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105 Cards in this Set
- Front
- Back
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How does economic growth effect full employment? |
Full employment means that there is some frictional unemployment but most people are employed it is called 'natural rate of unemployment' this is most likely to be achieved with economic growth |
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What might a large current account deficit do to a country running one? |
Large deficits may result in volatile exchange rates of a country's currency leading to instability in the whole economy |
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What is a global imbalance of the current account? |
When some large countries such as the UK and USA have large deficits and a country like China having a persistent currency account surplus |
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What is redistribution of income? |
In most developed countries they have progressive taxes and welfare payments to redistribute the income causing lower inequality. However in the developing world there is less likely to be redistribution of income through established tax systems |
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What might be another imbalance for a country? |
Fiscal balance - large fiscal deficits may be unsustainable and may be a problem if a country is unable to seek government bonds in order to finance deficits. This has been a problem in many euro countries in recent years e.g PIIGS economies |
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What are the PIIGS economies? |
Portugal Italy Ireland Greece Spain |
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What is the Keynesian aggregate supply curve? |
He believed the economy could be in equilibrium below full employment level. At lower levels of real output the as curve would be horizontal and as the economy comes into full employment there would be a bottleneck and shortages of factors of production. This will put pressure on costs and prices. |
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What did Keynesian say the economy should do with spare capacity? |
With spare capacity in the economy ( horizontal on the AS) demand management policies such as monetary and fiscal policies should be used to stimulate AD |
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What might cause he SRAS to shift? |
Change in wage costs New legislations Change in price of raw materials Changes in corporation tax |
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How might new legislations cause a shift in the SRAS curve? |
Health and safety regulations which increase a firms costs would shift SRAS to the left |
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What does the LRAS look like and what would be needed to achieve it? |
According the neoclassical economics ta the LRAS is vertical. There is full employment in the long run. Both neoclassical and Keynesian economists believed that the use of supply side policies would be needed to achieve economic growth to shift the LRAS right |
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What are causes of a shift in the LRAS? |
Increase quantity or quality of CELL factors Increased supply of labour Improvements in human capital |
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What are CELL factors? |
Capital/labour Technology Land Enterprise |
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What happens with an increase in capital stock? |
If capital increases relative to labour Ben productivity will increase |
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What is the monetary policy? |
Use of interest rates, money supply and exchange rates in order to influence AD. It can be used to control inflation - most countries have low inflation as a major target in the UK its 2% +- 1% |
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What's the main measure of inflation? |
CPI-consumer price index. This is measure using basket of 650 goods and the good and expenditure survey which shows changes in spending habits. This needs to be updated every year to take into account changes in taste and spending habits |
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What are the criticisms of CPI? |
Too narrow to measure inflation especially during a credit crunch and it doesn't take into account housing costs |
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How might interest rates changes be used as a demand side policy? |
It can be used to meet the inflation target. If inflation is high the Bank of England should increase the base rate and vice versa (tight monetary policies) |
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What would an increase of interest rates do to consumption? |
Increase the cost of mortgages Reducing income and there reducing consumption and AD it would reduce the demand for housing as housing because more expensive and therefore reduce the prices causing a negative multiplier effect |
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How might interest rates increasing have an impact on investment? |
Cost of borrowing would be more expensive and firms will be less likely to invest. It also increases the exchange rate (stronger pound) due to inflows of speculative money 'hot money' causing imports to be cheaper and exports dearer |
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What does an increase in interest rates and the effect it has on investment depend on? |
It depends on the income elasticity of demand for imports and the price elasticity of demand for imports and exports (j curve and Marshall Lerner condition) |
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What are some evaluation points about monetary policy? |
- the extent of the increase in AD on the multiplier effect - depends on the magnitude of the interest rate changes - delay with mortgage holders on fixed rates - affects both small and large firms - interest rates currently can't go any lower - depends where AD is no the LRAS |
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How might increased interest rates effect production costs? |
It increases production costs at a time when inflation already causes higher costs therefore making firms worse off |
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What is inflation? |
A sustained rise in price level over a period of time |
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What are the costs of inflation? |
Loss of international competitiveness Exports dearer,imports cheaper UK investment falls due to uncertainty FDI decreases |
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What are benefits on inflation? |
It reduces the real interest rate so costs of borrowing falls Might be a sign that profits could make more profit Investment might increase A little inflation might be good for the economy as shows an upturn or boom |
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What is demand pull inflation? |
Inflation is initiated by an increase in AD. This increase leads to an increase in the price level this has a greater impact of the AS curve is vertical |
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What is cost pull inflation? |
When inflation is initiated by an increase in costs facing firms. It therefore arises from the supply side of the economy. The overall increase in price level is driven by costs faced by firms. An increase in costs pushes up prices |
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What is Rostock 5 stages of development? |
1-traditional society 2- preconditions period 3- take off 4- drive to maturity 5- age of mass consumption |
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What is a traditional society and transitional stage? |
Traditional society- subsistence, barter, agriculture Transitional stages- specialisation, surpluses, infrastructure |
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What is the take off stage? |
Industrialisation, growing investment, regional growth, political change |
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What is the drive to maturity? |
Diversification, innovation, less reliance in imports, investment |
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What is the high mass consumption? |
Consumer oriented, durable goods flourish, service sector become dominant |
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What is the dependency theory? |
The notation that countries of the world con be divided into core and periphery and that countries I the core developed by exploiting those in the periphery |
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What is the Lewis dual sector model? |
He argued that LDCs could be seen as having 2 sectors - traditional and modern (e.g agricultural and industrial) and that labour could be transferred from the traditional to the modern in order to bring about growth and development |
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What is the Harrod- Domar model? |
A model which emphasises the importance of savings and investment in economis growth and development. Savings = investment = output and income |
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How does aid promote growth and development? |
Aid is a voluntary transfer of resources from on country to another or loans given on concessionary terms |
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What are various types of aid? |
Tied aid is aid with conditions attached e.g on condition that they buy goods from the donor country Bilateral aid- one country gives aid to another Multilateral aid - when countries give money to an international agency who the distributes it to countries based on certain criteria |
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What are arguments for aid? |
Reduces absolute poverty Fills the savings gap (Harrod-Domar model as it injects) Provides funds for infrastructure Increase AD Multiplier effect on GDP improves human capital Contributed to globalisation |
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What are arguemnt a against aid? |
May create a dependency culture May end up in the hands of corrupt governments No evidence it contributes to reducing absolute poverty Aid may distort the market forces and therefore cause a inefficient allocation of resources
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How might debt cancellation promote growth and development? |
Many countries are heavily indebted eg Gambia, Bolivia and Malawi. Servicing the debt means less money to put on growth and development |
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What are arguments for debt cancellation? |
Developing countries would have more foreign currency to buy imported capital and consumer goods from the developed world Helps reduce absolute poverty Reduces savings gap Reduces foreign exchange gap Helps the environment |
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What are the arguments against debt cancellation? |
Moral hazard- no guarantee governments would pursue macro economic policies; curry prion might mean benefits are not enjoyed by the poor May benefit more if trade barriers were decreased toward LDCs |
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How might the development. Of different sectors of the economy promote growth and development ? |
Agriculture Manufacturing industries
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How can you evaluate the development of different sectors of the economy to promote growth? |
Lewis model Criticisms of the Lewis model- profits made in industrial sector might not be invested locally. May replace workers with machines May repatriate profits |
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How might tourism promote growth and development? |
Some countries have developed on the basis of investment in tourism. Demand is likely to be income elastic unlike primary product dependency. |
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What are the advantages of tourism? |
Generates foreign currency as tourists spend on goods and services Attracts investment and FDI by transnational hotels Jobs are created Helps preserve national heritage May improve infrastructure Improves public services |
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What are arguments against tourism? |
May be a significant rise in imports- capital equipment etc Sending profits back to share holders In recession could cause a fall in demand May only be seasonal employment Increase in litter on the beaches
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How might fair trade schemes help growth and development? |
It involves paying above market price for their produce providing the meet certain labour/production standards |
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What is micro finance? |
Providing small loans to very poor families to enable them to engage in productive activities or grow their own small business |
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What is quantities easing? |
A process by which the Bank of England increases the money supply by buying government bonds and corporate bonds from financial institutions so increasing liquidity in the banking system |
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What have been the effects of QE in the UK? |
Increased price of bonds and decreased interest rates Annual income for a pensioner on an annuity has fallen Might be inflationary because it results in an increase in he money supply |
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Can LDCs apply monetary policies? |
Many lack financial markets Foreign exchange gap may inhibit international trade There's needs to be a central bank |
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What are fiscal policies? |
The use of government expenditure, borrowing and taxation in order to influence AD. |
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What are automatic stabilisers? |
Government spending and taxation can change automatically in response to the business cycle without government intervention. Eg in a revession G increases and tax revenue falls |
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What are discretionary fiscal policies? |
The use of FP by the government to stimulate or slow down the economy |
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What is expansionary fiscal policies? |
Involves increasing G or reducing T on order to increase AD when G > T the government would be running a deficit |
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What is a budget deficit? |
When government spending is greater than what the recurve in tax eg tax revuene |
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What are contraction art fiscal policies? |
Reducing G or raising T in order to reduce AD |
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What are some evaluation points on fiscal policies? |
1- depends on the size of G + T 2- depends on where the colony is on the LRAS 3- time lags 4- tight fiscal policy- (rise in direct tax) leads to less incentive to work 5- 'crowding out' |
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What is crowding out? |
Expansionary fiscal policies can reduce the amount of money available for the private sector and increase cost of borrowing. The government has to borrow to spend money and therefore decreasing money available to borrow for the private sector therefor decreasing investment from the private sector |
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What are the impacts on AD with fiscal policies? |
Changes in taxation- income tax affects income and therefore consumption and AD corporation tax changes investment by firms Changes in government spending impacts on AD and depends on the multiplier effect |
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What are the impacts of fiscal policy on the economy? |
Impacts in economic growth Inflation Balance of payments |
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Can you use fiscal policies in LDCS? |
Might significantly benefit from G in education and health They are less efficient in tax collection causing less tax revenue for the government |
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What are progressive, proportional and regressive taxes? |
1- the proportion of income paid in tax rises as income rises 2- the proportion of come paid in tax remains constant as income rises 3- the proportion of income paid in tax falls as income rises eg VAT |
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What are the benefits of globalisation? |
Increase in global trade Specialisation and comparative advantage More consumer choice Lower prices due to economies of scale Benefits of economies of scale for producers More competition and efficiency |
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What are the disadvantages for globalisation? |
Exploitation of workers Less regulations for health and safety in developing countries Environmental degradation Trade liberalisation of financial markets has contributed to increased global instability |
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What is de globalisation? |
Adopting protectionist policies for other countries |
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What is comparative advantage? |
Specialising in the production of a good with the lowest opportunity cost |
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What is absolute advantage? |
When a country can produce a good at the lowest production cost |
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What are some reasons for protectionism? |
Protect infant industries Protects jobs Prevents dumping Raises revenue Corrects balance of payments |
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What are arguments against protectionism? |
Distorts comparative advantage and free trade Higher prices and less choice May result in X-inefficiency May be hard to remove barriers as it increases competition for domestic suppliers |
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What is trade creation? |
Removal of trade barriers results in specialisation of trade allowing comparative advantage and economies of scale |
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What is trade diversion? |
Members of trading blocs but goods from other members instead of countries outside the bloc. Trade diversion leads to inefficient allocation of resources |
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What are some causes in the exchange rates? |
Relative inflation rates Relative interest rates State of the economy Balance of payments Confidence in the country's currency |
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What are the effect of a change in the exchange rate? |
Changes in exports and import prices could worsen balance of payments Depends on elasticity of demand and supply of imports and exports |
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What is the Marshall- Lerner condition? |
Must be met for there to be an improvement on the current account of balance of payments. |
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What is the j curve effect? |
Could be a time lag before improvements to the BoP occur due to in elastic demand. |
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What is the monetary union? |
When different countries give up their currencies and adopt one single currency |
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What are the advantages of a monetary union? |
Price transparency Elimination of transaction costs Easier trading conditions Encourages trade between members Comparative advantage could be increased Reduction in uncertainty with exchange rates |
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What are some disadvantages of a monetary union? |
Lose of control over interest rates - no monetary policies Loss of exchange rate flexibility Possible loss of control for fiscal Transition costs Poorer/weaker countries may see employment fall as their goods aren't demanded internationally
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What does the disadvantages depends on? |
Degree of integration between member countries the closer the integration the higher the benefits as costs fall Depends on the amount of trade taking place outside the EU |
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What are factors influencing international competitiveness? |
Real exchange rates Wage and non wage costs Labour productivity Education and training - human capital R and D Infrastructure Labour market flexibility - ease of hiring and firing |
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What are measures and policies that increase competitiveness? |
Investing in capital to raise productivity Spending on R and D G spending on infrastructure Privatisation Incentives to invest and become more efficient like tax breaks or subsidies |
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What are supply side policies? |
Policies that aim to increase supply achieving an increase in LRAS andPPF would be long term economic growth |
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What does supply side policies involve? |
The involve increasing quality and quantity of factors of production |
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What are labour market policies? |
Policies aimed at improving human capital and increasing productivity it also involves giving incentives to work |
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What are product market policies? |
Policies aimed at increasing competition and efficiency eg breaking down monopoly power making it easier for small firms to start up |
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What are capital market policies? |
Measures to boost investment and savings |
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What are the implications of lack of international competitiveness? |
Exports are an injection into the circular flow so a fall in exports would reduce the injection leading to a negative multiplier effect on GDP leading to a fall in AD and economic growth |
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What is relative poverty? |
Those living below a certain income threshold for a country it can be measured by the % of the living population living below 50% of the median income |
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What are composite measures of poverty? |
HPI- human poverty index; considers income (GDP per capita by PPP) education and health |
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What is HDI? |
Human development index - a composite measure of economic development through income health ( life expectancy from birth) and education ( number of enrolled in school and adult literacy rates |
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What are factors influencing inequality? |
Wage rates Education and training Inheritance Ownership of assets Social benefits/ tax systems Unemployment Occupational and geographical mobility Discrimination Wealth Renting |
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What are causes of poverty and inequality in LDCs? |
Less developed financial markets Property rights are weak Inefficient labour market Inequality between rural and urban areas Dependency on agriculture Poor infrastructure Capital flight Low income causes low marginal propensity to save and therefore low investment May cause more crime Poor governance and weak institutions |
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What is capital flight? |
When higher income earners send money abroad and therefore causes an import in the circular flow of income |
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How can you measure inequality? |
Gina coefficient Lorenz curve Kuznets curve |
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What are limits to growth and development? |
Inadequate human capital Primary product dependency Corruption Civil wars Savings gap Foreign exchange rates Population issues Capital flight Poor infrastructure Lack of FDI health Population growth Debt |
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What is primary product dependency? |
A heavy reliance on a narrow range of products often commodity products such as coffee |
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What are some country examples of PPD? |
Uganda - coffee Nigeria - oil |
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How might being PPD on coffee effect Uganda? |
Farmers in this countries may have asymmetric information as to the real prices of their primary products. They are subject to price fluctuations as there tends to be an in elasticity of supply and demand meaning any changes have a greater impact on price. They also face protectionism |
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How might poor infrastructure cause limitations on developing countriesvm? |
Makes it difficult to attract domestic investment and FDI. |
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What is the prebisch-singer hypothesis? |
The terms of trade between primary products and manufactured goods tend to deteriorate over time |
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Why has this hypothesis not applied in recent years? |
World food prices have risen due to an increase in demand form China and India, whilst prices of manufactured goods fell. |
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Can the government influence growth? |
Average incomes low and tax collection systems are undeveloped. It's difficult to raise revenue to fund policies encouraging growth and development. Some LDCs have gotten aid or borrowed from abroad but have no seen the best use for it |
