Higher economics test 3 - policies, devolved powers, global economics

Fiscal policy

Expansionary is when gov increases spending/ reduces tax to increase AD
Contractionary is the opposite

How fiscal policy is used to achieve UK gov macroeconomic aims

Increase gov spending has multiplier effect eg increasing subsidies means firms will supply more at all prices
Increase capital spending will increase employment. Multiplier effect stimulates growth and demand for labour
Reduce income tax/ VAT = more disposable income and increased jobs/output
Reduce corporation tax increases funds available for firms to invest and create jobs

Monetary policy

Use of rates/ money supply to control AD in economy.
Expansionary = lowering rates and quantities easing to drive growth and increase money supply.
Contractionary = opposite, aims to decrease AD.

How monetary policy is used to achieve UK government macroeconomic aims

increase interest rate to reduce inflation rate to discourage borrowing by making it more expensive/ make saving more rewarding. Reduced spending from less borrowing and more saving reduces AD.
Reduced AD reduces demand-pull pressure in economy and reduces inflation rate.

Economic powers devolved to the Scottish parliament

Full economic decision making on tourism, economic dev, social housing policy
Full budgetary decisions on health and education eg having no prescription charges

Supply-side policy

Aim to increase economy's capacity to produce goods by improving efficiency and flexibility.

How supply side policy can be used to achieve uk gov macroeconomic aims

Increase minimum wage - working will be more financially rewarding
Encourage self employment
Cheaper childcare encourages new parents to return to work
Reduced corporation tax increases potential for future investment allowing firms to take on more workers
More job centres make unemployed aware of vacancies

Describe globalisation

Process by which worlds economies become more integrated through trade, communication and transportation

free trade agreement

Member countries reduce/ eliminate trade restrictions on goods traded among them

Impact of free trade on UK consumers

Reduced price of foreign imports meaning they can buy same foreign goods with smaller portion of their income, thus more disposable income
Allows consumers to satisfy wants, increases standard of living
Encourages foreign firms to export more goods meaning more consumer choice and higher standard of living

Impact of free trade on UK firms

Increased competition as more goods are imported due to free trade, must become efficient and productive to compete (eg specialisation)
Larger firms may expand more to exploit new markets, increasing sales which increases profits
Could cause firm to suffer from coordination diseconomies of scale meaning they can't communicate manufacturing processes to branches, decreasing quality of production

Impact of free trade on UK gov

Firms may lose out on sales to foreign imports therefore needing to lay off workers. Rate of unemployment will rise.
Gov must spend more on unemployment element of universal credit, unable to spend as much on other areas
Cheaper imported goods encourages consumers to spend more, increasing gov revenue from VAT

Recent trends in uk imports and exports

Trade in goods in a deficit
Trade in services in a surplus

Types of trade barriers

Tariffs - tax on imported goods, making them more expensive
Quotas - limit on number of imported goods
Subsidies - gov payments to domestic producers
Embargoes - complete ban on certain goods/ imports from certain sources to a destination
Legislation - actions by gov to reduce int trade

Reasons for restricting trade

Stops foreign competitors allowing starting industries in UK to grow. Overseas competitors have access to economies of scale which may be unavailable to starting industries.
Prevent dumping - foreign producers selling at low prices to eliminate competition
To improve balance of payments - reduced demand for imports may reduce a deficit
To reduce quantity of goods that don't meet H&S standards

Disadvantages of restricting trade

Increased cost for imported goods
Countries may retaliate by imposing barriers on exports, harming domestic industries as they'll make less profit selling in foreign markets
Less foreign competition makes domestic firms less efficient from lower standards
Reduces amount/ variety of goods available as foreign firms import less

Absolute advantage

When an economy is more efficient at producing something than another economy
Countries should specialise in good they have most absolute advantage as will lead to increased world output and improved living standards
Eg, Saudi Arabia's oil production and Scotland's whiskey production

Comparative advantage

Gained when country with no absolute advantage in any area specialises in area it's least disadvantaged
Country produces at lower opportunity cost than others, meaning it would sacrifice less of one good to produce another good
Uk has comparative advantage in financial services as UK has highly educated and skilled workforce
Even if a country is less efficient at producing it should still engage in int trade, producing the good it's least disadvantaged in

Adv of being a member of a trading bloc

Countries can specialise in producing what they're best meaning no resource waste on inefficient production
Reduces barriers to trade making it easier for domestic country to sell goods overseas
Poorer economies benefit from radical advancements in tech available in developed economies part of the bloc
Reduced barriers facilitates more goods being traded

Disadv of being a member of a trading bloc

More vulnerable to economic shocks from being reliant on economic performance of other countries
Industries in other countries in the bloc may outperform a domestic country, creating structural unemployment in home country

Reasons for a MNC choosing to locate in the uk

Skilled workforce
Advanced infrastructure
Relatively cheaper labour compared to other countries in Western Europe
Well established financial sector

Impact of a MNC/ increasing FDI on uk economy

Creates jobs - increased national income as more will be produced by MNC
Increased AD as people spend more, increasing use of multiplier effect
Increased gov revenue from income tax as more ppl make an income - less gov spending on universal credit as less claim unemployment element
MNC may repatriate profits to its home country, increasing leakages in circular flow
MNC takes business away from local firms, reducing GDP

Impact of a UK MNC moving production to a developing economy on home country

Profit repatriation means UK receives profits gained from MNC in developing economy, increasing injections
Optimises use of multiplier effect - more money available to spend
Increased tax revenue for uk gov - spent on education, creating skilled workforce that goes into higher paying jobs, increasing standards of living
Job losses in uk as MNC utilises developing economy's workforce
Initial investment for operations overseas results in huge cash outflow, increasing leakages

Factors causing strengthening in value of sterling

Increased tourism increases demand
Low rate of uk inflation compared to other economies
High confidence in uk economy
Increase in number of UK exports purchased abroad

Impact of weakening pound on uk consumers and producers

Increased demand for firms as foreign imports seem more expensive - increased profit allowing firms to expand
Consumers spend more to buy same amount of imports - less disposable income
Decreased demand for exporting uk firms as goods seem less attractive to foreign consumers - loss in profit, firm laying workers

Balance of trade

Difference between how much a country imports and how much it exports

Components of capital and financial account

FDI is foreign investors making large purchases in uk and the opposite
Portfolio investment is when foreigners invest in uk stocks
Hot money flows is when investors move more money to uk banks due to increased returns
Reserve account is used by central bank to buy and sell foreign currency

Components of the current account

Balance of payments deficit

Payments made out of country exceeds value of payments made in

Recent trends in uk current account

Trade in goods is in a deficit - uk is small densely populated island, must import lots of food to feed everyone
Trade in services in surplus as uk esp London and Glasgow offers very sought after financial services
Trade in goods deficit as uk manufacturers offshore production to emerging economies for cheaper production

Methods of reducing current account deficit

Introduce barriers to trade to reduce value of trade in goods imported
Increase taxes and rates or reduce gov spending to reduce demand for imports
Better R&D and investment in education increases quality of uk goods, increasing demand

Characteristics of developing and emerging economies

Developing economy will have low growth rate, low living standard, poor infrastructure from low investment, low investment in education thus unskilled population. Example, Chad.
Emerging economy will have rapidly increasing growth rate, improved living standard, increase investment in infrastructure and education. Example, Brazil.

Types of aid

Multilateral is given from any int body to one country
Debt relief is cancelling debt interest from loans from developed countries
Bilateral is given from one country to another
Medical is provision of medical staff, vaccines and building hospitals.

Characteristics of developed economies

High income/ GDP per capita
Tertiary sector dominance
Well developed education system
Not reliant on single industry/ resource

Measures a developed economy can take to increase economy growth in developing economies

Creating free trade agreements allows firms in developing economy to trade int easily, increasing profits. Could decrease unemployment.
Increased AD increases output by firms, increased GDP.

How does rapid economic growth in emerging economies impact the uk economy

Uk firms see new markets to exploit, increasing profits
New competition in foreign markets encourages efficiency and innovation to compete effectively. Uk firms may labour shed to focus on that.
May be technology and innovation spill over as we benefit from new ideas

Role of WTO, IMF, World Bank

WB: promotes long term economic dev and poverty reduction in developing economies, offers aid to developing economies, assistance is long term.
IMF: promotes global economic and financial stability and provides policy advice, can be accessed by all countries regardless of wealth, provides short/ medium term loans to countries
WTO oversees global trade rules between members and supports free trade, main role is to promote free trade and improve global living standards. Funded by member states.

Effects of challenges facing developed economies

Developed economies are more likely to experience national debt due to running consistent budget deficit. Creates higher inflationary pressure due to increased monetary supply from borrowing.
May experience reduced availability of labour from an ageing population. Increased spending on transfer payments on pensions, reduced tax revenue from income tax.
Likely to experience slower growth rates - increased chances of unemployment as firms need to labour shed due to less AD

Factors affecting a change in the value of GBP

Increase in UK exports will cause demand for pound to rise as foreign producers require GBP to purchase exports
If investors see the UK as safe investment demand for GBP will rise
Speculators demand GBP if they think the currency value will continue to rise

Describe recent economic trends

In 2023 inflation peaked at approx 10% and fell over second half. Slowly rising over 2025.
Unemployment fell over 2021 from post Covid and started to increase in 24/25 since pandemic.
Current account has been in consistent deficit

Explain reasons for economic trends

High interest rates reduced AD and alternative energy suppliers found from Russia and Ukraine.
Higher nat min wage + employer NI contributions caused cost push inflation
Businesses adopting AI, starting to affect demand for labour
Trade in goods deficit: specialisation in financial services meaning need to import more physical goods