MACROECONOMICS Finals

Globalization

Increasing interdependence and integration of global economies, often facilitated by trade, investment, technology, and cultural exchange

International Trade

the exchange of goods and services between countries

Trade Liberalization

The removal or reduction of trade barriers (e.g., tariffs, quotas) to promote free trade.

Multinational Corporations (MNCs)

Companies that operate in multiple countries, benefiting from lower production costs and wider markets

Positive Effects of Globalization on International Trade

Increased Market Access

Lower Costs and Higher Efficiency

Technological Advancements and Faster Trade

Foreign Direct Investment (FDI)

Consumer Benefits

Increased Market Access

Companies can sell products worldwide, leading to higher revenues and business expansion.

Lower Costs and Higher Efficiency

Businesses benefit from cheap labor and resources in different regions, reducing production costs.

Technological Advancements and Faster Trade

Innovations in transportation and digital communication improve trade efficiency.

Foreign Direct Investment (FDI)

Growth Companies invest in foreign countries, creating jobs and economic growth.

Consumer Benefits

Consumers have access to diverse products at competitive prices.

Negative Effects of Globalization on International Trade

Job Displacement and Outsourcing

Income Inequality

Environmental Concerns

Trade Dependency and Vulnerability

Cultural Erosion

Job Displacement and Outsourcing

Companies relocate manufacturing to low-cost countries, leading to job losses in high-cost regions.

Income Inequality

While globalization boosts overall wealth, it often benefits corporations and skilled workers more than low-income workers

Environmental Concerns

Increased production and transportation lead to pollution and climate change.

Trade Dependency and Vulnerability

Countries reliant on foreign supply chains face economic risks during disruptions.

Cultural Erosion

Globalization promotes Western brands and lifestyles, sometimes overshadowing local cultures.

Comparative Advantage

ability of a country to produce a good or service at a lower opportunity cost than another country. Even if a country is less efficient in producing all goods compared to another country, both nations can still benefit from trade if they specialize in what they produce best.

Who introduced comparative advantage?

David Ricardo in the early 19th century

Absolute Advantage

When a country can produce a good more efficiently (using fewer resources) than another country

Opportunity Cost

The value of the next best alternative foregone when choosing to produce one good over another.

Specialization

The focus on producing specific goods or services where a country has an advantage, leading to increased efficiency.

Trade Liberalization

The reduction or removal of trade barriers (such as tariffs and quotas) to encourage international trade.

Benefits of Comparative Advantage in Global Trade

Increased Efficiency and Productivity

Lower Production Costs and Consumer Benefit

Economic Growth and Job Creation

Encouragement of Innovation

Trade Partnerships and Global Cooperation

Challenges and Criticisms of Comparative Advantage

Short-term Job Losses

Dependence on Other Nations

Environmental Concerns

Unequal Distribution of Benefits

Money

any asset that is widely accepted as a medium of exchange for goods and services.

Functions of Money

Medium of Exchange

Store of Value

Unit of Account

Standard of Deferred Payment

Central Bank

a national financial institution that regulates the banking system, controls money supply, and implements monetary policy.

Roles of a Central Bank

Issuing Currency

Monetary Policy Implementation

Lender of Last Resort

Regulation of Commercial Banks

Maintaining Financial Stability

Monetary Policy

strategies used by the central bank to regulate money supply and interest rates to ensure economic stability.

Types of Monetary Policy

Expansionary Policy

Contractionary Policy

Expansionary Policy

increases money supply to stimulate growth

Contractionary Policy

reduces money supply to control inflation

Monetary Policy Tools

Open Market Operations (OMO)

Reserve Requirement

Discount Rate

Open Market Operations (OMO)

Buying/Selling of Government Securities

Reserve Requirements

percentage of deposits that banks must keep in reserve

Discount Rate

interest rate charged by the central bank on loans to banks.

Types of Banks

• Commercial Banks

• Investment Banks

• Development Banks

Commercial Banks

offer deposit and loan services

Investment Banks

specialize in capital markets

Development Banks

provide financial support for economic development

Money Supply and Demand

The money supply is the total amount of money in an economy, while money demand is the desire to hold cash rather than invest.

Factors affecting Money Supply and Demand

• Interest Rates

• Inflation Expectations

• Economic Activity

Nominal Interest Rate

stated interest rate without adjusting for inflation

Real Interest Rate

interest adjusted for inflation

Financial Markets

Stock Market

Bond Market

Stock Market

Companies issue shares

Bond Market

Governments/corporations raise capital by selling bonds

Inflation

the increase in general price level of goods and services

Demand-Pull Inflation

prices driven up due to high consumer demand

Cost Push Inflation

higher prices due to rising production costs

Deflation

decrease in prices, which can slow down economic growth

Foreign Exchange (Forex)

Global market for currency trading

Fixed Exchange Rate

Governments control currency value

Floating Exchange Rate

Currency value depending on market forces

Managed Float (Hybrid System)

Some central banks intervene occasionally to stabilize excessive fluctuations

International Considerations in Macroeconomic Policy

Global Interest Rate Trends

Trade Policies and Tariffs

International Financial Institutions

Financial Technology (FinTech)

the use of technology in improving financial services

Digital Banking Innovations

Cryptocurrencies

Mobile Payments

Blockchain Technology

Financial Crises

occur when banks and financial institutions face liquidity shortages, leading to economic downturns.

2008 Global Financial Crisis

Triggered by the U.S. housing bubble and excessive risk-taking by banks.

1997 Asian Financial Crisis

Currency devaluations in Thailand, Indonesia, and South Korea led to financial turmoil.

Causes of Financial Crisis

Excessive Leverage

Asset Bubbles

Moral Hazard and Poor Regulation

External Shocks

Sudden Stops in Capital Flows

Excessive Leverage

When households, firms, or banks borrow too much, they become vulnerable to shocks

Asset Bubbles

Overvaluation of assets (such as real estate or stocks) can lead to sudden crashes when the bubble bursts.

Moral Hazard and Poor Regulation

When financial institutions take on high risk due to lack of oversight or expectation of bailouts.

External Shocks

Events such as oil price hikes, geopolitical tensions, or pandemics can trigger or deepen crises

Sudden Stops in Capital Flows

In emerging markets, a quick reversal of foreign investment can cause currency and banking crises.

Types of Financial Crisis

Banking Crisis

Currency Crisis

Debt Crisis

Twin Crisis

Banking Crisis

Banks face insolvency or liquidity problems, leading to panic and bank runs.

Currency Crisis

Rapid depreciation of a national currency, often tied to loss of investor confidence or speculative attacks.

Debt Crisis

When a country (or large corporation) is unable to meet debt obligations.

Twin Crisis

A combination of currency and banking crisis.

Shadow Banking System

Shadow banks are financial intermediaries that perform bank-like functions (e.g., lending, securitization), but do not operate under strict banking regulations.

Hedge Funds

private investment partnerships that pool capital from accredited investors or institutions to invest in a wide range of assets using aggressive strategies such as leverage, derivatives, and short-selling

Goal of Hedge Funds

Their goal is often to generate high returns regardless of market conditions. Hedge funds are lightly regulated compared to mutual funds or banks. They typically require high minimum investments and are open only to qualified investors.

Money Market Mutual Funds (MMMFs)

investment funds that invest in short-term, low-risk securities such as Treasury bills, commercial paper, and certificates of deposit. They offer liquidity and safety, often used by corporations and individuals as a cash management tool.

Mortgage Brokers

intermediaries who connect borrowers with mortgage lenders. They do not lend money themselves but earn commissions by facilitating mortgage deals.

Structured Investment Vehicles (SIVs)

special-purpose entities set up by financial institutions to buy long-term, high-yielding assets (like mortgage-backed securities) and finance them with short-term, low-cost debt.

Income Inequality

refers to the uneven distribution of income and wealth across different individuals or groups within a society.

Economic Growth

is the increase in the production of goods and services in an economy over time, typically measured by the rise in GDP.

Kuznets Curve Theory

suggests that inequality initially increases as an economy develops (as industrialization and urbanization take place) but eventually decreases as the economy matures and wealth is more evenly distributed.

Human Capital Theory

suggests that investing in education increases an individual’s skills and thus their earning potential. As more people get educated, the income distribution becomes more equal.

Automation

the use of technology to perform tasks without human intervention

Technological Displacement

Technology increases productivity, but automation often results in job displacement, particularly in manufacturing and low-skill sectors. The skills gap means that those without high-tech skills will see wage stagnation or unemployment

Progressive Taxation

Progressive taxes mean that higher-income individuals pay a larger percentage of their income in taxes, which can be used to fund social services and reduce inequality. However, critics argue that higher taxes on the wealthy can discourage investment and entrepreneurship, which could hinder growth.

Welfare and Social Programs

These policies aim to redistribute wealth to poorer populations. Some economists argue that social safety nets improve human capital (e.g., through healthcare, housing, and education), which can increase productivity. Others argue that too much redistribution can create dependency and reduce economic dynamism

Sustainable Economic Growth

refers to growth that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Fair Economic Opportunities

mean that everyone has equal access to economic resources, such as jobs, education, and healthcare

Sustainable Growth

means businesses pursue environmentally friendly practices and social responsibility while still generating profits. This approach tries to balance the need for economic development with environmental protection and social equity.