratio of area between 45 degree line and Lorenz curve divided by whole triangle) - gini measured between 1 and 0, bigger the coefficient, more unequal the country

Answer 53

**wages:** - because of better education, work longer hours, or skills more in demand - higher income, save more, wealth builds up **wealth levels** - if already have high wealth, able to build up larger wealth than those with lower wealth e.g. may undertake more risky investment, with bigger reward - high wealth means can earn rent/interest on their assets so increased income **chance** - buying house in the right area/correct asset in right time will see massive price increase - choosing correct sort of job will see income rise higher than other areas **age:** - working class at peak career will earn more than fresh starter - older had chance to build up wealth and assets

Answer 54

wars droughts famines and earthquakes. certain social groups excluded etc, and developed countries favour each other when trading so develop more than countries not involved

Answer 55

- **Kuznets hypothesis**: as society develops and moved from agri to industry, ineq increases as wages of inf workers rises faster than farmers - then wealth is redistributed by taxation and govt spending so inequality falls

Answer 56

- capitalist economy leads to income ineq, as wage differentials (based on supply/demand, which vary for diff jobs) - individuals can own assets/resources so wealth differs - argues equality can't be achieved in capitalist society where possibility of having more is important to encourage hard work. w/ no incentive to get more, ppl wont try hard or take risks, so inequality is v. important for capitalism to work

Answer 57

**SR:** - increased consumer income, so increased demand for goods where household spending > supply side production of economy, so imports up, to net trade down - strong exchange rates, makes imports relatively cheaper, so increased M, worsens net trade - high level of inflation will decrease exports as relative price will increase compared to goods from other countries **LR:** - if country loses comparative advantage, ppl will buy exports from diff countries - lack of capital investment, so less productivity, so less production (Germany 35% more productive per hour than UK) - countries w/ lots of natural resources export more, and if have small pop often have current acct surplus - some countries more competitive, e.g. for high labour productivity/reputation of high quality

Answer 58

Demand side: - monetary/fiscal policy used to reduce AD, which reduces income, so reduces demand for imports BUT SR solution, limits output of economy so reduction living standards and growth Supply Side: - measures to improve productivity/efficiency, or improve quality so products more demanded (improving labour/infra) Expenditure switching: - tariff/quota reduces attractiveness of imports, but may cause trade wars as other countries implement protectionism, so worsens trade deficit for all

Answer 59

- deficits less of a concern to countries like USA or UK, who have no problem financing deficits and borrowing hasn't built up to unsustainable debts - becomes problem when govt cant reay their foreign currency debts - misconception that large deficits are a problem, and large surpluses are successful. both cause instability/problems

Answer 60

- supply and demand for currency demand determined by number of British goods ppl want to buy/number of foreigners wanting to invest into the UK, visit or put their money in a British bank supply determined by amount of foreign goods ppl in Uk want to buy, or number of British firms that want to invest abroad, British ppl wanting to go abroad or place money in foreign banks - overall, affected by X and M, lvl of investment and holidays - speculation on rise/fall in value crucial as if speculated, currency holders will act upon it

Answer 61

- interest rates: increase in IR will strengthen pound, as ppl will convert money to £ and put in English banks, so demand rises. fall in IR does opposite. - can use gold/foreign currency reserves to manipulate value of currency: if value of £ too high, can increase supply by buying foreign currency or gold with £. to strengthen £, can sell foreign currency reserves/gold in exchange for £, so less supply of it so appreciates.

Answer 62

- where a country deliberately intervenes in foreign exchange markets to drive down vaue of currency - weaker currency encourages exports and discourages imports, so BoP improves assuming marshall lerner condition - can cause inflation as X>M, so AD up, so inflation, reduces competitiveness so fall in BoP - BUT, other countries may follow, and reduce currency asw.

Answer 63

**Marshall Lerner condition:** states that the sum of price elasticities of imports and exports must be more than one (elastic) if a currency devaluation is to have a +ve impact on trade balance - if elastic, the decreased price of exports/increased price of imports will have a large +ve effect on quantity - if inelastic, decreased price exports/increased price imports wont have much of an effect on quantity **j curve**: - people will not immediately realise that UK exports are cheaper, and so it will take a while to find a source for these cheaper exports. meanwhile, UK consumers wont see imports are more expensive, so wont switch away immediately. demand ineastic in SR. therefore, amount sold of each stays same, but price of exports falls/price of imports rises, so value rises. In LR, demand become more elastic, so people change to the cheaper UK exports, and stop importing goods, so the current account deficit falls.

Answer 64

weaker exchange rate likely to increase exports, as become cheaper. decreases imports as more expensive. this leads to increase in AD, so increase econ growth and employment

Answer 65

falls in exchange rate will increase inflation as imports more expensive, so rises in prices and fall in SRAS as production more expensive. net exports section fo AD increase, so inflation rises further

Answer 66

- fall in currency may increase FDI as becomes cheaper to invest. BUT, if currency continues to fall, indication the economy has serious difficulties, so discourages investment

Answer 67

- unit labour costs: total wages / real output (the cost of employing workers for each unit of good) - measured in an index number, with one year chosen as base - rise in relative unit labour costs shows cost per unit is rising faster in UK than in other countries, so UK less competitive relative export prices: - price of UK exports compared to exports of UKs main trading partners. rise in relative prices means UK exports prices have risen more than others, so less competitive

Answer 68

**exchange rates** (affects export + import prices, more expensive exports = less competitive) (depends on elasticities and reaction of firms) **productivity** (rise prod = increased competitiveness as costs lower so prices fall) **regulation** (high regs slow down business decisions, so less adaptable to changes in global market, and increases cost of production. so reduces comp **investment** investment to infra improes productivity, ensures reliability, cheaply and efficiency. investment to R+D means new products, increases comp as other countries don't have. new tech reduces costs and increases efficiency **taxation** high levels can reduce investment, so recudes int competitiveness. reduces incentive to take risk, so innovation reduced **inflation** low inflation increases comp, as UK goods increase in price by less than goods in other countries, so more competitive **flexibility** improves competitiveness as businesses can move labour in response to change in demand in market, prevents unnecessary wage increases, keeps costs low. **resources/FoP** good FoP and resources mean more and better quality goods can be produced that a country with limited resources and FoP

Answer 69

+ takes account THREE factors which are important for devel of a country + relatively easy to calc - health takes no notice of qual of life ppl have, education doesn't account quality/success of education - no consideration of equality of income - other factors which affect development, not just those 3

Answer 70

- agri, mining etc - large amount of most developing countries econ activity is based on primary product - natural disasters can wipe production so farmers no income, non renewable so country suffers when they run out - low YED, as ppl wealthier, decreased demand for primary goods - Prepisch Singer hypothesis, LR price of primary goods declines in proportion to manufactured goods, those dependent on primary goods see fall in terms of trade - **dutch disease**: when a country becomes a commodity's main producer in a short time, increases demand for currency, pushes value up. increases export prices, reduction of competitiveness of the whole economy, fall in output of other areas.

Answer 71

- inelastic demand and supply curves, so small changes in demand or supply, so HUGE fluctuation in price - large price changes mean producer's income and country's earnings rapidly fluctuate, difficult to plan and carry out LR investment, as well as producers see income fall v quickly, so poverty

Answer 72

- developing countries have lower incomes and so save less, means less money for banks to lend, reducing borrowing and so reducing investment/consumption - savings gap is the **difference between actual savings and the level fo savings needed to achieve higher growth rate** - savings rate Africa 17% of GDP, 31% avg for middle income countries

Answer 73

- says saving provides funds which are borrowed for investment purposes, and that growth rates depend on lvl of saving and productivity of investment - econ growth depends on amount of labour and capital, and developing countries have a vast labour supply, so their problems are caused by capital. to improve, investment needed, which requires savings HOWEVER, - econ growth not same as econ development - hard for individuals to save when they have little income, and borrowing from overseas causes problems ith debt - investment could be wasted

Answer 74

- when exports from developing country are too low compared to imports - means cant finance purchase of investment or other goods needed to econ growth faster e.g ethiopia (public debt 60% GDP, most foreign currency. likely they don't have enough to repay)

Answer 75

- large amounts of money taken out the country, instead of being left for ppl to borrow and invest - if money in banks within country, credit cld be created by banks for consumers and businesses to spend - occurs as lack of confidence in countries stability, to hide from govt authorities

Answer 76

- developing countries often higher population growth, limits development - if pop grows 5%, economy needs to grow 5% to **maintain** living standards. therefore, developing countries need higher growth rates than more developed countries - high pop growth caused by high BR, which increases no. of dependants, and doesn't immediately increase no. or working age pop. - strain on education system, leads to youth unemployment

Answer 77

- developing countries received large loans from banks in developed world (1970-80s) - now suffer from high lvl of interest repayment, where repayment is more than the loans and aid they have received - means less money to spend on services, so may need to raise taxes, limits growth and development

Answer 78

- developing countries have limited access to credit and banking compared to developed countries, with complex systems. - means those in developing countries cant access funds for investment, struggle to save for future

Answer 79

- in developed countries, complex networks of buildings, roads, ports, railways, airports utilities and elec cables - low levels of infra make hard for businesses to trade and set up within country, e.g if lack of roads. makes their services less reliable HOWEVER, development of infra can be expensive, conflicts env goals

Answer 80

- poor education within countries means low-skilled workers, sometimes can't read/write, so low levels of productivity - China/South Korea invested heavily into human capital when developing, benefitted in LR. ethiopia suffers from 49% illiteracy rate

Answer 81

- where individuals are allowed to own and decide what happens to certain resources. - lack of rights means individuals/businesses cant use law to protect assets, so reduced investment - unwilling to buy machinery, build factories or establish brands

Answer 82

- corruption: leaders likely to make decisions to benefit themselves, not economy's development and output - diseases: HIV/AIDS and malaria have -ve impact on economic growth (workforce ill, less productive, lower output, etc) - poor climates and geo terrain: natural disasters, hard for farmers to set up businesses - civil wars: Syria + Iraq, high levels of poverty, destroys infra, so hard for country to revuld even after war has ended

Answer 83

**trade liberalisation** - removing trade barriers = domestic industries close/forced to be as efficient as other world producers. resources allocated to best use where country has comp advantage **promotion of FDI** - FDI when a priv sector company invests in another country, to access new markets and lower production costs. - brings in expertise, creates jobs, and so boosts productivity and wages. - However, can lead to dependence on foreign firms, limits opportunities for local companies (cant compete with international firm) **removal of govt subsidy** - placed on essential items/industries - aim to decrease absolute pov and stimulate development but several challenges. - often poorly targeted, leading to inefficiency and high government spending, = debt and corruption. - Removing subsidies politically unpopular, may have unintended consequences, e.g smuggling and env damage **floating exchange rate systems** - market forces determine currency, country doesn't have to worry abt foreign currency reserves, gov doesn't intervene - means currency can be volatile, so hard for X/M to make decisions abt future - can cause big changes in macro variable, like econ growth **microfinance schemes** - aim to provide permanent access to financial services to poor households, offering small loans, savings, insurance, and fund transfers through institutions like 'Opportunity'. - loans typically require little to no collateral, utilize group lending and pre-loan saving requirements. - target marginalized groups, such as women, and enable borrowers to invest in businesses. - However, has led to financing consumption not investment, exacerbating reliance on the informal economy. diverting resources from sustainable development activities like manufacturing. **privatisation** - can end the corruption within a firm owned by state, saw as encouraging to be more efficient by increasing comp - selling a loss making firm will improve govt finances, reduce debt levels - if firm privatised as monopoly, will be no comp in market, and can be associated w corruption (selling company lower than market price to a friend, monop is profit making)

Answer 84

**development of human capital** - provides workers with skills and training, more productive and efficient. allows innovation and helps businesses expand - allows country to develop from primary sector to manufacturing sector, overcoming primary product dependency - improves qual of life **protectionism** - allows domestic industries to grow, keeps foreign goods and protects from strong comp - can use import substitution (swap imports for domestic goods) - creates jobs in SR, industry develops, barriers can then be removed and industry competes globally - HOWEVER, countries lose out on benefits of specialization and comp advantage, causing inefficiency. domestic producers lack of comp, inefficient price **managed exchange rates** - setting diff ex. rates for imp and exp, with higher rates for essentials and lower rates for others, including exports. - high rate = imports of essentials is relatively cheap, reduces poverty if goods are consumer goods, encourages investment if capital goods. - lower exchange rate for other imports and exports to discourage them, so more likely to buy from domestic - however, black markets form, corruption (govt officials buy at one rate, sell at another while making profit) **infra development** - essential for development, country needs roads/airports/schools/hospitals - interventionists believe govt shld provide, market-based says shld be private sector - free rider problem, high capital costs, so unlikely priv sector will develop it. - many social benefits, so govt shld provide as govt max social welfare - govt may not have funds, may be inefficient. can cause env damage, be poorly built/maintained, opportunity cost **promoting joint ventures w/ other companies** - reduces exploitation of countries as result of FDI - govt can insist that firms setting up from abroad in their country have to find local partner to jointly own a company. means some profits stay within the country, used for investment **buffer stock schemes** - involve setting max and min prices for goods, with govt buying excess supply and selling during periods of excess demand - self-financing: money raised when selling products, used to buy next batch - when effective, stabilizes prices, encourages investment, and prevents sharp price fluctuations - however, requires large start-up and admin costs, and storage problems may arise. - Min prices can lead to inefficiencies, and if scheme operates at loss, taxpayers bear burden.

Answer 85

**Industrialisation: Lewis model** - Lewis model assumed developing countries had dual economies, traditional agri sector, low wages, low prod, underemployment, low savings, modern industrial sector, high investment and urbanisation - Rural-to-urban migration occurs due to higher wages in industrial sectors, leading to increased savings and investment - but, labour prod low some parts of year, in planting and harvesting ssn, lots of labour needed. not necessarily true that ppl w. higher wages will save and invest money - urban pov replaced rural pov, as industrial sector unable to provide jobs for all immigrants. improvements in tech = reduced demand for labour, so more pov **development of tourism** - natural climate and geog allows countries to build tourism industry, provides funds to develop economy - income elasticity of tourism = as global economy grows demand for industry will follow. also means will suffer during recession - tourists are source of foreign currency, so can fund imports with no -ve consequences - investment from TNC hotels, who bring knowledge. = improved infra, govt incentive to provide this. this investment has multiplier effect - jobs created working @ hotel, low skilled workers in local area. - higher tax rev as higher income and profits - but seasonal unemployment, tourism destinations in/out of fashion - if TNC repatirate profits, host country gets nothing. capital flight - externalities of production, e.g. pollution, waste, env damage, culture impact **development of primary industries** - provides funds to allow a country to diversify, allows infra development and better education - primary products volatile, primary prod dependency causes issues, Dutch Disease **fairtrade schemes** -key principles: fair price, community development, fair working conditions and protecting the env - means agreements made to buy guaranteed amount of produce over time period, @ price above market. gives producers stability and raises income - means no child labour, sustainable production, so no env damage **aid** - reduces absolute poverty, emergency relief after natural disasters. unclear if money ACC reduces absolute pov, as infra doesn't help those In need - increased globalisation and trade, and reduced world inequality - however, results in dependency culture, leaves countries unconcerned by finances as know can get aid. - corruption means money not always where meant to be. - hard to know best way to spend for best outcome **debt relief** developing countries suffer from high-interest repayments, limits growth, while small % of countries who have ent. makes sense to be written off - eases govt finances, allows money on provision of services and infra to aid development - moral hazard, as every poor country now expected to receive debt relief.

Answer 86

- aim to bring long term development and reduction in poverty - provide financing, policy advice and tech assistance. helps poorest countries and middle income, asw as powerhouses - helps strengthen priv sector in developing countries, provides w/ finance, tech assistance, risk insurance and settlement of disputes - funded over 12000 development programs since 1947

Answer 87

- not for econ development, to make sure exchange rate systems work well - provide loans, helps countries when there are int. exchange rate crises or when cant pay off int debt - when giving loans, IMF says to make a macroecnomic effort fixing it. usually, involves reducing imports and increasing exports, which reduces amt of domestic resources available for consumption. - however, countries not forced to get help from IMF, but only do as alternative is defaulting a loan. reforms help overcome issue, not a punishment - IMF also provides advice, aims to bring econ stability and raise living standards.

Answer 88

- non-profit organisations, run independently from govt - provide direct assistance to countries, such as education to healthcare, can be emergency or LR - act as pressure groups to lobby govt - however, believed they cant ever solve a problem alone, govt has to fix issues

Answer 89

**facilitate savings:** - allows ppl to transfer spending power to future. done through assets, e.g. storing money in savings acct, holding stocks and shares **lend to businesses and individuals** - allows consumption and investment. **facilitate exchange of goods and services** - by creating a payment system. central banks print paper money, institutions process cheque transactions. companies offer credit card, banks buy and sell foreign currencies **provide forward markets** - where firms can buy/sell in future @ set price, e.g. farmer selling crop they growing for a guaranteed price in 1 month time - provides stability **market for equities** - issuing shares allows companies to finance expansion, but ppl unlikely to buy shares if unable to sell in future. - financial markets make share be able to be sold on in future, so asset more appealing **providing insurance** - e.g. life, home, car

Answer 90

- retail banks - commercial banks - investment banks - speculators (generally investment banks) - insurance companies - savings vehicles (pension funds, priv equity, hedge funds, trusts)

Answer 91

- financial institutions often have more knowledge than customers. means can sell products they don't need, or that are cheaper elsewhere - asymmetric info on regulators too

Answer 92

- when the individual or firm doesn't pay the full costs of their actions - high risk decisions in order to make profit, leads to failure of businesses, significant financial losses for invidisuals

Answer 93

- where individuals make decisions in own best interests, knowing there are potential risks - occurs where workers take risk to increase their salary, any problems they cause are companies problems. worst is they lose job, company loses millions - global financial crisis, selling too many mortgages so wages went up, and wouldn't see -ve effects if loan not repayed

Answer 94

- almost all trading in financial markets is speculative, leading to market bubbles where asset price rises massively and then falls. - occur as investor sees price of asset rising, so purchase as believe price will continue up, and so profit. leads to high demand, price up, so investors decide not worth it, dumb oil, so mass selling. know as **herding behaviour** - bubble in housing market, lent too much mortgages, so increased demand for houses. when bubble bursts, e.g. rise interest rates, fall In demand for houses and -ve wealth effect, reducing AD, and banks left with unpaid loans

Answer 95

- where a group of firms/businesses collude to fix prices or exchange info, which will lead to gains at expense of other `participants in market - one eg. is insider trading, where individual has knowledge abt somt which will happen in future, that others don't know

Answer 96

- controls monetary policy, through IR and controlling money supply - acts as banker to govt. differs from country to country, England was previously responsible for the national debt but role transferred to debt management office - banker to other banks: banks deposit in central bank, used to balance acct of banks at end of each day, when banks owe money. - some countries regulate the financial system. important to prevent financial institutions undertaking activities which harm consumers or engage in risky activities which cld lead to collapse and prevent risk, causing whole system to fall.

Answer 97

- includes: banning market rigging, preventing sales of unsuitable products, max interest rates to prevent consumer exploitation and preventing excessively risky sending

Answer 98

- lower the avg income of country, lower % of GDP spent by govt. poorer countries lower tax rev, and HIC demand more services from govt, govt provided goods are income elastic - however, some countries like USA have low state spending as different attitudes - govt trying to reduce debt, so spending decreases, and depends on govt aims

Answer 99

- free market economists say govt spending wasteful and causes inefficiency. but govt enjoys economies of scale when provides goods, improves productivity - education creates human capital (needed for growth) and healthcare reduces number of days workers lose from illness. spending on R+D not done by priv sector, govt does to give businesses LR competitive edge - spending = multiplier effect, focused on areas w/ high unemp, = growth

Answer 100

**living standards** - reduce absolute poverty, providing benefits and basic goods e.g schooling + healthcare. - in developing countries, govt not have resources, leads to malnutrition, bad water - principal-agent problem? govt spend on behalf of ppl, but individuals may have done differently. loss in welfare, fall in living standards (political system so ppl vote who they like, shld reduce PAP)

Answer 101

to spend money above tax rev, govt has to borrow from individuals and businesses. but money in economy available to borrow doesn't increase. - so increased demand for loanable funds (govt competing with priv sector), so higher interest rates - discourages firms from borrowing and investing, as increased cost - limited number of resources means that all being used by govt, none in priv sector, so lack of spending/investment in priv sector means no real increase in AD (-ve impact econ activity) - offsets effect of govt activity as lack of priv sector activity

Answer 102

- where govt spending is high, tax has to be high so spending is sustainable. - but high tax might disincentive - oil rich countries exception, oil pays for most of govt spending

Answer 103

- spending shld increase equality, leads to redistribution of wealth so helps provide minimum standard of living - means everyone has access to basic goods, e.g education + healthcare

Answer 104

- high marginal rates of tax discourage individuals form working. - supply of labour relatively elastic, reduction in tax will = significant increase in work, so ppl work longer, take promotions and more ppl join workforce - high taxes on high-income earners cld encourage to move abroad, taxes on poor = poverty trap - high income tax reduces incentives, whereas indirect tax doesn't. - potentially, high taxes means ppl work longer to maintain money, so increases incentive to work

Answer 105

- laffer curve shows that a rise in tax rave doesn't necessarily increase revenue. is ppl taxed @ 100%, wouldn't do work and so tax rev is 0% - rev initially rises as tax rate increases, but will be maximised and then start to fall. as tax rises, motivation and drive fall, so fall in output, increased reason to use tax avoidance/evasion - revenue from indirect tax uncertain, depends on consumer spending patterns

Answer 106

- taxes impact LRAS, SRAS, AD - changes will impact price - indirect taxes like VAT often cost push inflation

Answer 107

- rise in taxes decreases income, and so decreases consumption - means less spent on imports, as income elastic, so in SR, trade balance improves - in LR, lower AD will reduce business's need to invest, reduces competitiveness so exports decrease

Answer 108

- low taxes on profit.investment = encourages businesses to invest, as higher lvl of return - can lead to 'race to the bottom' where countries keep lowering taxes to make lowest, to encourage investment. eventually, fall in rev for all countries

Answer 109

automatic stabiliser: regulates, ensures fluctuations not too big discretionary fiscal: deliberate manipulation of govt spending and taxes to influence AS is a control, DF is a conscious action

Answer 110

national debt is all govt debt over many years fiscal deficit it when govt spends more than receives in that current year

Answer 111

cyclical deficit when govt spending and tax fluctuate around trade cycle. recession, tax rev low, govt spending high, so deficit. when boom, no cyclical deficit, so any deficit is structural deficit (fiscal deficit when cyclical deficit is 0) (LR and not related to state of economy) if govt has structural deficit, likely national debt grows over time as govt has to consistently borrow money to finance spending. argues structural deficits need to be eliminated, but difficult as impossible to know what part of the deficit it structural/cyclical

Answer 112

- trade cycle. downturn, govt tax rev decreases while govt spending increases, so deficit increases - unforeseen events like natural disasters = huge increase in spending which increases deficit - interest rates. if int rates on govt debt increase, amount needed to be prepared increases, so deficit increases. impact depends how significant this is in size of deficit - privatisation provide one off payments to govt, decreases deficit in SR, depends on value of company sold - number of dependants affect spending and tax rev so influence deficit. - size of deficit as % of GDP, depends on speed/size of growth

Answer 113

- if govt continuously deficit, national debt will increase slowly. - general view if fiscal deficit over 3%, will lead to increased national debt as proportion of GDP - ageing population = high national dept as lots of pensions to fund, so structural deficit.

Answer 114

- High borrowing may raise interest rates, potentially crowding out priv-sector investment. However, during recessions, priv sector investment falls, interest rates remain unchanged. - Govt spends significant amounts on servicing national debt through interest repayments, impacts future generations as they have to pay off current budget deficit. however, if deficit from capital expenditure, future benefits so extra payments justified. However, inflation and GDP growth over time can erode value, decreases burden. - High fiscal deficits = inflation if government spending increases without a corresponding decrease in private sector spending. otherwise, AD rise (inflationary). if govt cant borrow, may print money. Excessive money printing can cause hyperinflation as ppl have more, spend more, AD rises a lot (depends how much printed) - High debt levels can lead to reduced credit ratings, increasing the government's borrowing costs as riskier - If a govt borrows from abroad, it may struggle to repay debt in foreign currency, impacting imports and potentially causing economic disruptions. - govt borrowing for capital spending can improve the supply side of the economy and stimulate growth. Additionally, deficits can be used for short-term demand management during recessions. - intergenerational equity, fiscal deficit benefits current gen at expense of future generations

Answer 115

- stimulate demand by high spending = econ growth, higher tax rev and so budget surplus and eventually reduced national debt - rely on automatic stabilisers to allow economy to grow, so national debt decreases as % of GDP

Answer 116

- Progressive tax and inheritance taxes can redistribute wealth, but enforcement challenges exist. avoidable by careful planning - Benefits and transfer payments, both universal (available to everyone) and means-tested (available to ppl with sufficiently low income/wealth), provide support and min standard of living, better @ improving inequality as directed at poor - but can reduce incentive to work, esp if benefits are near same amount as salary - Govt provision of essential services like healthcare and education aims to ensure equal opportunities but also benefits higher-income individuals and carries high costs. - Policies like national min wages, equal pay legislation, and trade union support can reduce wage differentials, but may also lead to unemployment or loss of skilled workers. - Improving access to education and training opportunities mitigates intergenerational inequality for kids w/ poorer backgrounds. schemes like lower grades into uni for those in poor areas - Price controls on essential goods increase spending power for the poor but may lead to excess supply or black markets.

Answer 117

- may do for domestic reasons, e.g. to control inflation, or global issues like low exchange rate/change in world commodity prices - fall in bank rate likely to increase supply of money as more demand for loans - overall, central banks shld allow inflation caused by supply side shocks, but manage demand side

Answer 118

- govt can increase any of factors which increase comp - supply side measure improve flexibility and productivity. encourage competition, forcing firms to be efficient and therefore comp in global market - emphasis on quality of products, education improves skills of workforce and helps flexibility - exchange rate policies can be used, to control inflation and macro stability

Answer 119

- tax, reinvest money to greener energy sources/technology (supply side policy) - interventionist policy, subsidise green tech - removing taxation on solar panels/green tech

Answer 120

- less structured govt, so cant make decisions - corruption

Answer 121

- economies increasingly interdependent. macro policies used to combat effects of -ve shocks - commodity price shock, oil prices increase a lot. expansionary policy to combat fall in GDP, deflatinary to control inflation - financial crisis, expansionary to increase AD, output, incomes, and so spending - changes in exchange rates can cause inflation, or fall in growth and poor BoP

Answer 122

- TNCs can bring large gains to economy, through creation of jobs, tax revenue raised, knowledge brought in, and investment they undergo - but, -ve econ and soc impact by destroying local culture, affecting environment, withdrawing more profits than they inject from investment - some countries won't allow TNCs unless they join with a local partner, so some profits stay in country, and knowledge/tech is transferred.

Answer 123

- transfer pricing allows for firms to tax avoid, occurs if firms produce good in one country and transfer into another country to make a diff good which then sells - if taxes higher in first country than second country, can set low price on product in first country, as aim is to increase profit made in low tax country, and decrease in high tax country so overall tax is less. - in UK, countries who don't allocate sufficient profits challenged by HMRC, billions of £ earnt

Answer 124

- hard for individual govt to control TNCs. small countries may earn less in rev than TNC earns in profit. high educated, successful executives use lots of resources for solutions which will benefit them - anything that would benefit UK would lead to massive losses for other countries like Bahamas, Ireland etc.

Answer 125

**Inaccurate Info:** - SR economic data may be unreliable, making it difficult for the government to identify problems or effectively address tax evasion and avoidance. - Past data may not accurately reflect current economic trends, complicating decision-making for entities like the Bank of England. - Conducting thorough cost-benefit analyses is time-consuming and costly. **Risks and Uncertainties:** - The future is unpredictable, making it hard for the govt to determine the necessity of additional spending or accurately anticipate consumer reactions to policy changes. - Managing risks is crucial for effective decision-making. **External Shocks:** - Policymakers can't control external shocks to the economy, only mitigate their impact. - Responding to unforeseen events may require adapting policies, which could undermine existing plans. - e.g Brexit has disrupted government efforts to balance the budget.

Answer 126

- if demand side shock: changes AD, spend money to boost consumption (interest rates?) or increase confidence, COVID - if supply side shock, changes SRAS, if prolonged will decrease LRAS as all oil production = less efficient - govt shld pursue expansionary fiscal

Answer 127

cigarette industry has value of £2 billion, so contributes to GDP and therefore growth, but doesn't lead to development as it worsens the quality of life for people

Answer 128

qatar spent 300 bil on infra before world cup, whole country connected now due to infra, trains etc eval: HS2 very expensive, didn't work and so large opportunity cost

Theory Flashcards

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