Macroeconomics Arguments

Causes of globalisation

Trade liberalisation

Technological advancements

Containerisation/cheaper transport

Growth of MNC’s

Increased labour mobility

Deregulation of financial markets

Political globalisation

Pros of globalisation

Cheaper goods and services for consumers

More competition in consumer markets
Reduction in extreme poverty rates

Gains from specialisation of factors of production

Transfer of ideas stimulates innovation

Gains from improved labour mobility

Cons of globalisation

Trade imbalances

Dominant TNC’s and less cultural diversity

Corporate tax avoidance

External costs from unsustainable growth

Growing relative poverty

Brain drain effects

Pros of protectionism

Job protection in domestic industries

Response to dumping allegations

Raise tax revenues

Improve the balance of payments of current account

Development strategy for fledgling industrial sectors

To protect against environmental/market failure

Protects infant industries

To increase domestic employment

To prevent dumping

Cons of protectionism

Risk of retaliation

Market distortions/resource misallocation

Higher prices for consumers

Regressive effect of income inequality

By-passing import controls

Higher costs for exporters

Potential for corruption

Increased input costs

Barrier to entry - reduces market contestability

Pros of free trade

Comparative advantage exploitation and allocative efficiency

Lower prices and higher quantity

Higher profits for firms - economies of scale

Higher economic growth

Greater technology diffusion

Cons of free trade

Overspecialisation

Unfair trade practices

Unemployment

Standards

Environmental tradeoffs

Current account deficit

Expenditure reducing policies

Contractionary fiscal policy

Contractionary monetary policy

Expenditure switching policies

Currency depreciation

Protectionism

Subsidies to domestic producers

Pros of monetary policy

Independence and speed

Effective control of inflation

Encourages investment and consumption

Positive wealth effect

Unconventional stimulus

Flexible exchange rate

Cons of monetary policy

Significant time lags

Liquidity trap and low confidence

Conflicting objectives

Impact on different groups

Limited impact on supply side

Exchange rate volatility

QE limitations

Pros of fiscal policy

Stimulated AD during recessions

Improves long-run growth

Direct control over demand

Reduces inequality

Manages inflation

Cons of fiscal policy

Time lags

Budget deficits/national debt

Crowding out

Inflationary pressures

Disincentives of tax cuts/hikes

Pros of supply side policy

Lower inflation

Reduced structural unemployment

Sustainable economic growth

Improved competitiveness and balance of payments

Increased productivity

Cons of supply side policy

Significant time lags

High fiscal cost

Increased inequality

No guarantee of success

Pros of a trade balance

Long-term sustainability

External stability and exchange rates

Sign of international competitiveness

Avoids protectionism

Cons of a trade balance

Limited capital inflows

Missed growth opportunities

Constraints of consumption

Pros of low and stable inflation

Encourages consumption/investment

Reduces real value of debt

Wage and price flexibility

Sign of growth

Cons of low and stable inflation

Reduced purchasing power

Menu and shoe leather costs

Uncertainty and reduced investment

Loss of competitiveness

Redistribution effects

Pros of economic growth

Higher living standards

Employment effects

Fiscal dividend

Accelerator effect

Rise in productivity - lr

New goods and services - lr

Improved health - lr

Cons of economic growth

Risks of higher inflation and higher interest rates

Environmental effects

Inequalities of income and wealth

Pros of high employment

Increased output and growth

Improved fiscal position

Increased confidence

Cons of high employment

Demand pull inflation

Cost push inflation

Balance of payments deficit

Unsustainable growth

Pros of redistribution of income and wealth

Boosts AD

Increased equality of opportunity

Improved human capital

Cons of redistribution of income and wealth

Reduced investment and enterprise

Brain drain

Administrative costs

Tax evasion/avoidance

Pros of market based supply side policies

Increased productive potential

Reduced government spending

Lower unemployment

Improved competitiveness

Less inflationary pressure

Cons of market based supply side policies

Increased inequality

Time lags

Resistance and social costs

Market failure

Lower government revenue

Examples of market based supply side policies

Tax reductions

Deregulation

Privatization

Labour market reforms

Pros of interventionist supply side policies

Reduced structural unemployment

Increased productivity and competitiveness

Reduced regional disparities

Improved long-run economic growth

Market failure rectification

Cons of interventionist supply side policies

High cost and taxpayer burden

Long time lags

Government failure/inefficiency

Opportunity cost

No guarantee of results

Examples of interventionist supply side policies

Investment in human capital

Infrastructure spending

R&D grants

Industrial policy

Pros of increased tax

Recued budget deficit/increased surplus

Funding public services and merit goods

Reduced income inequality (if progressive)

Controlling inflation

Correcting market failures

Improved balance of payments

Cons of increased tax

Reduced consumer spending

Disincentive effects

Reduced investment and growth

Risk of brain drain

Reduced international competitiveness

Laffer curve effects

Pros of depreciation

Improved trade balance

Boost to economic growth

Job creation

Avoiding internal deflation

Boost to tourism

Cons of depreciation

Cost-push inflation

Reduced living standards

Depends on elasticities - Marshall-Lerner condition

Potential for speculative pressure

Pros of appreciation

Lower inflationary pressure

Increased purchasing power

Lower costs for firms

Increased international purchasing power

Helps control a booming economy

Cons of appreciation

Reduced export competitiveness

Worsening trade balance

Lower economic growth

Deflationary risk

Pros of regulation on financial markets

Reduced systemic risk

Corrects market failure

Protects consumers

Maintains confidence

Promotes competition

Cons of regulations on financial markets

High costs of enforcement

Regulatory capture

Stifles innovation/competition

Government failure

Reduced profitability

Pros of inflation

Beneficial to debtors

Reduces the real value of government debt

Profit incentives

Avoids deflationary traps

Cons of inflation

Reduced purchasing power

Reduced savings value

International competitiveness

Uncertainty and reduced investment

Menu and shoe-leather costs

Fiscal drag

Pros of deflation

Increased purchasing power

Lower production costs

Improved competitiveness

Cons of deflation

Deflationary spiral

Increased real debt burden

Higher unemployment

Monetary policy ineffectiveness

Pros of joining a currency union

Elimination of exchange rate risk

Reduced transaction costs

Price transparency

Increased stability

Trade creation

Cons of joining a currency union

Loss of independent monetary policy

Loss of exchange rate flexibility

Asymmetric shocks

Fiscal constraints

One-off changeover costs

Pros of national debt

Fiscal stimulus in recession

Investment in productive capacity

Stabilising the economy

Intergenerational equity

Cons of national debt

High interest payments

Crowding out

Intergenerational burden

Reduced fiscal flexibility

Inflationary risk

Pros of FDI

Economic growth

Bridging the savings gap

Employment and wages

Technology and knowledge spill overs

Tax revenue

Financing current account deficits

Cons of FDI

Profit repatriation

Crowding out local firms

Exploitation of labour and environment

Dependency and political influence

Limited trickle-down effect

Pros of floating exchange rates

Monetary policy autonomy

Automatic shock absorber

Elimination of large reserves

Correction of trade imbalances

Cons of floating exchange rates

Increased uncertainty/volatility

Cost-push inflation

Reduced discipline

Speculation

Pros of fixed exchange rates

Reduced uncertainty

Low inflation discipline

Attracting investment

Preventing speculation

Cons of fixed exchange rates

Loss of monetary policy

Balance of payments imbalances

Costly reserves

Vulnerability to shocks

Pros of international trade

Increased overall global output

Greater competition

Employment opportunities

Encouragement of specialisation, leading to greater efficiency

Improved quality of goods and services

Cons of international trade

Over-specialisation

Structural unemployment

Infant industries

Dumping

Environmental concerns

Pros of QE

Lowers long-term interest rates

Increases bank lending

Boosts asset prices

Prevents deflation

Encourages currency depreciation

Cons of QE

Increases inequality

Inflationary risk

Limited impact on real economy

Distorts financial markets

Difficult to exit

Pros of slowing/reversing globalisation

Greater supply chain resilience

Reduced transport costs and environmental impact

Focus on service trade and automation

Protection of domestic industries

Cons of slowing/reversing globalisation

Reduced efficiency and gains from trade

Increased consumer prices

Reduced FDI and knowledge transfer

Risk of protectionism

Causes of slowing/reversing globalisation

High-profile tariff/trade wars

Concerns over energy and water security

Growing environmental awareness of externalities

Backlash regarding labour migration

Increase in non-tariff barriers to trade

Self-reliance bias and more focus on domestic firms

Economic activity is shifting towards services

International transport costs have stopped falling

Manipulation of tax systems to support domestic firms

Pros of MNC’s abroad

Creates employment

Increases skills base

Increased standard of living

Raises country’s profile

Improves balance of payments

Improves infrastructure

Cons of MNC’s abroad

Profit leakage

Low paid jobs

Pull out quickly

Poor safety record

Increases urbanisation

Widens the poverty gap

Policies to attract FDI

Attractive rates of corporation tax

Soft loans and tax relief/other subsidies

Trade and investment agreements

Flexible labour markets

Special economic zones

High quality infrastructure

Open capital markets to allow remitted profits

Availability of low cost labour

Key constraints of growth

Infrastructure gaps

Primary export dependency

Macroeconomic instability

Endemic conflict and corruption

Human capital weaknesses

Insufficient private savings

Natural capital being depleted

Rising income inequality

How to sustain economic growth in the long run

Building trust/social capital

Growing intra-regional trade

Improving institutions

Growing a dynamic private sector

Sound macro policies to control inflation

Focusing on addressing equity/fairness

Pros of a trade surplus

Boosts AD and growth

Job creation

Improved balance of payments

Increased foreign reserves

Cons of a trade surplus

Inflationary pressure

Appreciating exchange rate

Lower domestic consumption

Pros of a trade deficit

Higher standards of living

Reduced inflationary pressure

Sign on growth

Foreign investment inflows

Cons of a trade deficit

Leakage from circular flow

Job losses

Sustainability issues

Depreciation pressure (imported inflation)

Uncompetitiveness

Dependence of capital flows

De-industrialisation