Unit 4 Flashcards

Question

What does the Terms of Trade Calculation Show?

Answer 1

>100 : Terms of Trade are Improving (It shows the exports can buy x% more than it could before) <100 : Terms of Trade are Worsening

Answer 2

Low inflation Better standard of living (less has to be exported to buy a given quantity of imports) Deterioration in the current account Lower AD: low output + high unemployment

Answer 3

A worsening terms of trade indicates that a country has to export more to purchase a given quantity of imports. High inflation Worse standard of living (more has to be exported to buy a given quantity of imports) Better trade balance

Answer 4

No Internal Trade Barriers: Members are allowed to freely trade with each other.

Answer 5

No Internal Trade Barriers Common External Trade Barriers: Members share similar rules with external trading

Answer 6

No Internal Trade Barriers Common External Trade Barriers Factor + Asset Mobility: Factors of production (e.g. labour) can move freely between members

Answer 7

No Internal Trade Barriers Common External Trade Barriers Factor + Asset Mobility ``` Common Currency (e.g. Euro) They also have similar labour market policies, and some degree of tax harmonisation ```

Answer 8

A group of countries that join together and agree to increase trade between themselves.

Answer 9

1. FDI: An increase in FDI results from trade blocs, creating larger markets, resulting in lower costs to manufacture products 2. Enhanced Competition: Trade blocs bring manufacturers in numerous countries closer together, resulting in greater competition. This promotes greater efficiency. 3. Market Efficiency: The inc. in consumption experienced with changes in demand combines with a greater amount of products manufactured, to result in an efficient market 4. Trade Effects: Trade blocs eliminate tariffs, driving the cost of imports down. Consumers make purchases based n the lowest prices, allowing firms with a CA to thrive. 5. Economies of Scale: Larger markets created via trading blocs. Therefore, the gains of efficiency + advanced technology can be reaped.

Answer 10

1. Regionalism vs Multiculturalism: Trading blocs inherit bias in favour of their participating countries. This means integration only happens regionally, rather than globally. 2. Competition: Existing smaller firms are unable to compete with international firms, driving out competition 3. Market Efficiency: The inelastic nature of supply for some firms means they are unable to match the competitive levels of other firm and so can't be as efficient; this gives monopolies an unfair advantage. 4. Interdependence: If trade of one country is suddenly disrupted (e.g. due to conflict or natural disaster), this will have severe consequences for the economies of all participating countries

Answer 11

With more trading blocs, trade has been created between members, but diverted from elsewhere. Trade creation occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer. Trade diversion occurs when trade shifts to a less efficient producer. Usually, a country might stop importing from a cheaper producer outside a trading bloc to a more expensive one inside the trading bloc. Moreover, protectionist barriers are often imposed on countries who are not members, so trade is diverted from producers outside the bloc to producers within the trading bloc. The UK trades mainly with the EU, at the expense of former trade links in the Commonwealth. (Trade Creation is an advantage of trading blocs; Trade Diversion is a disadvantage.)

Answer 12

An international organisation that regulates global trade. Their headquarters are in Geneva, Switzerland There are 164 member states in the world.

Answer 13

1) Non-Discriminatory: They're not allowed to have free trade policies with one country and strong protectionist measures with another 2) Free from Barriers: less protectionism; the WTO obviously likes trade, ad so thinks as much should take place as possible 3) Predictable Trade: Individual countries can foster an economy where investment decisions can take place, jobs are created well + businesses flourish 4) Promoting Fair Competition: May allow protectionist measures for helping businesses be competitive. This only happens when it's needed/justified 5) Beneficial for Developing Countries, through Special Provisions: e. g. the time + flexibility to grow and develop

Answer 14

Set + enforce rules on international trade Resole trade disputes Provide a forum for negotiating trade liberalisation To monitor further trade liberalisation To increase transparency of the decision making process To help developing countries fully benefit from global trade Cooperate with other major economic institutions

Answer 15

Trade within regional trade agreements has also significantly increased (trade creation) as a result of their emphasis on free trade. However, this is at the expense of trade with non-members (trade diversion) who may be subject to trade barriers. This is in conflict with the primary aim of the WTO.

Answer 16

Infant Industry argument Geriatric/Sunset Industry argument Ensures employment Protection Corrects a BoP Deficit on the Current Account Restricts Imports from countries with less stringent health + safety and environment legislation Strategic reasons Raises Tax Revenue Retaliation Prevents Dumping

Answer 17

Industry: Without protection, new small businesses may not be able to compete, as they have yet to establish themselves. Geriatric: the protection of industries that need time to restructure so they can become competitive again

Answer 18

Barriers to trade may be imposed by Country X on Country Y, because Country Y has restricted the imports of Country X's goods

Answer 19

This is a type of predatory pricing behaviour, whereby goods are sold for export at less than the average costs of production. It is illegal under WTO rules, and unfair distorts Comparative Advantage

Answer 20

1. Higher price and less choice for consumers 2. Inefficient resource allocation - CA is distorted, leading to lower output + SoL 3. Regressive Effect on Income Distribution - he tariffs fall on the products lower income families spend a higher % of their income of 4. Product Inefficiencies - firms protected from protection competition have little incentive to reduce production costs 5. Trade Wars - one country imposing import controls will lead to retaliatory actions 6. Difficult to remove barriers once they're set up

Answer 21

``` Tariffs Quotas Embargoes Rules + Regulations Domestic Subsidies Preferential state Procurement Policies ```

Answer 22

They are simply taxes on imports

Answer 23

Custom Duties

Answer 24

Physical Restrictions on the amount of goods that can be imported

Answer 25

A Complete Ban on the import of a particular good

Answer 26

Grants given to domestic producers

Answer 27

Where a government favours local/domestic producers when finalising contracts for state spending

Answer 28

Price paid by consumers rises Imports fall Domestic output rises Government tax revenue rises

Answer 29

https://11tanihi.files.wordpress.com/2011/01/pic008.gif | the two triangles represent welfare loss

Answer 30

``` Price paid by consumer rises Imports fall Domestic output rises Loss of businesses to some importers Revenue to the remaining importers rises (because prices go up) ```

Answer 31

https://image.slidesharecdn.com/a2protectionism-130916023547-phpapp02/95/protectionism-25-638.jpg?cb=1379299646 (This is for steel, but it applies for everything) The rectangle with height P1P2 and length 0-Quota shows extra revenue for remaining importers 0-Q1: Imports before quota 0-Quota: Imports after quota

Answer 32

No imports Domestic Output increases Prices rise for consumer

Answer 33

Increases cost for importers

Answer 34

Eliminates competition

Answer 35

Elasticity of D+S Amount of the tariff Ability of domestic firms to Increase Output Deadweight welfare loss / producer + consumer surplus Potential retaliation, regressive effects, inefficiencies, etc

Answer 36

A record of all a country’s financial dealings with the | rest of the world over the course of a year.

Answer 37

Current account Capital account Financial account International investment position

Answer 38

1. Balance of trade in goods, and balance of trade in services (MAINLY) 2. Income 3. Current Transfers

Answer 39

This comprises income earned by domestic citizens who own assets overseas minus income earned by foreign citizens who own assets in this country. It includes profits, dividends on investments abroad and interest

Answer 40

Money transfers between central governments (who lend and borrow money from each other) Grants, such as those that the UK receives as part of the CAP from the EU.

Answer 41

Direct Investment Portfolio Investment Financial Derivatives Reserve Assets

Answer 42

Capital provided to or received from an enterprise, by an investor in another country.

Answer 43

Investments in equities and debt securities.

Answer 44

A contract between 2+ parties, whose value is agreed upon financial assets/index/security

Answer 45

Financial capital held by monetary authorities to finance trade imbalances

Answer 46

Transfers of ownership of fixed assets It is relatively small.

Answer 47

The balance sheet of the stock of external assets and liabilities.

Answer 48

* relatively low productivity * relatively high value of the country’s currency * relatively high rate of inflation * rapid economic growth resulting in increased imports * non-price factors such as poor quality and design.

Answer 49

Expenditure Switching Policies Expenditure Reducing Polices Supply Side Policies

Answer 50

Policies to make the Price of Imports Rise, or the price of UK goods to fall 1. Protectionist policies- e.g. tariffs, quotas or subsidies to domestic producers Problem: Illegal under WTO rules 2. Devaluation/Depreciation of the exchange rate Problem: You don't interfere in the exchange rate market, if you have a floating exchange rate E: Revaluation- causing exports to also fall so that the current account deficit won't be corrected

Answer 51

Policies that aim to Reduce the Spending Power of Consumers 1. Deflationary Fiscal Policy: Reducing AD either be decreasing gov. spending or by increasing taxes 2. Deflationary Monetary Policy: Increasing interest rates Problem: Most counties have independent central banks, which control inflation, but not the exchange rate E: Spending on domestic goods decrease, increasing unemployment and reducing economic growth

Answer 52

Policies designed to Increase Productivity and Competition. These help improve international competitiveness, increasing exports. Goods are made competitiveness through: 1. Increase in Education + Training 2. Tax breaks + investment allowances to stimulate purchase of capital equipment 3. Tax breaks + investment allowances, to stimulate purchase of capital equipment 4. Privatisation, deregulation + contracting out of public services E: Opportunity Cost

Answer 53

Negative Impact on AD - Fall in real GDP/ output, negative multiplier effect - Economic slowdown/recession - Negative output gap Negative effect on Company Profits + Business Confidence - Fall in demand - fall in capital investment - Plant closures/ job losses - cyclical unemployment - Fall in tax revenues, rise in benefits - Could worsen North/South divide

Answer 54

Higher Standard of Living | Better quality goods

Answer 55

Inflationary pressure, because exports/injections are high in relation to imports/leakages Increase in the value of the £ - fall in international competitiveness Living standards may fall if the surplus was caused by higher exports, resulting in less goods available for domestic consumers

Answer 56

Increase in International Competitiveness Greater confidence in UK economy Greater FDI

Answer 57

The rate at which one currency can be exchanged for another.

Answer 58

The number of units of the domestic currency that can purchase a unit of a given foreign currency

Answer 59

Measures the value of a currency against a basket of other currencies These currencies refer to the countries they trade the most with

Answer 60

Supply + Demand

Answer 61

Under floating exchange rates, the exchange rate is determined by supply and demand. There is no government/central bank intervention. The UK uses this.

Answer 62

A currency's value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value (e.g. gold) The value is determined by the government or central bank

Answer 63

The exchange rate is allowed to float usually within a range, and the central bank intervenes by buying + selling the currency, in order to influence the exchange rate. Chine + India uses this.

Answer 64

When the exchange rate goes up. This only occurs in a Fixed exchange rate, where the government/central bank determines this

Answer 65

When the exchange rate goes down. This only occurs in a Fixed exchange rate, where the government/central bank determines this

Answer 66

When the exchange rate goes up. This only occurs in a Floating exchange rate, where market forces (supply/demand) determines this

Answer 67

When the exchange rate goes down. This only occurs in a Floating exchange rate, where market forces (supply/demand) determines this

Answer 68

Relative interest rates (hot money flows) Relative inflation rates International trade performance Government finances (budget deficits/surpluses) State of the economy Inflows + Outflows of foreign investment (FDI) Speculation Quantitative Reasoning

Answer 69

Changing Interest Rates: Raising interest rates will increase the value of the currency Intervention on the Foreign Exchange Market Making the demand curve shift right will increase the currency's value

Answer 70

Weak pound - Imports dear + exports cheap - Increase in exports - Current account Improves

Answer 71

Weak pound - Current account improves - (X-M) is higher - Right shift in AD

Answer 72

Weak pound - Current account improves - Right shift in AD - Higher price level - More Inflation

Answer 73

Depreciation - Country is more Attractive for foreign countries to invest (as resources are cheaper) - FDI Increases

Answer 74

The Marshall-Lerner Condition The J Curve Effect

Answer 75

There will only be an improvement in the current account if the sum of the PEDs for imports + exports is More Than 1.

Answer 76

In the short run there might be a deterioration in the current account of the balance of payments because the demand for imports might be price inelastic if firms have stocks or if they are tied into contracts; and the demand for exports might be price inelastic because consumers take time to adjust to the new, lower, prices. However, in the long run demand for exports and imports is likely to become more price elastic so the significance of the above factors disappears.

Answer 77

Criteria which EU members are required to meet to adopt the euro as their currency.

Answer 78

1. Inflation Rates- No more than 1.5% points higher than the average of the top 3 best performing members of the EU 2. Government Finance The annual gov. deficit to GDP must not exceed 3% The ratio of gross gov. debt to GDP must not exceed 60% 3. Exchange Rate Applicant countries should have joined the exchange-rate mechanism (ERM II), under the European Monetary System for 2 consecutive years, and should not have devalued its currency during the period. 4. Long-Term Interest Rates The nominal long-term interest rate must not be more that 2% points higher than the 3 lowest inflation members

Answer 79

Changeover Costs from joining the Euro: It will cost money to change the currency for all machines, accounting systems, etc. and will also cause confusion for many Higher Prices: Potential loss of consumer welfare if suppliers increase prices The vast majority of consumers will continue to Buy Locally; making the switch less effective

Answer 80

Britain loses Instruments of policy adjustment: A 'one size fits all' monetary policy may not work with the UK Fiscal Policy: The EU growth and Fiscal Stability Pact is a weakness of the current system UK economy has Out-Performed Euro Zone: The UK has achieved low inflation and sustained growth (macro stability) Continued high levels of FDI The UK still benefits from the EU market The UK tends to be more sensitive to interest rate changes The UK may join at an inappropriate exchange rate- could worsen the business cycle

Answer 81

International Competitiveness refers to the ability of a country to sell its goods/services abroad. The ability of a nation to sell its goods + services in international markets at an attractive price + quality

Answer 82

It is usually determined by the price and/or quality of the good or service.

Answer 83

* Relative unit labour costs which are heavily dependent on productivity * Wages and non-wage costs relative to those of competitors * Rate of inflation relative to competitors * Regulation relative to that of competitors.

Answer 84

1. Raise Productivity: Near capital equipment investment Training for staff 2. Reduce Costs: Rationalisation - getting rid of staff Relocate production abroad Source cheaper materials from abroad 3. Improve Quality + Design: Research + development Hire experienced designers

Answer 85

Supply Side Policies: Tax incentives for firms to increase spending on research + development Privatisation - encourages competition Public spending on Infrastructure Deregulation, and lowering tax for businesses Reducing unemployment benefits Increasing flexibility of labour market Create Macroeconomic Stability

Answer 86

Costs of Machinery/Training/Redundancy/Relocation Problems surrounding locating abroad (language, culture barriers, etc) Cheaper materials = Worse quality Significance of PED

Answer 87

Opportunity Cost Increased budget/fiscal deficit Time lag Increased inequality Privatisation - not always efficient

Answer 88

Surplus in the Current Account (as demand for exports increase) Export-led Growth (AD) Low levels of Unemployment

Answer 89

Reduction in BoP Increase in Unemployment - quite often in particular industries (manufacturing, services) Negative Effect on Multiplier (which affects AD)

Answer 90

``` Exchange Rates Productivity Relative unit labour costs Share of exports in world trade Investment (as proportion of GDP) Education + Training (well skilled - good output) Communications + infrastructure Industrial Relations ```

Answer 91

Real exchange rate Wage costs Relative labour productivity Relative inflation rates

Answer 92

Quality + Design Non-Wage costs (e.g. NIC, pensions, health + safety, employment protection, anti-discrimination laws) Availability, Reliability Technology

Answer 93

``` 1. Switzerland Singapore USA Netherlands Germany Sweden UK Japan Hong Kong 10. Finland ```

Answer 94

1) Relative unit labour costs: The more productive a country becomes, the lower its unit labour costs. This makes the country more internationally competitive. 2) Relative export prices: This is the ratio of one country’s export prices relative to another country, and it is expressed as an index. The lower the relative export price, the more competitive the country.

Answer 95

Earning a low income compared to other incomes within their economy/society For the UK, this is earning an income that is 60% of the median income or less.

Answer 96

When a person's continued daily existence is threatened because they have insufficient resources to meet their basic needs Earning below the poverty line

Answer 97

If people earn below this line, they're in Absolute Poverty In 2008, The World Bank set the poverty line to $1.25 a day Some economists put it at $2 a day

Answer 98

Human Poverty Index This consists of HPI-1 and HPI-2

Answer 99

The HPI-1 is a measure of deprivation in the poorest countries in the world Consists of 3 elements: % of people expected to reach the age of 40 % of population who are illiterate % of children who are illiterate, and % of the population who don't have access to safe water + healthcare

Answer 100

A measure of poverty more relevant to developed countries Consists of 4 elements: - Probability at birth of not surviving to 60 (x 100) - Adults lacking functional literacy skills - Population below relative income poverty line - Rate of long term unemployment (lasting at least 12 months)

Answer 101

1. Inequality in Wages + Earnings 2. Falling Relative Value of State Benefits 3. Higher levels of Structural + Long Term Unemployment 4. Regressive Taxes 5. Inheritance

Answer 102

* De-industrialisation leaves sector jobs having lower pay * Those in the Public Sector earn less than those in the Private Sector * Increase in part time/temporary jobs (which may give low pay) * Decrease in trade unions- many workers unable to bargain for higher wages * Increased demand for highly skilled workers

Answer 103

* Pensions and other benefits go in line with the inflation rate * Wage rates increase faster than inflation rates

Answer 104

* Unemployment is the biggest cause of poverty in the UK * … because people rely on benefits * 65% of the poor aren’t in work

Answer 105

* Regressive Tax: Tax that increase rate, while income decreases * Tax changes in the 80s and 90s put a higher burden on the poor * There’s been a shift in taxes from progressive income tax to regressive indirect taxes * The government has increased VAT and indirect taxes on alcohol + petrol, which take a higher % on those with low incomes

Answer 106

• This allows wealth inequality to be passed on, and is quite important in the housing market

Answer 107

Out of 80m people (2008), 35m live under the poverty line (44%) More than 12m are chronically or periodically food insecure 80% of Ethiopians are dependent on agriculture

Answer 108

Poverty in Ethiopia is more pronounced in the rural areas as compared to the urban areas. The situation recently worsened due to sharp increases in the prices of food + fertilisers on world markets- making it harder for poor household in Ethiopia to secure adequate food supplies

Answer 109

Arid conditions (inc. insufficient rainfall) - leads to irregular production of agriculture; as well as periodic famines Improper strategies to market/advertise Poor development of technology/transportation Failure of rural people participating in awareness programs HIV/AIDS pandemic - 6% of adults have it

Answer 110

Economic growth/ Economic development FDI Policies which result in increased trade Government tax and benefits policies Changes in asset prices

Answer 111

Income: The amount of money received over a set period of time. (what you receive) Wealth: The value in money of assets held. (what you own)

Answer 112

Some skills are more Highly Demanded than others, so they receive higher wages Workers in the Public Sector earn more per week than those in the private sector Average full time earnings also differ considerable between Different Regions (e.g. London vs the North)

Answer 113

1. Wealth often Earns Income (e. g. shares may increase in value, generating more income) - Reinvestment - Those earning income from their wealth can invest that income again (e.g. buy more shares), generating even more income - This makes the wealthy even wealthier; and those with low wealth can't invest as much 2. Assets tend to increase in value Quicker than income rising 3. Income is taxed, but wealth isn't

Answer 114

The Lorenz Curve shows income inequality x axis - Cumulative % of the population y axis - Cumulative % of income A straight upwards line shows perfect equality, and the greater the gap between the Lorenz curve and the perfect equality line, the greater the inequality.

Answer 115

1. Incentive for people to Work Harder + Earn More This increases productivity, and reduces benefits 2. Trickle Down Effect The rich become richer, they spend more on goods + services which provide more income for the poor 3. Encourages Enterprise

Answer 116

1. Absolute + Relative Poverty stays high 2. The poorest won't be able to fund businesses- restricts economic growth 3. Rising incomes - high spending on imports - more withdrawals 4. Crime is likely to increase (e.g. theft)

Answer 117

Equality means that everyone is treated completely equally; they all get exactly the same things Equity is more about fairness - people have different circumstances, so it's more about people getting what they need

Answer 118

Horizontal Equity- people with the same same circumstances are treated fairly (i.e. they're treated the same) Vertical Equity - people with different circumstances are treated fairly, but differently

Answer 119

The ONS reported that in the 2015-16 tax year inequality in Britain (measured by the Gini Coefficient) fell to its lowest since 1986

Answer 120

Thomas Piketty famously discredited this theory in 2014 by arguing that the capitalist free market system inevitably leads to continued inequality. The rate of return on capital increases, so as the rich get richer with higher returns on their investments, inequality increases.

Answer 121

Capitalism is a society where capital is privately owned and workers are paid wages by private firms. There is minimal government intervention and resources are distributed according to the market.

Answer 122

In a capitalist society, entrepreneurs take risks and are driven by the profit motive. Profits are a reward to take risks. Therefore, inequality is essential to encourage entrepreneurs to take risks. Inequality motivates workers, which encourages them to learn new skills and work hard. A higher wage reflects higher productivity in a capitalist society, which results in wage inequality. Capitalism leads to monopoly power. Monopolies can exploit consumers with higher prices, and exploit their consumers with lower wages. This allows them to earn even higher profits. Inheritance is passed down generations, which means wealth is often concentrated in the hands of a few families. Those who inherit lots have more wealth. They can also access the best education and therefore the best jobs, which is not accessible by those with less wealth. It results in an inequality of opportunity and income. Wealth can generate more income for the rich, which widens inequality. There can be income redistribution and wage equality through government intervention. For example, inheritance tax means rich families cannot keep their entire wealth. Moreover, state education means everyone can access education, and there is regulation for firms with monopoly power. It can be argued that this stops the economic system from being capitalist. Essentially, the price mechanism and the free market ignore equality. To evaluate, it can be argued that inequality exists, but the degree of inequality may vary between capitalist societies.

Answer 123

Y axis: Rising Inequality (going upwards) X axis: Rising incomes The graph shows an upside down parabola; suggesting inequality initially rises but then goes back down https://upload.wikimedia.org/wikipedia/commons/6/6b/Kuznets_curve.png

Answer 124

G = A / (A+B) A: Area between the diagonal line and Lorenz curve B: Represents the area under the Lorenz curve The Gini coefficient will have a value between 0 and 1, with 0 representing absolute equality and 1 representing absolute inequality

Answer 125

* education, training and skills * wage rate including minimum wage rates * strength of trade unions * degree of employment protection * social benefits * the tax system (e.g. how progressive it is) * pension entitlements * ownership of assets (e.g. houses and shares) and inheritance.

Answer 126

Kuznet's Curve: https://upload.wikimedia.org/wikipedia/commons/6/6b/Kuznets_curve.png Kuznet's hypothesis states that as society moves from agriculture to industry, so it develops, inequality within society increases, since the wages of industrial workers rises faster than farmers. Then, wealth is redistributed through government transfers and education. He essentially argued that inequality in poor countries is just a transitional phase, and once nations become economically developed, inequality reduces.

Answer 127

``` GDP / GDP per capita HDI IHDI MPI Other Indicators ```

Answer 128

GDP / GDP per capita shows the average income per person in a country

Answer 129

It doesn't take other factors into account (factors include health, pollution, education, happiness, etc) It is a strictly monetary figure; whereas development isn't.

Answer 130

Human Development Index

Answer 131

The HDI ranks countries in terms of social + economic development It's split into 3 equally weighted sections: 1. Health (measured by life expectancy) 2. Education (measured by average/expected years in school) 3. Standard of Living (measured by GNI per capita)

Answer 132

1st: Norway 2nd: Australia 3rd: Switzerland 8th: USA 14th: UK

Answer 133

Education - HDI doesn't consider the quality of the schools/ education system GNI per capita - may be tempered with (via the hidden economy, etc); doesn't consider inequality Life Expectancy - doesn't consider/represent happiness

Answer 134

The HDI excludes many aspects of economic + social life regarded to constraint development (e.g. crime, corruption, negative externalities) Critics argue that the equal weighting between the 3 main components is "rather arbitrary"

Answer 135

Inequality-Adjusted Human Development Index

Answer 136

HDI which is adjusted for inequalities in the distribution of achievements in each of the 3 components

Answer 137

The HDI will be equal to the HDI if there is no inequality. It falls below HDI as inequality increases. The difference between HDI + IHDI shows the 'loss' in potential human development.

Answer 138

Multi-dimensional Poverty Index

Answer 139

Reports + complements money-based measures, by considering multiple deprivations and their overlap. It takes into account the many factors that may make up a poor person's experience of deprivation - such as poor health, lack of education, lack of income, threat from violence, etc. It shows the number of people who are multi-dimensionally poor, and the number of deprivations which poor household contend. It highlights the complexity of poverty.

Answer 140

Proportion of Male population involved in Agriculture Energy Consumption per person Proportion with access to Clean Water Proportion with Internet access Mobile Phones per 1000 Genuine Progress Indicator (GPI)

Answer 141

(This doesn't have to be well learned) Includes measures of the impact of economic growth on the environment, as well as social factors Takes GDP into account, but also measures the negative effects of growth (e.g. resource depletion, deregulation) - the negatives are subtracted from the positives GPI also looks at Quality of Life - measures the cost of crime, and the value of volunteer work, housework + painting Problem - it is Subjective.

Answer 142

Measures the relative inequality between men and women. It combines HDI with a consideration of gender. For example, it will consider differences in life expectancies, income and education between genders.

Answer 143

Economic Development: an upward movement of the entire social system in terms of income, savings and investment along with progressive changes in socioeconomic structure of country (institutional and technological changes). Economic Growth: an increase over time in a country`s real output of goods and services (GNP) or real output per capita income.

Answer 144

Economic Development: Development relates to growth of human capital indexes, a decrease in inequality figures, and structural changes that improve the general population's quality of life. Economic Growth: Growth relates to a gradual increase in one of the components of Gross Domestic Product: consumption, government spending, investment, net exports.

Answer 145

``` Economic Development: Qualitative. HDI (Human Development Index), Gender- related index (GDI), Human poverty index (HPI), Infant mortality, Literacy rate etc. ``` Economic Growth: Quantitative. Increases in real GDP.

Answer 146

Economic Development: Brings qualitative and quantitative changes in the economy Economic Growth: Brings quantitative changes in the economy

Answer 147

Economic Development: more relevant to measure progress and quality of life in developing nations. Economic Growth: more relevant metric for progress in developed countries. But it's widely used in all countries because growth is a necessary condition for development.

Answer 148

Economic Development: Concerned with structural changes in the economy Economic Growth: Concerned with increase in the economy's output

Answer 149

Primary products are supply inelastic: They take a long time to grow, and growth is further stunted through weather/ sped up through a good harvest Therefore, a large decrease in price for a product = a small increase in demand, leading to less revenue

Answer 150

Demand Inelastic Demand tends to be very price inelastic because food and drink products are necessities, and demand is not dependent on price. Also, the low value added of many commodities and demand for primary products is often income inelastic. Therefore, a change in supply will lead to a much larger change in price

Answer 151

Supply and demand for a product will fluctuate, making the price of them heavily fluctuate. There will be times when farmers are making a lot of money, as well as times farmers will be making hardly any revenue. This means they won't be able to fend for themselves/develop.

Answer 152

1. The government could interfere/help | 2. Things can get good in the long run - for a lot of economies, the good years can outweigh the bad

Answer 153

Demand for primary products is income inelastic. When people's/the world's income increases, they don't spend a proportional amount on primary products/necessities Demand for manufactured products is income elastic. When income increases, more is spent on manufactured goods/ luxuries/ your wants As world income increases, countries that mainly export primary goods still get low demand, meaning fewer is exported, and they get less money.

Answer 154

As the world's population increases, there is more demand, and so price gets pushed up regardless Primary products should be sold, if they have the comparative advantage in it Demand for some primary products (e.g. gold, oil, etc) are income elastic

Answer 155

Ethiopia: 80% agriculture Angola: 97% oil Ghana: 39% gold, 26% oil, 17% cocoa Zambia: 84% copper

Answer 156

The prices of these goods can be volatile on world markets When prices fall, an economy will see a sharp reduction in export incomes, an adverse movement in their terms of trade, risks of a higher trade deficit and a danger that a nation will not be able to finance state-led investment in education, healthcare and core infrastructure

Answer 157

Primary product dependency may be undesirable for a variety of reasons including: price fluctuations, the low value added of many commodities and demand for primary products is often income inelastic.

Answer 158

Corruption occurs when power is abused for personal gain

Answer 159

A country's resources are diverted away from their most productive use, so government + private firms become less efficient (e.g. with a civil war, more is being spent on military + weapons, instead of helping people) All of these effects make it very difficult to compete internationally, and attract FDI

Answer 160

The Harrod-Domar model states that investment, saving and technological change are required in an economy for economic growth. The rate of growth increases if the savings ratio increases. This leads to increased investment and technological progress, which leads to higher productivity. The rate of growth is calculated by the savings ratio / capital output ratio in the Harrod-Domar model. Growth increases with more saving or a small capital output ratio.

Answer 161

The limitations of the model are that there is a low marginal propensity to save in some countries, or that there might be a poor financial system. Funds might not lead to borrowing and investment. There could also be inefficiency in the workforce. Moreover, the paradox of thrift could be considered. An increase in savings could lead to an increase in investment. However, an increase in savings means there is a reduction in spending, which leads to a fall AD.

Answer 162

In many developing countries, there is only limited wealth, which means money cannot be put aside for the future, and they can only afford to spend in the short run. Consumers have to focus on their immediate needs, including food and safe water, to ensure they can survive. Without sufficient savings, there is inadequate capital accumulation. It is the gap between the level of domestic savings in an economy and the investment needed to grow that economy. This lack of investment in capital means incomes are likely to remain low Africa’s saving rate is around 17%, whilst the average for middle income countries is around 31%. This makes it more expensive for the African public and private sectors to get funds since they have higher borrowing costs. This impedes capital investment. Low savings = low investment = low amounts of capitals = low incomes = low savings, etc. It goes in full circle

Answer 163

Capital outflows > Capital inflows A foreign currency gap exists when the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments. In other words, the value of the current account deficit is larger than the value of capital inflows.

Answer 164

When a country is dependent on exports of primary products, or imports of manufactured goods When a country has to spend a lot of money servicing debt

Answer 165

When people start holding their savings abroad (often as a result of high tax rates or political instability) This lack of domestic investment makes economic growth more difficult to achieve. It also means less tax is collected (since the government won't receive taxes due on those savings) This is when capital and money leave the economy through investment in foreign economies. It is triggered by an economic threat, such as hyperinflation or rising tax rates. It can worsen an economic crisis and cause a currency to depreciate.

Answer 166

The population can impact the growth and development of a country. There is a link between keeping birth rates down and fighting hunger, poverty and environmental damage. Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa. The current population of 1.1 billion is expected to double by 2050, which is not sustainable.

Answer 167

If people aren't sure they'll be able to keep the land they have, they may not invest in improvements to their homes, or in setting up businesses. This can harm development. Weak or absent property rights mean entrepreneurs cannot protect their ideas, so do not have an incentive to innovate.

Answer 168

For example, an earthquake prone country is likely to find it hard to develop their infrastructure, and people might be pushed into poverty. Nepal was already one of the poorest countries in the world, but the Nepal earthquake in 2015 pushed more people into poverty.

Answer 169

Civil wars are also a disaster for a country's economy, and are more likely in LEDCs. Large numbers of people are killed or become refugees, absolute poverty generally increases and infrastructure is damaged. Even after the war ends, capital flight + military spending usually remain high. All of this makes it difficult to compete internationally and attract FDI

Answer 170

``` Roads School's Water Supplies Sewerage Railways Hospitals Electricity Supplies Telephone + Internet Services ```

Answer 171

The basic facilities which are needed for a country to function

Answer 172

Poor Roads = poor transport links = goods can't move throughout the country = more difficult to improve things (like resources) around the country = less development Scarce Telephone + Internet Services = bad/worse communication = worse coordination of their operations = less development Poor Transport Links = less imports + exports of resources = less access to resources which can improve + develop a country

Answer 173

Developing countries may hold important resources, meaning they can persuade foreign investors to help improve their infrastructure (aid)

Answer 174

If a country's population grows faster than its economy, this leads to a fall in GNI per capita, and possibly standard of living. It also leads to pressure on the education system. Household poverty keeps children out of school. Lower educational standards likely leads to a less productive workforce due to less human capital. This makes it difficult to attract FDI. It can also be difficult for people to access professional training in developing countries, causing similar problems

Answer 175

Disease results in lower productivity if people are unable to work, and puts a strain on the country's healthcare system AIDS has lead to a number of orphaned children, who commonly miss out on going to school.

Answer 176

1. Aid 2. Debt Relief 3. Structural Change 4. Tourism 5. Outward Looking Strategies 6. Inward Looking Strategies 7. Microfinance 8. Fair Trade 9. International Institutions 10. Non-Government Organisations

Answer 177

The transfer of resources from one country to another

Answer 178

Aid between two countries When donor countries pass the aid to an intermediate agency, which then distributes the aid to recipient countries

Answer 179

Aid sent on the condition that the money is sent in a particular way Things will be given in return (e.g. imports from the donor country)

Answer 180

Aid given when a country's in an emergency (e.g. war, tsunami, earthquake, etc.)

Answer 181

1) Reduces absolute poverty- aid can be spent on basic needs, health + education, etc. which leads to improvements 2) Leads to health and education improvements; which improves human capital. 3) Helps fill the savings gap, and foreign exchange gap 4) Multiplier Effects (e. g improvements in infrastructure leads to a direct increase in AD, leading to more jobs created and more money to spend, leading to further AD)

Answer 182

1) Dependency Culture: countries start to count on receiving aid indefinitely, instead of developing their own economies 2) Corruption: aid can be misused by corrupt governments, meaning the money spent doesn't help people. 3) Some argue that the money spent on aid could be spent to improve the donor country instead.

Answer 183

The growth rate of an economy is directly linked to two things: 1. The levels of saving in the economy 2. The efficiency with which the capital in the economy can be used If either of these factors can be increased, than economic growth should be faster

Answer 184

Developing the agricultural sector. If the country has comparative advantage in that product, they can sell lots of it and get profit.

Answer 185

Developments in the agricultural sector can be seen as a 'stepping stone' in developing other sectors. For example, if improvements in the agricultural sector lead to increases in national income, other sectors can be invested into. The agricultural sector is often seen as a low-productivity sector (i.e.) the output is low, compared to the inputs required), where it's difficult to add value. A shift into this sector would thus largely benefit.

Answer 186

Primary product dependency.

Answer 187

There is excess labour in the agricultural sector. The same amount of agricultural output could be made by fewer people. Agricultural workers transfer to industry, to take advantage of the higher wages offered Because of the excess labour in agriculture, wages in industry don't rise - i.e. a country can industrialise without causing inflation Profits from industry can be reinvested in capital goods, leading to greater productivity gains. The reduction in excess labour also means agriculture productivity/efficiency goes up Eventually, an equilibrium will be reached, where everyone is better off.

Answer 188

Many in the agricultural sector don't have the skills to do a good job in the industry. In developing countries, there are often many who are unemployed, and so aren't working in any sector. It's a very simplified model; and things may not necessarily work that way The model also assumes that the secondary sector is labour-intensive, and not capital-intensive (a.k.a. there are workers, and not machines)

Answer 189

Increasing tourism will mean a country earns foreign currency from tourists. It also attracts foreign direct foreign investment. Developing a country's tourism industry can improve a country's economy. An increase in tourism is likely to lead to an increase in employment

Answer 190

Tourism may be seasonal MNCs may want to bring in their own management, meaning local jobs may be low skilled An increase in tourism is likely to lead to more imported goods; leading to a negative BoP Tourism may lead to environmental damage. It may also lead to inconvenience for the locals, as tourists' needs are prioritised

Answer 191

The aim of fair trade is to reduce the exploitation of farmers, by providing them a fixed income*. * guaranteed minimum fair price for their goods The fair trade movement is one way in which farmers in these countries are supposed to benefit, therefore improving development.

Answer 192

Guarantees the farmer a certain income Protects farmers from price fluctuations The money can be spent on improving the product/production methods; therefore increasing competitiveness Money can be spent on investing into education, health, infrastructure and other development programs Farmers are not subject to monopsony power from developing countries

Answer 193

Many farmers do not benefit (they may not be aware, may be membership fees, etc) There can be the 'middle man' involved, reducing the benefit Can cause market distortions – the low price indicates over supply in the market (the higher incomes sometimes leads them producing too much) Reduces incentive to improve quality/productivity Dependency trap Domestic consumers may have to pay more for fairtrade products

Answer 194

The WTO works towards reducing protectionist policies. Many developing and emerging economies are unable to sell their primary sector products abroad because of protectionism in the developed world or can only do so at relatively low prices because of the monopsony power of large companies in developed countries.

Answer 195

Some countries have managed to develop on the basis of primary products in which they have a comparative advantage. For example, Chile has benefited from the production of copper (at least, when the price is high) and also on other primary products with a high income elasticity of demand, such as blueberries and papaya.

Answer 196

They emphasise freetrade, deregulation (getting rid of red tape), and the promotion of foreign investment Firms are encouraged to invest, and seek new export markets

Answer 197

Free market strategies recommend less government intervention, and place a much greater emphasis on free trade. These are very similar to the outward that looking strategies; they aim to increase efficiency by freeing the market (e.g. by removing subsidies)

Answer 198

``` Trade liberalisation Promotion of FDI Removal of government subsidies Floating exchange rate systems Privatisation Microfinance ```

Answer 199

This is the removal of a tariff. This will lead to an increase in trade

Answer 200

The key is there will be less competition from imports and foreign producers when we have subsidies. When we remove the subsidy there will be more competition and more of an incentive for producers to minimise costs in order to be able to compete.

Answer 201

Schemes that provide finance for small-scale projects in LDCs It consists of making small loans (usually less than $200) to groups of people (usually women) who otherwise have no access to credit. The money is used to establish or expand a business. The group has collective responsibility for paying back the loan – this reduces risk, transaction and monitoring costs. The scheme has been highly successful – both in terms of constructive use of the funds and high pay-back rates

Answer 202

It is considered one of the most effective ways of reducing poverty. Reduces the need for borrowing at extortionate rates It is sustainable and it can be carried out on a massive scale. Once funds have been paid they are re-loaned, multiplying the impact of each $. Loans help new businesses which creates employment in the community Income generated by people is often spent on sending their children to school – creating a positive impact on human capital of a country

Answer 203

Impact is on a small scale Difficult industry to monitor Rates of interest are lower than informal lenders but still high – up to 28% As well as cash, many need support / advice for how best to invest

Answer 204

FDI has an effect on exchange rate: FDI into the UK creates a demand for sterling whereas UK investment abroad creates a supply of sterling; therefore, an increase in FDI from abroad would cause the value of sterling to rise

Answer 205

In many cases developing countries have tried to maintain an exchange rate at an artificially high rate. Consequently, floating the exchange rate should result in a depreciation of the currency.

Answer 206

Increased competition means improved efficiency, lower X inefficiency Lower taxes in the short run (The government won't pay for the new facility immediately)

Answer 207

Incentive for MNCs to establish production plants in the country, so contributing to the industrialisation in the country More choice and variety of goods More competition means more efficient production. It may promote efficiency in LEDCs LEDCs have access to markets in developed countries – increased exports, and higher GDP;the proceeds of which may be used for health, education, improved access to clean water Those with a competitive advantage can go further into the market, and sell even more of products There is more awareness of the environment

Answer 208

Domestic firms in LEDCs may be unable to compete with MNCs from developed economies Monopsony power of MNCs May result in the exploitation of resources of LEDCs Higher competitiveness means that if you're not going to succeed, your business will fail Even if you have a comparative advantage it may still not be the best product - people may not like it (e.g. Lada cars) It will affect the environment in a negative way

Answer 209

They seek to protect domestic industries, until they're ready to compete internationally

Answer 210

``` Development of human capital Protectionism Managed exchange rates Infrastructure development Promoting joint ventures with global companies Buffer stock schemes ```

Answer 211

Human capital refers to the skills, knowledge and talent of the workforce and it includes the idea that there are investment in people, such as education and training, which increase in individual's productivity

Answer 212

Protectionist policies include, quotas, and in particular, subsidies to domestic producers

Answer 213

Under a system of managed exchange rate, the central bank could engineer a depreciation of the country's currency, so increasing the competitiveness of its goods and services

Answer 214

Investment in infrastructure tends to be very expensive, but it is vital to a country development and prosperity. Such projects may be funded publicly, privately or through public-private partnerships

Answer 215

A ceiling price - The maximum price which should be allowed A floor price - The minimum price which would be allowed A Buffer Stock - Which involves the storage or release of stocks in order to reduce price fluctuations to the agreed limits

Answer 216

http://s1.thingpic.com/images/7M/FHMjWzHbH8G9YFouKiNfwhR4.gif

Answer 217

If the floor price is set too high, there will be surpluses every year If the ceiling price is set to low, then there may be insufficient stocks available in years of shortage Costs of storage Cheating by one of the members

Answer 218

To make money available to those who want to spend more than their income, using the savings of those who don't currently want to spend Simplified: To hand loans out, using savings people put in. They also provide a market in which stocks and shares can be traded.

Answer 219

By helping people + firms save- through bank accounts, pension funds, bonds and other financial products. By providing loans to businesses + individuals By allowing equities and bonds to be issued + traded on capital markets.

Answer 220

"The value of the shares issued by a company."

Answer 221

"A written and signed promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition."

Answer 222

Personal Loans: loans to individuals to be paid back over a small number of years Mortgages: loans to buy property. The bank owns the property until it's repaid. Credit Cards: A card which allows the holder to purchase goods or services on credit. Pay-Day Loans: e.g. wonga.com - short term, small, unsecured loans with high interest rates Overdrafts: used when funds in your account fall below 0 - you have to pay a fee to use it, and interest may also be involved.

Answer 223

Equity finance is raised by selling shares in a company

Answer 224

Effective + efficient financial institutions and financial markets enable economic growth to occur (although unstable institutions and markets can cause major problems) Economic growth is driven by the spending of individuals + firms, much of which relies on credit Businesses (esp. small firms) are unlikely to grow without credit. Firms not growing leads to fewer new jobs and lower exports. Firms in developing countries, where the financial sector tends to be weaker/ undeveloped, struggle to get credit which restricts their growth.

Answer 225

"Short Term" The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year.

Answer 226

"Medium and Long Term" The part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. Consists of: 1. Primary Market 2. Secondary Market:

Answer 227

Where different currencies are bought and sold. This is usually done to allow international trade and investment, or as speculation (to make money in fluctuations in currency prices) Consists of: 1. Spot Market: 2. Forward Market:

Answer 228

Part of the Capital Market Securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. - it is more direct

Answer 229

Part of the Capital Market Existing securities are traded (e.g. a stock exchange); which increases their liquidity.

Answer 230

Part of the Foreign Exchange Market For transactions which happen now (e.g. money will be transacted at current exchange rates- £1 : $1.50)

Answer 231

Part of the Foreign Exchange Market For transactions which will happen at an agreed period of time (e.g. money will be transacted at the exchange rates of the original payment- £1 : $1.50) If the exchange rate falls (£1 : $1.25), they benefit If the exchange rate rises (£1 : $2.00), they lose out

Answer 232

1. Systemic Risk 2. Market bubbles 3. Externalities 4. Asymmetric Information 5. Market Rigging

Answer 233

The financial sector is interlinked. There is a risk that a problem in one part can lead to the breakdown of a whole market, or even the whole financial system. Problems in one country's financial sector can also quickly spread across the world.

Answer 234

When the price of an asset increases much higher than it's original worth (inflation). People are more likely to buy into those assets because of their high worth. (e.g. house prices increasing as you buy them). However, maintaining these assets (e.g mortgage) becomes too expensive, and so people sell them off. This leads to high supply and low demand, leading to plummeting prices. This is when the market bubble 'bursts'. This is bad for banks, as they lend out the credit to provide for those assets (e.g. the banks lend out money to buy the house).

Answer 235

The mismanagement of risk is one cause of externalities. The problem with bank failure is that it affects everyone. (e.g. HSBC failure would affect more than 37 million customers in 70 countries and territories)

Answer 236

One side of the bank transaction knows more information than the other. For example, banks could lend to firms who may be hiding that they do a lot of risky things to stay in business. There is a risk with every loan given that the receiver is not good with their money.

Answer 237

It has been alleged that some bankers have been involved in rigging key interest rates and exchange rates. It occurs when traders on financial markets, or other working in the financial sector, collude to deliberately manipulate markets to make huge profits for themselves and the firms they work for

Answer 238

The rate at which banks lend to each other

Answer 239

Without banks, there would be no access to credit. 1. Effective and efficient financial institutions and financial markets enable economic growth to occur, while unstable institutions and markets can cause major problems 2. Economic growth is driven by the spending of individuals and firms, much of which relies on credit 3. Businesses (especially small firms) are unlikely to grow without credit. If firms don't grow, this means fewer new jobs and low exports 4. Firms in developing countries, whether financial sector tends to be quite weak/underdeveloped, struggle to get credit, and this restricts their growth

Answer 240

Money Market- deals with short term finance Capital Market- deals with long term finance Foreign Exchange Market

Answer 241

Primary market: New share + bond issues (more direct) Secondary market: Where existing securities are traded (i.e. a stock exchange). This increases their liquidity

Answer 242

Where different currencies are bought and sold. This is usually done to allow international trade and investment, or as speculation to make money on fluctuations in currency prices Consists of the Spot Market and Forward Market

Answer 243

Debt Finance: taking loans out Equity Finance: Selling shares

Answer 244

How easily something can be spent. How quickly it becomes cash

Answer 245

The rate of return on illiquid assets is generally higher than the right on liquid assets. Therefore they'll get more out for what they put in for illiquid assets Banks still need to have a certain amount of liquid assets available; as banks lend money out over a long term

Answer 246

Illiquid assets (e.g. loans and banks) generally give higher rates of return, given the banks profit Liquid assets are still needed, to give their money back to those who deposited savings to them. These, however, don't give any profit All investors (including banks) must balance the security open investment against its profitability

Answer 247

If too many depositors want to with draw their money at the short notice, the bank may not be able to repay them (as they don't have enough liquidity) However, it is very unlikely that this will happen – but it may happen when an economy is at risk, like Greece

Answer 248

Risk is a key idea in finance. The risk of the investment, the higher the returns

Answer 249

Less regulation in the financial markets help them to be more profitable However, a lack of regulation in the financial sector also lead to market failure, and other problems which contributed to instability

Answer 250

Excessive risk-taking lead to too many risks that didn't pay off The whole bank ended up losing out and making massive losses Market rigging lead to financial market failure Market bubble lead to financial market failure

Answer 251

Competition Structure of Firms + Risk Management Strengthening Rules + Principals that financial institutions must abide by Systemic Risks

Answer 252

By making financial markets competitive, to benefit consumers

Answer 253

They will ensure firms are stable This can be achieved by requiring banks to meet capital/liquidity ratios, or by preventing them from taking excessive risks (and making senior individuals in the bank personally accountable if they do)

Answer 254

Bank's Capital : Bank's Loans Gives the measure of the risk associated with the banks lending, and stability

Answer 255

Bank's Highly Liquid Assets (cash) : Bank's Loans Give us an idea of the banks stability, as well as the ability to meet short-term liabilities

Answer 256

For example, several countries are bringing in a policy of 'ring fencing' commercial bank activity, which keeps the commercial banking side separate from the investment banking side From 2019, UK banks with a large commercial side won't be able to use the deposit of retail customers and small firms for their investment banking activities

Answer 257

By identifying systemic risks in the financial markets and finding ways to manage/remove them e. g. Plans are now made to allow banks to 'fail safely' if necessary i. e. Allowing bank to go bust without distracting the whole financial system

Answer 258

Microprudential Regulation Macroprudential Regulation

Answer 259

Ensures that individual firms act fairly towards their customers, and don't take excessive risks/break the law

Answer 260

Tackles systemic risks in financial markets, and avoids large-scale financial crises that can hurt a country's economy

Answer 261

1) Regulatory Capture 2) If the regulation is too strict, it can lead to restrictions on credit, which harms economic growth. (Companies can't invest, consumers can't spend, etc) 3) It may lead to the growth of the shadow banking system - The shadow banking system contains risks which provide credit, but are not regulated 4) It can be costly to administer/maintain

Answer 262

The Bank of England Financial Conduct Activity (FCA)

Answer 263

It regulates markets through the work of two bodies: Financial Policy Committee (macroprudential) Prudential Regulation Activity (microprudential)

Answer 264

1. Identifying, monitoring and protecting against risk in the financial system 2. Issuing instructions to the PRA + FCA to tackle problems that threaten the financial system 3. Advising the government in managing the financial markets

Answer 265

Involves maintaining the sustainability of banks and promoting competition: Supervising firms and financial institutions to ensure they successfully manage risk Setting industry standards for conduct and management, and making sure they're followed Specifying capital and liquidity ratios for financial institutions

Answer 266

It aims to protect consumers, and increased confidence in financial institution and products It does this by: Supervising the conduct of firms and markets, to ensure things are done legally and fairly Promoting competition in financial markets, so that better deals are provided for consumers Banning financial products that don't benefit consumers Banning, or forcing firms to change, misleading adverts for financial products and services

Answer 267

Capital expenditure refers to long-term investment expenditure on capital projects such as Crossrail or new hospitals by the government.

Answer 268

Current expenditure relates to the government’s day-to-day expenditure on goods and services. Examples include wages and salaries of civil servants, and drugs used by the NHS.

Answer 269

Capital Expenditure Current Expenditure Transfer Payments

Answer 270

Transfer payments are those made by the state to individuals without there being any exchange of goods or services – there is no production in return for these payments. Typically, transfer payments are used as a means of redistributing income. UK examples include Employment and Support Allowance for ill and disabled people and child benefit.

Answer 271

changing incomes, such as demand for many state-provided services is income elastic * changing age distributions – ageing populations in many developed countries result in increased demands on healthcare * changing expectations – new technology in services such as health and education results in increased expectations * the financial crisis – this has led to an increased proportion of public expenditure being spent on debt interest in many countries.

Answer 272

Crowding Out Low productivity + low rate of economic growth Increase in national debt

Answer 273

Resource | Financial

Answer 274

Resource crowding out occurs when the economy is operating at full employment and the expansion of the public sector means that there is a shortage of resources in the private sector.

Answer 275

Financial crowding out arises when the expansion of the state sector is financed by increased government borrowing. This causes an increased demand for loanable funds which drives up interest rates and crowds out private sector investment.

Answer 276

This occurs because the state sector is not motivated by the profit motive and so there may be little incentive to increase efficiency.

Answer 277

If there were successive years in which there was a budget deficit, this would increase the size of the national debt. In turn, this would result in increased interest payments on the national debt in the future which may mean that less public expenditure is available for spending on public services such as new schools and hospitals

Answer 278

If there is increased public expenditure on infrastructure, transport, the health service and on education and training then this might help to promote economic growth in the future.

Answer 279

Direct taxation is levied on income, wealth + profit e.g. Income tax, National Income

Answer 280

Indirect taxation is levied on spending on goods + services e.g. VAT, excise duties (specific duties on goods like alcohol, cigarettes + fuel)

Answer 281

Taxes where the marginal rate of Tax Increases as Income Rises e.g. Income Tax, National Insurance

Answer 282

Taxes where the rate of Tax Rises as Incomes Fall e.g. VAT, Council Tax

Answer 283

A tax is proportional when all tax payers pay the same % of their income/wealth e.g. Corporation Tax

Answer 284

Tax aimed to correct a negative externality. | It's imposed to turn the external cost into private cost, achieving allocative efficiency

Answer 285

Higher rates of income tax (for example) might act as a disincentive for the unemployed to accept jobs or for those in employment to work overtime.

Answer 286

Shown by the Laffer Curve: When the tax rate is increased to a certain mid point, tax revenues increase. However, a further increase in the tax rate after that point causes a fall in tax revenue. This may be explained by the following factors: increased disincentives to work; an increase in tax avoidance and evasion; and a rise in the number of tax exiles.

Answer 287

http://i.investopedia.com/inv/dictionary/terms/laffercurve.gif

Answer 288

A progressive tax, such as income tax, will tend to redistribute income from those on higher incomes to those on lower incomes if the tax revenues raised are used for benefits to the poor.

Answer 289

An increase in taxes will reduce aggregate demand because taxes are a leakage from the circular flow of income. In turn, this might reduce real output and cause an increase in unemployment.

Answer 290

An increase in indirect taxes could be inflationary if it causes a wage-price spiral For example, increased indirect tax causes a rise in prices which, in turn, leads to increased wage demands by workers causing firms’ costs to rise and a further rise in prices.

Answer 291

A higher rate of corporation tax might deter FDI if rates are lower in other countries.

Answer 292

An increase in income tax would reduce disposable income and consumption. In turn, this would reduce demand for imports and so result in an improvement in the balance of trade.

Answer 293

Relates to gov. spending + tax revenues which change automatically in line with changes in GDP and the state of the economy e.g. revenue from income tax and unemployment benefits (recession = more unemployment = more spending on benefits. They have to do this. It's automatic)

Answer 294

Fiscal Deficit: when public expenditure > tax revenue National Debt: cumulative total of past government spending

Answer 295

Cyclical Deficit: A temporary deficit, which is related to the business cycle. It may occur during recessions, when governments increased spending to stimulate the economy Structural Deficit:A deficit due to an imbalance in the revenue + expenditure of the government. It occurs during every point in the business cycle

Answer 296

GDP/State of the Economy Size + Age Distribution of the Population (aging population = more health spending) Discretionary Fiscal Policy (more DFP - more fiscal deficit) Debt Interest (more debt - more interest; gov. could increase taxes to reduce it) Political Priorities (austerity) Unplanned Events (natural disasters, terrorism, Brexit, etc.)

Answer 297

If the government in continuously running a deficit, the size of the debt increases It is only when the government runs a budget surplus that the size of the national debt decreases Government policies (deliberate policies that will increase national debt)

Answer 298

A large national debt can cause certain problems: Opportunity Cost for Future Generations (could be less gov. spending in the future) Intergenerational Equity - the concept/idea of wealth fairness between younger + older generations Crowding Out (resource + financial - public requires more workers/resourceful, private suffers; public spend all money, private suffers) Danger of Inflation (more debt - more inflation) Country's credit Rating (depends on the ability of a gov to pay back national debt) FDI (low credit rating - less attraction from foreign countries)

Answer 299

Automatic stabilisers: government spending/taxation vary automatically over the course of the economic cycle (e.g. G rises in a slump owing to increased benefit payments and T falls as fewer people work and spend).

Answer 300

Deliberate alteration of government expenditure and taxation designed to achieve its economic objectives.

Answer 301

Budget deficits could be reduced with less government spending and higher taxes. However, this could lead to lower economic growth, which might cause government finances to worsen since tax revenue falls. Moreover, if taxes are too high, people could be discouraged from working, since they are not keeping much of their income. Economic growth could be promoted to help reduce a deficit. This would increase revenue from taxes without needing to raise the rate of tax. For example, consumers would spend more, which raises revenue from VAT. However, this is not effective is the government has a structural deficit. Governments can issue bonds to raise finance. This is not considered to be an effective long term solution to eliminate the government debt. However, it can help the government avoid raising taxes in the short run. The government has to pay interest to the investors who buy the debt, which has to be repaid at some point. Governments could choose to default on their debt if it is no longer manageable. However, this can make accessing credit in the future difficult. For example, Russia and Argentina have defaulted on their debts in the past. Sweden managed to use spending cuts and tax increases to balance their budget between 1994 and the late 1990s. Saudi Arabia used the sale of oil to reduce the debt burden from 80% of GDP to 10.2% of GDP between 2003 and 2010.

Answer 302

There can be income redistribution and wage equality through government intervention. For example, inheritance tax means rich families cannot keep their entire wealth. Over the past century, sustained economic growth has helped reduced pre-War poverty in Britain, since wealth was redistributed to the poorest.

Answer 303

Governments could use monetary policy to stimulate the economy and raise government revenue. For example, governments in the UK, the US and the EU have used low interest rates. This can encourage spending and investment, in order to try and boost economic growth. Central banks can also pump money into the economy electronically to try and stimulate the QE is usually used where inflation is low and it is not possible to lower interest rates further. It has been used by the European Central Bank to help stimulate the economy. Since the interest rates are already very low, it is not possible to lower them much more. The bank bought assets in the form of government bonds using the money they have created. This is then used to buy bonds from investors, which increases the amount of cash flowing in the financial system. This encourages more lending to firms and individuals, since it makes the cost of borrowing lower. The theory is that this encourages more investment, more spending, and hopefully higher growth. A possible effect of this is that there could be higher inflation in the economy. This is quantitative easing (QE).

Answer 304

International competitiveness is the ability of a nation to compete successfully overseas and sustain improvements in real output and living standards. Generally, the cheaper the relative unit labour costs, the more competitive the country in manufacturing. For example, countries such as China, India and Bangladesh have lower labour costs than countries such as the UK and US, which means that a lot of production requiring manufacturing, such as textiles, clothes and technology, has moved abroad. However, countries such as Germany are famous for producing high quality engineered goods, such as cars, so consumers might be willing to pay more for them. China has previously used currency manipulation in order to increase their international competitiveness. They devalued the Renminbi in order to make their relative export price lower. However, this is not a policy relevant for countries with floating exchange rates, such as the UK. Unit labour costs rise when wages increase at a faster rate than productivity. China’s large population means wages are generally low, but the rise of the middle class and consumer spending is pushing wages up. The UK government has tried to increase competitiveness by lowering the corporation tax rate from 21% to 20% in 2015. This is the joint lowest in the G20 and should help increase inward investment. Moreover, the UK government has established the ‘Red Tape Challenge’, which aims to simplify regulation for businesses, so it is cheaper and easier to meet environmental targets and create new jobs. It should help to encourage investment and innovation, so domestic firms can become more internationally competitive.

Answer 305

Due to globalisation, the world’s economies are increasingly interdependent. This means that economic shocks in one part of the world affect many countries. It is estimated that shocks in the global economy accounted for about 2/3 of weaknesses in UK output after the financial crisis. For example, economic decline in the Eurozone negatively affected the UK’s exports, since Eurozone countries form a large proportion of UK trading partners.

Answer 306

o the regulation of transfer pricing o limits to government ability to control global companies

Answer 307

Transactions between companies in the same multinational group form up a significant proportion of global trade. The price of these transactions is known as transfer pricing. This price is set up in accordance with tax rules that determine the rate of tax on profits in different countries. Transnational companies have to calculate their taxable profits, but the rules are complex and difficult to apply. They can allocate their profits to different countries with different tax rates. Sometimes, transnational companies exploit these rules so they can reduce the amount of tax they have to pay. They could say that their activities have been in countries with low tax rates, for example, to reduce how much tax they pay. Companies can relocate parts of their company such as financial assets and intellectual property to low tax rate countries. This means that profits are taxed at a low rate. In the UK, companies which do not allocate sufficient profits to the UK, in accordance to rules, are challenged by HMRC. This means they have managed to earn billions of pounds in tax.

Answer 308

The tax rules are complex and difficult to apply and regulate. There could be costs to HMRC to challenge firms which do not declare their profits truthfully. Although HMRC managed to secure £4.1 billion in tax revenue for the UK Exchequer, this might have taken a long time to sort out.

Answer 309

o Inaccurate information Some policies might be decided without perfect information. This might require a full cost- benefit analysis, and it could be time-consuming and expensive. For example, government housing policies are long term, and have failed several times in the past. However, it is impractical for governments to gain every bit of information they need, so assumptions are made. o Risks and uncertainties With government policies, consumers react in unexpected ways. A policy could be undermined, which could make government policies expensive to implement, since it is harder to achieve their original goals. o Inability to control external shocks For example, the financial crisis was unexpected and uncontrollable, and meant policies employed by policy makers did not have the intended effects.

Answer 310

Set up in 1945, and financed by the government Each member has a quota, which determines the amount of financial resources it has to make available to the IMF

Answer 311

To ensure the stability of the international monetary system – the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other To maintain stability and prevent crises in the international monetary system by reviewing country policies and national, regional and global economic and financial developments through a formal system known as surveillance To provide member countries with finance to correct balance of payments problems.

Answer 312

Granting reconstruction loans to war devastated countries Granting developmental loans to underdeveloped countries; providing loans to governments for agriculture, irrigation, power, transport, water supply, education, health, etc. Encouraging industrial development of underdeveloped countries by promoting economic reforms.

Answer 313

An NGO is any non-profit, voluntary citizens' group which is organised on a local, national or international level. The work of NGOs has brought community-based development to the forefront of strategies to promote growth and development. The key characteristics of these community-based schemes are: Local control of small scale projects, self-reliance, an emphasis on using the skills available and environmental sustainability.

Answer 314

1. Lower AD 2. Debt Burdens 3. Lower Exchange Rate

Answer 315

The Current Account consists largely of the trade balance; suggesting it is a likely reason for the Deficit A trade deficit means lower net exports; meaning lower AD This also leads to lower growth, and higher unemployment

Answer 316

Many countries will finance a Current Account Deficit by having a financial account surplus They can easily control this by issuing more debt (e.g. Selling corporate bonds & company shares - borrowing money from the rest of the world). Increasing more

Answer 317

Protectionism could distort the market and lead to a loss of allocative efficiency. It prevents industries from competing in a competitive market and there is a loss of consumer welfare. Consumers face higher prices and less variety. By not competing in a competitive market, firms have little or no incentive to lower their costs of production. It imposes an extra cost on exporters, which could lower output and damage the economy. Tariffs are regressive and are most damaging to those on low and fixed incomes, which could increase income and wealth inequality. However, taxes could raise more revenue for the government, which could be used to redistribute income to the poor or improve public services. There is a risk of retaliation from other countries, so countries might become hostile. Protectionism could lead to government failure.

Answer 318

Reduces the needs for currency reserves (which may not be viable and is very costly, esp foreign currencies) Freedom for domestic monetary policy (you can use m. policy to deal with domestic issues rather than keeping the exchange rate fixed) Useful instrument for macroeconomic adjustment (Increasing the supply of the currency (through low confidence in the economy, for example, lowering D and increasing S) lowers the price level, automatically correcting a current account deficit) Automatically helps the economy when it suffers

Answer 319

Volatility (Demand and Supply can easily change, altering the exchange rate highly. This puts off FDI and trade) Self Correction of Trade Deficit is Unlikely (Demand Imports & exports are only 2 factors that can affect the exchange rate/current account deficit. Other things, e.g. speculation, can affect/stop the effect of the automatic correction) Risk that high inflation levels can affect exchange rate. Lower exchange rates can cause demand pull inflation, making it even worse

Unit 4 Flashcards

(345 cards)