Macroeconomics (Year 2)

Monetarist belief

In the long run full employment will be reached (deficits will balance out)

Kenynesian belief

government intervention, particularly through fiscal policy, can stabilize the economy and promote full employment by influencing aggregate demand

definition of (absolute) poverty

Less than $2.15 a day

A state in which income is insufficient to provide basic necessities (food, shelter, medical care, clothing)

definition of relative poverty

<60% Median income

Compares the income of individuals or households in a society with median incomes.

What is the poverty trap?

A poverty trap is a mechanism that makes it very difficult for people to escape poverty. A poverty trap is created when an economic system requires a significant amount of capital to escape poverty.

e.g.

lack of access to education and training, lack of affordable housing and transportation, lack of affordable childcare, and discrimination in the labour market.

Name at least 3 causes of poverty

- low levels of human capital

- location

- discrimination / health issues

- unemployment

- low or no minimum wage

- low government intervention

- external shocks

- (income) dependency

- changes in the rate of economic growth: economic development, FDI, policies which result in increased trade, government tax and benefits policies, and changes in asset

prices.

what causes changes in poverty

- infrastructure

- education and training

- aid

infrastructure to decrease poverty

increase productivity, increase incomes, decrease poverty e.g south korea farming

education to decrease poverty

increased standard of education, decreased unemployment, increased income, decreased poverty

aid to decrease poverty

if aid is spent on healthcare or education, workers become more productive, increasing their incomes and reducing poverty

HOWEVER

Somalia received $1.3 billion in 2011, but 70% went to corrupt politicians or inflation

Why may aid not decrease poverty? Give an example too

Corruption. If the government or aid recipients are corrupt, the money is unlikely to be spent efficiently or given to the right causes.

- Somalia recei

ved $1.3 billion in 2011, but 70% went to corrupt politicians or inflation

working poverty

Families with at least one person in work but are still earning less than the 60% of median income

Caused by monopsony power, wage stagnation, cost of living, inflation outstripping wages, increased use of zero-hour-wages (

What may cause working poverty?

Monopsony power, wage stagnation, cost of living, inflation outstripping wages, increased use of zero-hour-wages

how can wealth generate income (how does this lead to wealth inequality)

shares - dividends

houses - rent

savings - interest

this means inheritence is a huge cause of wealth inequality because people gain more assets than others and these assets can be used to generate incomes and more wealth

picketty - 90% of all wealth is inherited

How do shares (asset) generate income

dividends

How do houses (asset) generate income

rent

How do savings (asset) generate income?

interest

wealth inequality

the unequal distribution of assets within a population

What does Thomas Picketty say about wealth? (not in the specification but great application)

Inherited wealth represents 80-90% of total wealth

r > g Hypothesis

If r, the rate of return on wealth, is greater than g, the rate of income growth, then wealth will grow faster than incomes.

impact of increasing minimum wage on income inequality

reduces inequality.

the poorer people now earn a higher income and the richest CEOs (who earn 271x more than average worker in America) will earn a smaller income because the cost of production increases and therefore their profits decrease.

Why is income inequality inevitable in the free market?

People with higher skills and abilities will attract higher wages, whereas those with poor skill levels will earn nothing. Further, private ownership of resources means that some people

will acquire considerably more assets than others which, in turn, may generate an income.

Why/how do some argue that inequality is essential in a capitalist system?

Some argue that inequality is essential in a capitalist system to

provide an incentive for individuals to take risks in the knowledge that they,

personally, will benefit from any profits made

how to measure inequality

lorenz curve and gini coefficient - (how much richer are the richest 20% in each country than the poorest 20%)

Name 3 causes of inequality

• 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.

income inequality

the unequal distribution of income - flow of money received by an earner every year

Why may an increase in the minimum wage actually worsen inequality?

If higher costs lead to unemployment, some low-income workers may lose jobs, which could increase inequality.

The richest CEOs in America earn ____x more than the average worker

271x

Has income tax worked?

Based on recent economic studies: without it, the richest 20% would be 20x richer than the poorest 20%. With it, the gap is only 4x

Draw the lorenz curve

What does the lorenz curve show?

Graph showing how much the actual distribution of income differs from an equal distribution

x-cumulative % of population

y -cumulative % of income

gini coefficient

A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.

Low Gini coefficient

less inequality

High Gini coefficient

more inequality

How to calculate gini coefficient

A/A+B

Palma Ratio

The ratio of the richest 10% of the population's share of gross national income (GNI) divided by the poorest 40%'s share

World Bank thinks it is more relevant than Gini and it shows if trickle-down economics works.

Perfect equality

every person has exactly the same income

Perfect inequality

one person has all the income, everyone else has zero

how to reduce inequality

Short run:

increase NmW

progressive taxation

inheritance tax

benefits

triple lock pensions

decrease maximum pay

Long run:

Spending on education (such as the gov's recent spending on T-Levels)

Spending on housing reforms (Maximum price on housing or subsidising housing production)

progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

unemployment trap

Occurs when an individual is little better off or even worse off when getting a job after being unemployed because of the combined effect of increased tax and benefit withdrawal.

fiscal drag

When average tax rates increase because taxpayers have moved into higher income brackets during an expansion.

Universal Credit

Single monthly benefit designed to replace 6 separate benefits for people who are on low income or out of work

regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

Draw the laffer curve

What does the Laffer curve show

A relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity is severely discouraged.

Riccardian equivalence theory

Increasing the deficit by spending on the economy may not lead to growth because consumers adjust their behavior by saving more and spending less + the government will increase taxes in the long run

current spending

Government spending on the day-to-day running of the public sector, including raw materials and wages of public sector workers.

capital spending

refers to money spent by a business for an item that will be used over a long period

windfall tax

A one-off tax levied on firms that have made unexpectedly large profits, typically due to external factors rather than their own efforts (e.g. energy companies profiting from rising oil prices). It is a tax, not a fixed cost.

What is a stamp duty

ha tax, payable to the government when purchasing assets such as houses or cars

Why do we tax?

1. to generate revenue for government

2. protectionist trade policy (tariff)

3. to alter a behaviour or activity that generates negative externalities (correct market failure)

4. Redistribute income/wealth inequality

5. manipulate the economy

Draw a proportional tax rate diagram (not in spec but helps you to visualise it)

Draw a progressive tax diagram (not in spec but helps you to visualise it)

regressive tax diagram (not in spec but helps you to visualise it)

marginal tax rate

the extra taxes paid on an additional dollar of income

crowding in

increased government spending stimulates economic activity, leading to more private investment

Name 3 causes of a budget deficit

1. national emergencies

2. need for public goods and services

3. stabilisation of the economy

4. role of government in society

5. demographic factors causing state pensions to rise

6. increase interest rates on debt leading to a rise in debt service costs

crowding out

a decline in private expenditures like investment as a result of an increase in government spending

service debt

To pay the interest and capital repayment in accordance with the loan contract.

"fiscal deficits are not an issue" - how could you defend this?

- if you are in a recession you need to spend to get out of it

- multiplier

- gov spending on capital spending - LRAS

- cyclical defict

- small proportion of GDP

- if the money is spent on external shocks e.g COVID19

"fiscal deficits are an issue" - how could you defend this?

- in a recession, there is no guarantee of demand

- could be inflationary

- increased tax burden for future generations

- crowding out

- gov debt leads to opportunity cost and you may be denied for a loan

- large proportion of gdp

- structural deficit

automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle

Why should the government cut the deficit?

Less money servicing Debt -> lower oppurtunity cost

Gives you more credibility, more stable currency and increased FDI

structural deficit

The part of the budget deficit that would exist even if the economy were operating at full employment.

cyclical deficit

Caused by a recession and the consequent decline in tax revenues. This becomes an issue when it persists over time

what is fairtrade

trade between companies in developed countries and producers in developing countries in which fair prices are paid to the producers.

Benefits of fair trade

enabling farmers to receive a fair price for their harvest, ensuring a fair wage and economic independence for workers, prohibits forced and child labour, improves worker's standard of living, can plan investment

Criticisms of fair trade

Benefits some, excludes others

Amounts to redistribution, not creation of value (economic growth)

Inflates prices above market value but doesn't address root problems, e.g., oversupply, underperforming farms

prevents resources moving to more productive processes

Globalisation

The increasing international interdependence or integration of economic agents

Francis Cairncross quote on globalisation

globalisation is 'the death of distance'

Peter Jay quote on globalisation

globalisation is the 'ability to produce any G or S anywhere in the world'.

How much of overall costs do shipping costs comprise?

1% of the total cost - clearly we are very efficient and globalised nowadays!

What does globalisation look like

- increased international trade

- increasing multinational corporations (MNC's)

- increased international movement of labour

- increased specialisation

- greater dependance on the global economy

- easier movement for goods and services

- recognition of companies such as McDonald's in LIC's

- global supply chains

- trade to GDP ratios increase (Luxembourg 400%)

What causes globalisation?

- Improvement in transport

- Collapse of communism

- The movement of labour and capital

- Multinational corporations

- IT (facilitates FDI)

- Containerisation

- Trade liberalisation

'Containerisation'

Coined by Mclean in 1956:

Movement of goods using ships/transport using standard containers

Shipping costs have fallen by approximately 70-90% in real terms since the 1950s.

How much have shipping/containerisation costs fallen since the 1950s?

100%

How much has trade increased as a result of containerisation?

790%

- World trade volumes increased by approximately 790% between 1950 and 2000. Containerisation was a major contributing factor, though trade liberalisation, globalisation, and rising incomes also played a role.

benefits of globalisation for consumers

better choice

lower prices

disadvantages of globalisation for consumers

may be higher prices because increased incomes lead to increased demand

some consumers worry about the loss of culture

being driven to consume more can reduce consumer hapiness (diderot effect)

Diderot Effect

obtaining a new possession often creates a spiral of consumption which leads you to acquire more new things. As a result, we end up buying things that our previous selves never needed to feel happy or fulfilled.

advantages of globalisation for workers

migrants can provide important and highly demanded skills which can increase AD and create jobs

highly skilled workers are paid high wages

Disadvantages of globalisation for workers

increased inequality as high skilled workers are paid much more than lower skilled workers

increased international competitiveness reduces wages

increased migration leads to lower wages

some are exploited by MNCs

structural/(sometimes frictional) unemployment as trade patterns change

advantages of globalisation for producers

global supply chains means that if one market collapses they can have a supply of resources from elsewhere

can employ low skilled cheap workers for more profit

can exploit their comparative advantage in a larger market

disadvantages of globalisation for producers

global supply chains can have high transportation costs

firms who are unable to compete internationally will lose out

advantages of globalisation for government

may increase tax revenue as other firms locate in the country

increased job creation means they can pay less benefits

disadvantages of globalisation for governments

footless companies may not pay the tax as they can just leave the country

TNC's may bribe or lobby the government

Tax avoidance (e.g starbucks)

Hundrerds of billions lost annually due to transfer pricing (when a firm makes its daughter companies pay its tax in a country with low corportation tax)

impact of globalisation on the environment

- environmental degradation, resources are exploited

- pollution = climate change

- resource depletion

- increase trade = increased emissions

BUT

world can share technology to counter climate change

Impact of globalisation on economic growth

Increase in investment (tnc)

TNCs may bring techniques and technology

exploitation of comparative advantage

Increased employment -> LRAS

BUT

TNCs may support unpopular or undemocratic regimes

remittances

emerging markets

places where consumer incomes and buying power are increasing because of economic expansion. These help globalisation because they receive greater investment.

how does Nike take advantage of working in Bangladesh

no laws/regulations

lower taxes

cheaper FoPs

no MnW

deglobalisation

Decreased economic interdependence between countries e.g decline in world trade, fall in capital movements, decrease in FDI

examples of backlash to MNCs

Nike - sweatshop

Starbucks - tax avoidance

absolute advantage

the ability to produce a good using fewer inputs than another producer

comparative advantage- DAVID RICARDO

the ability to produce a good at a lower opportunity cost than another producer

theory of comparative advantage

if all countries specialise in their comparative advantage, global output will increase

Countries specialise in the goods in which they have a comparative advantage/lower opportunity cost Through trade each country can now consume more in total as they focus on what they can produce more efficiently

limitations of the theory of comparative advantage

- assumption of no trade barriers

- assumes there are only 2 economies

- assumes no transport costs

- assumes perfect knowledge

- assumption of equal quality of goods

- assumes average cost of production is constant

cost of production is not always constant

increased specialisation might result in rising average costs caused by diseconomies of scale

assumption that there are no trade barriers

trade barriers might distort comparative advantage

assumption that there are no transport costs

high transport costs (e.g 5000km between Uzbekistahn and Germany) can reduce the benefit of specialisation in your comparative advantage