T4 4.1 - 4.5.4 A Global Perspective

T4 4.1 Financial markets

4.1.1 GLOBALISATION

4.1.1 GLOBALISATION

What is globalisation

The increased integration and inter dependence of world economies

What are 3 ways this can be seen through

Rising number of global brands

Increasing connectivity of people and business

Expansion of financial capital flows between countries

Give 3 characteristics of globalisation

Expansion of free trade

Expansion of FDI by TNC’s

High levels of labour migration within/between countries

Who are the East Asian Tigers

Newly industrialised countries who began to rise through export oriented industrialisation (70s and 80s)

What did the EATs do to make themselves off shoring hubs for FDI

They invested in their human capital which allowed them to diversify away from low value goods to higher value goods production

What percentage of global economic growth did the BRICs make up

28% (2000 - 2007)

What was Chinese economy market share of global economy in 1980 vs now

2% vs 18%

What is a TNC

A firm that is registered or operates in one or more countries

Where are many TNCs coming from nowadays compared to before

Newly industrialised economies compared to western countries previously

What do many people see de-industrialisation (levelling up) as responsible for

The rise in populism and right leaning governments

Why might a TNC want to invest abroad

Abundant raw materials

Cheap labour

Quality of labour

Low regulation

Saturated markets domestically

Tax avoidance

What is offshoring

Setting up operations or production in another country

What is outsourcing

The contracting out of a production/supply chain to a third party in another country

What is a global value chain

Refers to the interconnected network of activities involved in the production and delivery of goods and services that are performed by multiple firms in different countries

Where are the different stages of production such as design, research and development performed

In different countries by different firms, each adding their own value to the final product or service

Pros of TNC/MNC investment

Create jobs, stimulating growth

Size and scale of operation enables lower unit costs

Profits of TNCs can be used for R&D

TNCs bring new technology to LDCs which they can copy to help develop

Cons of TNC investment

TNCs in LDCs have strong bargaining power which allows them to drive down wages

MNCs have monopoly power

Lots of pollution (negative externalities)

What is a joint venture

When two or more businesses come together to pursue a common project

With a joint venture, the businesses remain separate in legal terms

Why are joint ventures becoming more popular

Because firms want to benefit from collaborative work or access a market (ie big company teaming up with local company in china)

What are some benefits of joint ventures

Allows sharing of costs with TNCs

Local businesses could gain access to resources including tech, human capital and finance

Risks of R&D are shared

Positive externalities

What are some Causes of the rise in globalisation

Advance in transport and containerasation

Role of World Trade Organisations (WTO) such as EU in reducing trade barriers

Improved technology (easier to communicate)

Improved mobility of capital

Growth of multinational companies

Further causes of rise in globalisation

Opening of formerly closed economies

Increased mobility of labour

Global trade cycles

Firms exploiting economies of scale to gain increased specialisation and reduced unit costs

Consumer welfare is an umbrella term that covers what 3 things:

Price

Choice

Quality

What are some benefits of globalisation

Higher growth rates (FDI injections + export led multipliers)

Increased allocative efficiency via using comparative advantage

Jobs created

Rise in consumer welfare

Attracting FDI

Fall in wage costs (increased migrant workers)

Reduction in absolute poverty

Is further up the supply chain closer to product or raw materials

Closer to the product

Is further down the supply chain closer to product or raw materials

Closer to the raw materials (Bottom up)

Define allocative efficiency

When price equals marginal cost

What is a monopsony

Monopsonies have buying power and can force costs to be lower

(ie NHS)

What is a monopoly

They have selling power (they own majority shares of market so can charge whatever price they want)

What does dynamic efficiency encompass

Product and process innovation

What are some costs of globalisation

Labour exploitation

Tax avoidance

Rising global income inequality

Large job losses

Environmental damage

Loss of cultural diversity

What do companies want to source

The lowest cost of production possible

What does this then cause LDCs to do with eachother

Compete with eachother to secure contracts which requires them to offer lower wages, taxes and reduced red tape

What can this lead to

A race to the bottom on wages and working conditions for workers

Name some supply side economic shocks

Tariffs (imports more spenny)

Extreme weather events

Volatile oil prices

Currency volatility

What are some demand side economic shocks

Covid

Global financial crisis

Currency volatility

Why was Covid - 19 a demand AND supply side shock

Demand because people were locked in houses so couldn’t go out and buy spend money

Supply because after borders reopened, some countries such as China opened later which meant there were supply side shortages for the UK in terms of Chinese imports

Why can currency volatility be both a supply side and demand side shock

Because when currency is weak in one country, imports become more expensive for that country which means that there will be less DEMAND for the exports of another country

Exports become cheaper which means there is more supply for a different country

What does de - globalisation refer to

A process in which countries or regions become less integrated with the global economy

What does de globalisation involve

Reduction in the value of the flow of goods, services, capital, information and people across international borders

What caused the rate of globalisation to decrease in 2008

The 2008 financial crisis

What are the main causes of De globalisation

Protectionism measures

Economic downturns in trading partners

Changing trade agreements

Environmental concerns

4.1.2 - 4.1.4 INTERNATIONAL TRADE

4.1.2 - 4.1.4 INTERNATIONAL TRADE

What is international trade

The exchange of products

What are static gains

Improvements in allocative and productive efficiency in markets

What are dynamic gains

The gains in welfare from product and process innovation, increased choice and more innovative behaviour

What is free trade

Trade free from artifical barriers such as import tariffs and regulations

What is absolute advantage

Where one country can produce goods using less resources/financial capital than another

What did Adam Smith Argue surrounding international trade

That a country should EXPORT those goods and services for which it is more efficient at producing and IMPORT those goods and services in which it is less efficient at producing

What was Paul Samuelsons critique in 2004 in the context of the debate surrounding international outsourcing and trade with China

That increases in productivity of labour in a developing country following trade liberalisation may diminish the developed nations share of the gains from trade

What are the Terms of Trade of a country

The amount of imported goods and and services an economy can purchase per unit of of exported goods and services

What does a rise in the price index for exports of goods improve

The terms of trade

4.4.1 - 4.4.3 ROLE OF FINANCIAL MARKETS (1)

4.4.1 - 4.4.3 ROLE OF FINANCIAL MARKETS (1)

What is the money supply

The entire stock of currency and other liquid investments circulating in a countries economy

What are the 4 functions of money

Medium of exchange

Standard of differed payment

Measure of value

Store of value

What is narrow money

Measure of the value of the notes and coins in circulation that are easily convertible into cash

What is broad money

The most inclusive definition of MS. The total money held by households and businesses in an economy

What is M0

Notes and coins plus central bank reserves

What is MZM (Money Zero Maturity)

Notes and coins plus all sight deposits (a bank deposit that can be withdrawn immediately without notice or penalty)

What is M2

Notes and coins plus all sight AND retail deposits (retail deposits are a money deposit at a banking institution that cannot be withdrawn for a pre set fixed ‘term’)

What is M4

Notes and coin, deposits, certificates of deposits and securities with a maturity of less than 5 years held by non bank private sector (less than 5 years because this makes them less vulnerable to interest rate fluctuations)

What is a bond defined as

A specifc sub category within securities (debt securities)

What does it mean when a bond matures

On the maturity date, the borrower gives back your initial investment in full, alongside your final interest payment. (The final payout)

What happens if a bond issuer cannot pay the maturity

• Credit Rating Downgrade: Credit rating agencies (like Moody's or S&P) will immediately slash the issuer's rating to "D" (Default). This makes any future borrowing incredibly expensive or impossible.

What are open market operations

Open market operations (OMOs) are the purchase and sale of government securities by a central bank to regulate the money supply and influence short-term interest rates

What is the relationship between the value of bonds and the interest rate and why

An inverse one

because as the demand for gov bonds goes up, their value increases, and the financial institutions which held them have more liquid money that they can use to lend, lowering interest rates

What is the reserve requirement imposed on banks and what is it currently set at

The % of deposits made by customers at the bank that the bank must keep rather than lending it out

12.5%

Do interest rates have a bearing on the supply of money in an economy

No

What is most money in a modern economy created by

Commercial banks lending - When they lend £100 to someone they update their balance sheets as having received £100 whilst the person now owes £100 so even though the SUPPLY of money has increased, the net wealth stays the same

Example of money supply expansion (Person B asking Bank for £5000 loan to buy car)

The bank created new money, but it also created an equal amount of debt.

• Person B has +£5,000 in cash to spend.

• Person B also has an obligation to pay back -£5,000 to the bank.

If you add Person B's new cash (+£5,000) and Person B's new debt (-£5,000) together, they cancel each other out to £0.

So, no new wealth was created out of thin air. However, new money (purchasing power) absolutely was.

Why does the total money supply expand over time

Because people and businesses are taking out new loans faster than they are paying old ones off.

What are some factors affecting the demand for money

Rate of interest on loans

Rate of anticipated inflation

To reduce the riskiness of a portfolio of assets

Changes in GDP (Business cycle)

How does increasing the money supply affect interest rates

It reduces them because an outward shift in money supply curve causes an extension of the money demand curve, lowering interest rates

What do lower interest rates then stimulate but why can this be bad

They stimulate AD but if there is no increase in real output (LRAS) then this will just lead to inflation

Define liquidity

The ease with which, and minimal cost by which, assets can be turned into cash and used immediately as a means of exchange

What assets are perfectly liquid

Notes and coins that are legal tender

What are sight deposits

Funds held in bank accounts that can be withdrawn or transferred immediately without any advance notice or penalty.

What are treasury bills

Treasury bills (T Bills) are short term, zero-coupon government debt securities that function as a low risk loan from an investor to the national government

What is the liquidity coverage ratio (LCR)

To mitigate liquidity risk deposit takers are required to hold sufficient regulatory liquidity

The LCR requires banks to hold sufficient cash to cover net cash outflows during a 30 day liquidity stress scenario

Difference between LCR (Liquidity coverage ratio) and the NSFR (Net Stable Funding Ratio)

The LCR requires a bank to at all times hold sufficient HQLAs (High quality liquid assets) to cover net cash outflows during a 30 day liquidity stress period

The NSFR requires banks to limit reliance on short term funding by requiring them to have sufficient stable funding to cover assets and off balance sheet activities that require funding over the next 12 months

What is the formula for the NSFR

Available stable funding (ASF) / Required Stable Funding (RSF) ≥ 100 %

What is a financial market

A financial market is any exchange that facilitates the trading of financial instruments, such as stocks, bonds, foreign exchange or primary commodities such as oil and gas

Outline the key features of a money market

Market for short term loan finance for businesses and households

Money is borrowed and lent for up to 12 months

(Includes inter bank lending and short term gov borrowing to help finance budget deficit)

Outline the key features of the Capital market

Market for longer term loan finance

Securities such as shares and bonds are issues to raise medium to long term financing (to invest in R&D or expansion)

Includes long term gov bonds (10 - 20 year) sold to fund infrastructure projects

What is the difference between debt and equity

Debt financing is borrowing money from a lender

Equity financing is selling ownership to investors

Do debt securities or equity investments yield more

Equity investments (if the business does well)

Are debt securities or equity investments riskier

Equity investments because it essentially means investors eat what is left over whereas debt holders are contractually guaranteed to be paid first

Why are equity investments riskier

Because during liquidation, the cash distribution follows a strict waterfall where the Banks are paid first by seizing collateral

Common shareholders are last in line to be paid

What are both debt securities and equity investments less volatile and therefore more steady than

The stock market (which fluctuates between highs and lows)

Where are debt securities traded

Over the counter (not centrally)

What are the main form of debt investments

Bonds and mortgages

What are mortgages secured against

The underlying real estate as collateral

What are some key pros of equity investment

Unlimited earning potential if company skyrockets

You have a say over company decisions (as a part owner)

What are the main downsides of equity investment

Last in line to get paid as shareholder

Dividends can be cut or skipped

Low income predictability

What are the main upsides of debt investment

You are paid in regular interest payments (coupon rate)

First in line to get paid (contractual agreement)

High income predictability