Macro Y

Economics Mr Tobais

Absolute Advantage

When a party has superior production capability than another

Comparative Advantage

When a party can produce something at a lower cost than another party

production possibilities frontier

Shows the maximum output combination reached when two goods are used efficiently

Theory of comparative advantage

If countries specialised in producing goods they are competitively good at producing, then world output would increase, also consumers would benefit

3 assumptions of comparative advantage

The average cost of production stays constant, there are no trade barriers, no transport cost

Economies of scale

Occur when long run average costs decrease as output increases

Globalisation

Increased integration of different economies around the world

5 factors that influence globalisation

Increased international movement of labour,

increased international movement of financial capital,

increased specialisation,

increased international trade,

increased trade to GDP ratio

Financial trade

Money used for investments

Conglomerate integration

Wher two firms merge, when they are in a different industry and completely unrelated.

Foreign direct investment (FDI)

An investment made by a firm in one country into a firm in another country, to gain control over foreign firms

Transnational corporation

A company that operates in two or more countries

Gross domestic product

Tells us how much is produced within an economy during a period of time

Trade-to-GDP ratios

Show how high the value for international trade is compared to the size of the countries economy

Trade-to-GDP ratio formula

Total value of international trade / GDP X100

Causes of globalisation

Improvement in transport,

Improvement in technology,

Containerisation,

Trade liberalisation.

Improvement in transport

The availability of transport (boats, planes, trains etc) has made it easier for workers to move counties. Therefore increase movement of labour

Improvements in technology

Development of the internet has increased international movement of capital, (people can order online)

Containerisation

Container ships getting larger => more goods can be traded => cost of transporting goods falls (economies of scale) => increase international trade

Trade liberalisation

Restraint placed by a country/government on the imports of foreign goods (eg tariffs)

Impacts of globalisation

individual countries,

Governments,

Producers,

Consumers,

Workers,

The environment.

Terms of trade

Shows the relationship between the price of exports and the price of imports

Index of export prices

Look at the average price of most commonly exported goods (then convert it to index exported goods)

Index of import goods

Average price of most commonly imported goods (then conver to index of imported goods)

Formulae for terms of trade

index of export goods / Index of imported goods X 100

Improved

Terms of trade increased

Deteriorated

Terms of trade decreased

Factors influencing a countries terms of trade

Raw material prices,

Tariffs,

Exchange rates,

Inflation rates

Exchange rates

the price of one currency in terms of another

Impact of changes in a counties terms of trade

Living standards

Competitiveness

Interdependence

When countries become reliant on eachother. Their economies are closely linked through trade.

ICT

Information and communication Technology, which has reduced the cost of communication and to almost 0

Balance of payments

A set of accounts showing the transactions between residents of a country and the rest of the world.

Current account

The imports and exporrts of goods and services, the net income payments recived and payed from abroad, government transfers

Financial account

Includes any trade of foreign exchnage reserves as well as the buying and selling of assets held in different countries

Balance of trade

Exports minus imports of physical goods as well as invisble services

Global imbalances

The spread of trade balances is very unequal, UK and USA are on huge current account defecits, China and German are on massive surpluses.

Trading Bloc

Group of countries who agree some level of free trade (international trade without restricitions) between them

Free trade area

Group of countries who abolish tariffs and quotas to all the free movement of goods between them. Eg- North American Free Trade Area (NAFTA)

Single Market

Free trade area which also has free movement of services and factors of production between members. Eg- The EU

Customs Union

Common external trade policy, all countries have the same tariffs against external countries outside the bloc. Eg- The EU

Single Currency Area

Trading bloc which adopts a single currency between nations, in order to encourage price transparency and increase trade.

European Union

Worlds largest trading bloc, a single market and customs union for 27 nations. Also contains a large single currency area

The Eurozone

Single currency area within the EU. Contains 18 countries

World Trade Organization (WTO)

International organisation founded in 1995 to encourage free trade between its members and handle trade disputes between them.

General Agreement on Tariffs and Trade (GATT)

The predecessor to the WTO

Protectionism

When countries try to reduce the amount of imports they receive.

4 types of protectionism

1) Tariffs

2) Quotas

3) Subsidies

4) Administrative Barriers

Tariffs

Indirect taxes on imports

Quotas

Physical limit on the amount of imports allowed

Subsidies

Sum of money granted by the government to a firm to increase production and lower costs

Administrative Barriers

Rules and regulations which have been designed to raise the cost of imports or deter foreign firms from exporting to your country

Floating exchange rates

Exchange rates determined by supply and demand for your currency

Fixed Exchange Rates

Currencies' exchange rates are fixed against each other to provide stability for trade, control inflation and to draw economies closer.

Managed Exchange Rates

Where the government or central bank intervenes in the currency markets to manage the exchange rate by buying and selling currency

Appreciation

When a floating currency rises in value

Depreciation

When a floating currency falls in value

Revaluation

When a fixed currency gets set at a stronger value

Devaluation

When a fixed currency gets set at a weaker value, or the fix is abandoned and the currency falls.

International Competitiveness

The ability of companies in your country to successfully compete with companies from other countries

Productivity

Output per factor of production, the amount you get out for the stuff you put in.

Relative Unit Labour Costs

Average cost of an hour of labour compared to other countries

Relative Export Prices

Average cost of exports compared to exports from another country

Terms of trade

Ratio of export prices to import prices. Tells you what value of exports you need to "pay for" a given value of imports

Innovation

Creative process of finding new ways to do things or to make things, including new technologies.

Research And Development

Spending by firms/government on science and technology designed to create new products or find better ways of doing things

Income Inequality

Incomes and wealth are not equally divided up between the whole population. There is rich and poor

Income Redistribution

Government takes income from some households and gives it to others.

Capitalism

Economic system where free markets allocate resources, capital is privately owned, and economic production is done by firms for profit

Marxism

Marx believed capitalism exploited workers so he believed in a Marxist system where workers own the means of production

Lorenz Curve

Measure of inequality in a country. The further away the curve bends from the line of perfect equality (45degrees) the more unequal society

Gina Coefficient Or Index

A numerical measure of inequality based on the Lorenz curve. Measured from 0 to 1 (coefficient) or 0 to 100 (index). A higher number equals greater inequality

Absolute Poverty

Households who do not have adequate nutritional intake per day, or do not have adequate shelter or clothing in order to survive. People earning below $1.90 a day

Relative Poverty

A measure of poverty that compares a households income to the average amount in the rest of society.

Economic Development

Long run improvements in income per capita, education and health outcomes and reduction in extreme poverty and hardships

Human Development Index (HDI)

Development measure. Combines GDP per capita (wealth), literacy rate (education) and life expectancy (health) in a single number. Measured from 0 to 100, the higher the number the more developed

Multivariable Poverty Index (MPI)

Qualitative measure of poverty and development using many specific factors and measures such as access to running water, electricity, phones etc.

Sustainable Development

Development which takes into account using earth's rescources sustainably/environment damage and promoting social equality

Primary Product Dependency

An economy dependent on primary products for most of its GDP and its potential export earnings.

Subsistence

Making just enough to surivive/feed yourself, Means there is nothing left to exhcnage/trade/save

Savings Gap

Country has lots of subsistence farming and therfore it cannot put aside enough savings to fund investments