Unit 4

Question 1

CPI

Answer 1

the headline measure of inflation derived from movements in a weighted basked of goods over a 12 month period

Question 2

Trade deflection

Answer 2

redirection of international trade due to the formation of a free trade area

where traders will try to
Import goods to members with the lowest tarring then export them to other members this circumvents the polices of these that want higher tarried as once the foods are moored trade inside the area is free

Question 3

Advantages of HPI

Answer 3

shows what both developing and developed countries lack

Shows the extent of deprivation in an area

Takes into account social factors

Looks at people in terms of the poorest

Question 4

Limitations of HPI

Answer 4

Not all data is always valuable

Many of the data are too broad to take into consideration

Depends on the accuracy of data

Question 5

Unemployment is a

Answer 5

is a lag indicator because there has to be certainty that jobs are avalonale and stables

Question 6

Limitations of HDI

Answer 6

Wide divergence between countries, countries like Kenya and China have difference HDIs spending on the region

HDI reflects the long term changed and mah not respond to the short term

Higher national wealth does not always reflect welfare

Question 7

Family expenditure survey

Answer 7

A representative monthly survey of the UK’s household expenditure used to derive changes in the CPI

Question 8

Weighted CPI

Answer 8

weighted according to its relative importance as a proportion of total spending

Question 9

Wage rate spirals

Answer 9

A process whereby an increase in costs such as wages will lead to an increase in prices which will lead to an increase in a firm’s costs and so on

Question 10

Inflation raw materials

Answer 10

Inflation in countries that export commodities or a fall in the value of the pound May increase the UK price of imported raw materials

Question 11

HDI Currency

Answer 11

if the currency changes then it may be that our standard of living falls but will just be a result of the exchange rate falling

Question 12

Unemployment disadvantage scarce

Answer 12

A waste in scarce repaired and results in the opportunity cost of lost potential output, the economy is operating below the maximum output it could achieve increased unemployment is likely to reduce consumer spending as less is being produced. As consumer spending confidence falls the willingness of people to spend falls and they will tend to build up their spending.

Question 13

Hysteresis

Answer 13

The tendency for a variable not to return to its original value or state once changed

Question 14

Unemployment and income and wealth

Answer 14

Areas and regions of persistently high unemployment see falling incomes and widening inequalities of income and wealth

Question 15

Advantages of fixed ER

Answer 15

increased certainty

Seen as a way of controlling inflation as the government had to follow economic policies that would maintain that rate by restricting demand for foreign currency and ensure inflation was not higher than trading partners

Fixed ER would lead to orderly international currencies resulting from price stability and increased trade; the fluctuations of the trade cycle would be reduced as countries would not seek to gain an advantage by devaluation

Question 16

Policies to reduce unemployment

Answer 16

Increase AD in order to generate increased national income and employment

Expansionary monetary policy to make credit more available

Regional policy to stimulate economic activity in those areas and regions where unemployment tends to be above the national average

Question 17

Second Phillips curve

Answer 17

Higher level of unemployment can be traded off with any level of inflation

Question 18

Indirect tax choices

Answer 18

Indirect taxes have less impact upon individual work very leisure choices therefor governments could levy high indirect taxes to allow a direction in different taxes

Question 19

Benefits of unemployment

Answer 19

Reduced environmental damage and pressure on non renewable resources if unemployment leads to slower growth of consumption and production

Question 20

Indirect tax spending

Answer 20

Indirect changed are arguably more effective in changing the overall pattern of demand for particular goods an serviced by changing relative prices

Question 21

Cyclical budget deficit

Answer 21

Looks at the overall budget deficit which rises and falls alongside economic activity as automatic stabilisers take effect

Question 22

Fiscal policy poverty trap

Answer 22

The negative effects of the poverty trap where households in low incomes gain little net financial benefit from supplying extra hours of their labour can be reduced with record of the tax and benefit system

Question 23

Fiscal policy time lag

Answer 23

The inability to accurately predict the time lag of fiscal policy makes it near enough possible to use it for fine tuning any aspect of AD as shown through the destabilisation of stop go policy

Question 24

Bhsiness investment fiscal policy

Answer 24

Lower rates of co op tax and business rates will increase potential profitability and hence boost the firm’s spending on fixed capital

Increased tax allowances can be used to stimulate increase in research and development and encourage entrepreneurship

Low rates of co op tax could also attract DFI

Question 25

Crowing out tax

Answer 25

if the government increase tax on the private sector then this will reduce the discretionary income of cinders and firms Higher government spending financed by higher tax should not increase overall AD begin effect

Question 26

Broad money

Answer 26

Money held in banks and building societies that is not immediately accessible. This money is held in accounts for which notice is required to make withdrawals

Question 27

Borrowing crowding out

Answer 27

If the government borrows it borrows from the private sector If the government buy these government securities and pension funds they will not be able to use this money to fund the private sector investment Governing borrow crowds out the private sector investment

Question 28

MNCs on developing countries

Answer 28

The ability of the host government to regulate their activities effectively, may not be prepared to forgo safety and human rights to attract foreign direct investment

Question 29

MNCS may expect incentives

Answer 29

Abolition of free trade restrictions Special tax rates Subsidies from labour laws Not only will this reduce fiscal revenues but also create opportunities for illicit behaviour by tax administers and compiled This issue has become cubical in emerging economies which face more severe budgetary constraints and corruption than industrial industries

Question 30

Advantages of trade worldwide

Answer 30

Worldwide selling opens up larger markets for countries with the lowest comparative cost, firms will have access to larger markets which will enable them to produce a larger scale and achieve the MES, increases output and reduce prices to improve competitiveness and portability

Question 31

Advantages of trade econ

Answer 31

international trade is essential to achieve full employment and the exploitation of economies of scale as the UK market is too small in isolation The expansion of firms should bring with it economic growth and rising living standards The case of speculation and trade is based on the idea that all countries in total will gains in terms of increased production welfare and economic effiency

Question 32

Globalisation call centres

Answer 32

the movement of manufacturing and growth of outsourcing in terms of call centres and information technology services has led to calls for job protection Especially marked in the USA which has experienced job losses and structural unemployment as firms have located to developing countries

Question 33

A store of value or wealth

Answer 33

As we can exchange money for goods and services it is a confident way of holding purchasing power into the future of we choose not to spend it today

Question 34

Comparative advantage

Answer 34

Indicate that global resources can be used more effiency let when countries specialise in producing goods and services, even if they don't benefit from absolute advantage they should still specialise

Question 35

Advantages of trade economies

Answer 35

Specialisation allows for increased efficiency, with greater effiency the prices of goods should fall and falling import prices will put pressure on domestic producers to improve their effiency and lower prices

Question 36

Without trade

Answer 36

Firms will not be able to fully exploit economies of scale and reach MES

Question 37

Dumping

Answer 37

Some countries subsidise firms to produce goods that can exported and sold below the price of non subsides firms in competitors' countries

Question 38

Adjustable peg

Answer 38

value of a fixed ER can be changed as circumstances require

Question 39

Agricultural sector developing

Answer 39

agricultural sectors of developing countries face tariffs imposed by developing countries and reduce their potential to exploit their comparative advantage

Question 40

Capital account b of P

Answer 40

the part of the balance of payments that records capital flows in and out of the economy

Question 41

Net income flows

Answer 41

the difference between inward and outward flows of interest profits and dividend

Question 42

Net current transfers

Answer 42

mainly government transfers to and from overseas organisations

Question 43

Net foreign direct investment

Answer 43

The net acquisition of productive assets by UK firms overseas and by foreign firms in the UK

Question 44

Net portfolio investment

Answer 44

the purchase of financial assets

Question 45

Expansion of the EU

Answer 45

free market capitalist economies with very low rate or flat taxes and are natural allies or Anglo Saxon neo libarlism this means economic reform is aimed st boosting the dynamicsm of the economies in contrast to the social model which stresses social objectives they are seen by the UK as a powerful counterweight to the combined power of Rwanda and Germany within the EU

Question 46

Supply side

Answer 46

``` Flexibility Incentives Training Privatisation Regulation Reform of Unions Degregulation Education ```

Question 47

under a fixed ER they could

Answer 47

increase interest rates which would increase the demand for £ and increase the supply for $ as they need our currency to invest in order to max short term profit and in exchange they offer us $

Question 48

Supply side challengers for the UK

Answer 48

``` Persistent productivity gap High youth unemployment Low trend growth of GDP rise of emerging nations Deep regional economic divide Structural trade deficit Low investment and research Rising inequality ```

Question 49

Economic cycle

Answer 49

The cyclical pattern of short term fluctuations in GDP from year to year

Question 50

problem with calculating GNP in a different currency

Answer 50

The accuracy of calculations is based on the assumption that the exchange rate of the local currency accurately reflects the value of the dollar PPP - an exchange rate that takes into consideration the cost of an average basket I one country of goods in comparison to another

Question 51

Sustainability of economic growth

Answer 51

Meeting the needs of the present generation whilst not compromising the needs of the future generation

Question 52

Market mechanism can overcome problems stated in clubs of Rome by

Answer 52

Cause consumers to change buying habits Increase in supply of oil as firms find it profitably to exploit new relatively inexpensive oil fields Firms find it profitable to invest resources in substitute technologies eg solar power

Question 53

Boom

Answer 53

Unemployment is low and economic growth is high due to exciting firms expanding and new ones being created After this point it is not possible for output to meet increasing levels of demand, with increasing demand relative to supply the economy may overheat leading to increased inflation and b of P problems

Question 54

Downturn

Answer 54

Inflationary pressure created by the boom will result in a reduction in internal competitiveness which may lead some firms to cut back on production or go out of the business The increase in inflation and subsequent rise in unemployment will reduce confidence and deter consumption and investment

Question 55

Recession

Answer 55

Aggregate demand is falling and unemployment is high The fall in confidence of firms may take the economy into a depression or slump Eventually falling economic activity ceases and the economy moves into recover due to the constraint on demand At some point households will have to raise their spending in order to replace worn out items which is plausible due to increased welfare benefits due to high unemployment P

Question 56

Changes in inventory

Answer 56

As well as capital equipment firms also invest in stocks of raw materials and stocks of finished goods ready to be sold In order to ensure that there are no interruptions in production and to protect against fluctuations in demand Although inventory investment accounts for a very small percentage of GDP fluctuations in inventories can trigger a recession Stocks of unsold or finished goods build up when firms are too optimistic about demand and the knock on effect is that they are then forced to cut production by more than the original fall in demand this restocking can turn into a slowdown or recession

Question 57

Speculative bubbles

Answer 57

A rapid rise in economic growth will result in a speculative bubbles of asset prices in which individuals will look to require assets who's value is rising When consumers realise that the value of the asset has risen considerably above its real value they will sell it in order to gain a profit before it's too late which can cause the bubble to burst resulting in a loss of consumer and business confidence and result in recession

Question 58

Environment floods

Answer 58

Insurance claims for damage caused by floods so far in winter 2015 would reach £1.3bn average insurance claim for damage is £50,000 which is well above the average of £31,000 for storms in 2013-2014

Question 59

Environment floods

Answer 59

Insurance claims for damage caused by floods so far in winter 2015 would reach £1.3bn average insurance claim for damage is £50,000 which is well above the average of £31,000 for storms in 2013-2014

Question 60

Shoe leather costs

Answer 60

The time and money spent on shopping around by consumers to find the best deals when prices are rising throughout the economy If forces are stable then consumers know what is a reasonable prices but when prices are rising costumed and businesses are unclear about what constitutes as a fair price Shoe leather costs is the search costs for consumers father information about price changes and IR which banks offer to max the real return on their savings

Question 61

Inflation and slow wage growth

Answer 61

creates a cost of living crisis as the value of the £ falls and increases the cost of living because it would now buy less goods and services than in the past

Question 62

Replacement ratio

Answer 62

A high level of state benefits relative to their income after tax and receipt of benefits when in work creates a disincentive to accept employment

Question 63

Replacement ratio

Answer 63

A high level of state benefits relative to their income after tax and receipt of benefits when in work creates a disincentive to accept employment

Question 64

The pace of technological change

Answer 64

and global integration will increase demand for a more highly skilled workforce with the ability to adopt to changing technologies and shifting product demand

Question 65

Borrowing in many cases has resulted in a build up of unsustainable debt

Answer 65

heavily indebted countries found that a high proportion of export revenues were being taken up with debt repayments

Question 66

A key problem with LEDCS

Answer 66

they lack the ability to produce the physical capital needed to improve productivity and must import goods from abroad

Question 67

Politicians

Answer 67

may be unwilling to use resources to promote long term development and focus on short term gains that will keep them in power

Question 68

NPower

Answer 68

Cut gas prices by 5.2%

Question 69

Obama oil

Answer 69

Obama is to tax every barrel of oil $10 until his time in the white house ends, seen to raise $20bn a year, is to be reinvested into low carbon technologies and expand national transit systems

Question 70

Why did the PC break down

Answer 70

Stagflation

Question 71

Phillips curve

Answer 71

1861-1957 The result may be that higher unemployment is required to keep inflation at a certain target level Monetarist believe the best control for inflation is a tight control of money and credit

Question 72

if unemployment falls below the NAIRU

Answer 72

because a government stimulates AD in a bid to reduce unemployment the rate of inflation rises

Question 73

If unemployment rises above the NAIRU

Answer 73

the wage rate and inflation will fall

Question 74

Uses of taxation

Answer 74

Funding government spending - governments must raise finance for their various expenditures they are bale to borrow up to a certain extent but the majority of the finance must come from taxation to avoid inflation Managing the economy as a whole - taxation can be used to influence the UK's macroeconomic performance The government may alter taxes and their rates in order to influence economic growth inflation unemployment and to a lesser extent b of p Redistribution of income - if a government judges the distribution of income to be unequal if may levy tastes to reduce inequality in some groups in society in order to boost income of others

Question 75

fiscal policy fine tuning

Answer 75

in the last governments attempt fine tuning altering the government spending and radiation which aimed to make precise adjustments to the level of AD

Question 76

Monetary policy history

Answer 76

Controlling inflation has been the main objective of UK monetary policy since the late 1970s Before 1992 the bank attempted to control inflation by intermediate monetary policy Mid 1970s until 1985 underpinned by monetarist economic theory the money supply was used as the intermediate target of monetary policy Replaced from 1985-1992 with the exchange rate

Question 77

Developed countries

Answer 77

Reduced inflationary pressure and low IR the reduction in price of manufactured goods has increased the real income of consumers in developed countries and increased standard of living

Question 78

Criticisms of comparative advantage

Answer 78

ignores a fluctuating currency - a country could have a comparative advantage in production that could be eliminated in the movement of a currency, can cause prices and costs to change and would lead to inefficiencies and a reduction in the amount of trade taking place In reality firms are likely to pretext goods and services which they consider to have a strategic value meaning they are of extreme importance to a country Political considerations such as grade embargoes may lead to countries pleading goods with high comparative costs Ignores transport costs and reduced costs due to conterainsrism

Question 79

TOT

Answer 79

the rate of exchange will determine the benefits of trade for the two trading partners

Question 80

Reasons against protectionism

Answer 80

Welfare losses occur due to economic inefficiency as countries are not specialising in those foods where they have the lowest opportunity cost, can be seen in terms of domestic consumers paying higher prices as a result of EU protection for textiles Retailiation may occur if firms feel their domestic market is threatened, will reduce world trade, China threaten e to retaliate against the levy of additional duties by zEu On exports of shoes Protection props up inefficient monopoly producers as they do not face efficient competition

Question 81

Tariffs

Answer 81

Specific - a tax levied at a fixed rate per unit Advolorem - a tax which is a percentage of the price of the unit

Question 82

Why do firms dump

Answer 82

gain a foothold in the market and common currency and benefit from economies of scale

Question 83

Foreign direct investment

Answer 83

Investments in the domestic economy in new manufacturing plants by foreign multinational companies

Question 84

Stability of growth of AD

Answer 84

backed by sensible government policies generate the ideal environment for business investment

Question 85

Measure of domestic progress

Answer 85

A measure of economic welfare designed to reflect progress in quality of life and profess towards a sustainable economy by factotum in the social and environmental costs of economic growth and benefits of unpaid work

Question 86

Stability of economic growth considers

Answer 86

whether the pursuit of maximum growth today will impose costs in future generations that outweigh the benefits

Question 87

Sensible demand side policies

Answer 87

Which avoid large cycle gum adjoins will of donuts to economic stability and a good environment for investment

Question 88

Macroeconomic stability

Answer 88

Meeting the needs of the current generation without compromising or imposing costs onto the needs of the future generation