Macroeconomics Theme 4 <3

globalisation

the process by which the worlds economies are becoming closely integrated

causes of globalisation

decreased cost of communication

decreased transport costs (containerisation)

reduction in world trade barriers

growth of trading blocs

increased importance of TNCs

\
containerisation

decreased cost for shipping

less labour and time

economies for scale

increased output

off shoring

characteristics of globalisation

increased trade to GDP ratio

increased FDI and TNC

decrease in global inequality

increased flow of labour

increased capital flow between countries

benefits of globalisation in LEDCs

higher living standards

economies of scale

reduced absolute poverty

increased tax revenue

technology transfer / new managerial techniques

costs of globalisation in LEDCs

negative externalities

overdependence on exports

increased inequality

exploitation of labour

exploitation of resources

tax avoidance

benefits of globalisation in MEDCs

higher living standards

economies of scale

lower prices

increased consumer choice

costs of globalisation in MEDCs

overdependence on imports

increased inequality

increased unemployment

absolute advantage

the ability to produce a good more efficiently

comparative advantage

the ability to produce a good relatively more efficient with a lower opportunity cost

law of comparative advantage

overall output can be increased if individuals or countries specialise in producing goods they have a comparative advantage in

things that determine the global patterns of trade

trading blocs

bilateral agreements

comparative advantage

exchange rates

factor endowment

terms of trade (TOT)

measures the rate of exchange of one product for another when two countries trade

TOT formula

index prices of exports/index prices of imports x 100

trading bloc

free trade area

customs union

common market

monetary union

free trade area

trade barriers are removed between countries but each country can impose its own restrictions on countries outside the area (NAFTA)

customs union

same as free trade area but with a common external tariff (EAC)

common market

same as customs union but free movement of factors of production (EU)

monetary union

same as common market but with a common currency (eurozone)

benefits of free trade

comparative advantage

export led growth

increases in consumer surplus

increased efficiency

access to larger markets

greater political ties

costs of free trade

deterioration in the trade balance

danger of dumping

unemployment

contagion

sectoral imbalance

global monopolies

benefits of monetary union

lower transaction cost to trade

more FDI

reduced currency fluctuations

costs of monetary union

loss of independent monetary policy

tariff diagram

gain - government through tax revnue - domestic producers (+PS)

loss - consumers (-CS) - global producers

purpose of protectionism

protect strategic and infant industries

reduced risk of dumping

reduced impact of global monopolies

increased tax revenue

reduced over dependence on imports

non tariff barriers

Quotas \n Voluntary Export restraint \n Intellectual property laws \n Technical barriers to trade \n preferential state procurement policies \n domestic subsidies \n currency intervention

balance of payments

record of all payments

monetary transaction between countries

components of balance of payments

current account

capital account

financial account

components of current account

trade in goods

trade in services

current transfers

investment income

component of capital account

fixed assets

components of financial account

FDI

hot money

portfolio investment

current account deficit causes

structural shift - deindustrialisation \n overvalued exchange rate \n declining TOT \n rising commodity prices

current account surplus causes

export oriented growth \n undervalued exchange rate \n FDI growth \n closed economy \n high domestic savings rates

floating exchange rate

demand and supply of the currency depends on the exchange rate

fixed exchange rate

when the exchange rate is fixed in relation to another country

appreciation

increase in the value of the currency in a floating exchange rate

deppreciation

decrease in the value of the currency in a floating exchange rate

revaluation

increase in the value of the currency in a fixed exchange rate

devaluation

decrease in the value of the currency in a fixed exchange rate

factors influencing exchange rate

relative inflation rates

relative interest rates (hot money)

current account balance

FDI

speculation

buy the pound

increase IR

return on pound increases

more demand for pound

appreciation of pound

sell the pound

prediction of UK recession

investors sell pound

more supply of pound

depreciation

arguments for a floating currency

automatic correction of current account deficit

no problem with lack of currency reserves

insulation from external economic events

govt can use IR to change AD

maintaining a fixed exchange rate

using reserves

borrowing money from abroad

interest rates

J curve effect

after a currency depreciation

current account will worsen in the short run

then improve in the long run

marshal lerner condition

if there is a depreciation then the current account will only improve if the PED of exports + the PED of imports > 1

J curve for a current account surplus

J curve for a current account deficit

depreciation leading to inflation COR

depreciation of currency

increase price of importing raw materials or capital goods

increased cost for firms

decrease SRAS

cost push inflation

depreciation causes TNC

depreciation of currency

cheaper for TNC to invest (china-belt and road)

build bridges, roads and dams

increase AD and LRAS

long run economic growth

competitiveness

measure of a countries ability to sell its goods on international markets at a price attractive in those markets

measuring competitiveness

relative export prices

relative unit labour cost

pillars of the Global competitive index (GCI)

institution

infrastructure

ICT adoption

health

macroeconomic objectives

labour market

market size

innovation capability

factors influencing competitiveness

unit labour cost

productivity

exchange rate

labour taxes or subsidies

govt laws and regulations

research and development

UK tax breaks for R+D to improve competitiveness COR

tax breaks for R+D

incentives to investment in R+D

technological spill over

gain a comparative advantage in tech

increase in FDI

increase productivity

increase in relative export prices

increase in competitiveness

UK tax breaks for R+D to improve competitiveness EV

uk govt has a high national debt

they cant be sure all firms will use the tax breaks effectively

this leads to a high opportunity cost

UK deregulation improve competitiveness COR

leaving the EU

allows the UK the ability to cut regulation (in financial sector)

lowers compliance cost

fall in COP

fall in relative export prices

increase in competitiveness

UK deregulation improve competitivenes EV

market failure

negative externalities are a risk in the financial sector

can affect growth of competitiveness in the future

improving access to vocational education improve competitiveness COR

increases access to apprenticeship scheme

help young people get specialised skills (digital literacy)

increases quality of human capital

increases productivity

decreases unit labour cost

increases competitiveness

improving access to vocational education improve competitiveness EV

rapid automation

risk of unemployment for those with vocational training

occupational mobility of labour (too specialised and jobs may be replaced)

improving infrastructure to improve competitiveness COR

infrastructure project (financed by china)

attracts FDI

belt and road initiative

decrease transport costs

attracts further FDI

increase geographical mobility of labour

increase knowledge transfer and technological spillover

increases productivity

increases competitiveness

improving infrastructure to improve competitiveness EV

countries may be dependent on chinese imports in the future as part of the agreement

absolute poverty

when a person has insufficient resources to meet basic human needs

absolute poverty figure

less than $2.15 PPP a day

causes of absolute poverty

population growing faster than GDP in low income countries

severe savings gap

absence of basic public services

effects of corruption

high levels of debt and high interest rates

damaging effects of civil wars and natural disasters

low employment rates, vulnerable jobs and poverty wages

absence of basic property rights

relative poverty

when a person is poor compared to others in society

relative poverty figure

below 60% of median household income

reasons for a fall in relative poverty

increase of age of leaving school from 16 to 18

furlough scheme

more uni students

lower unemployment

reasons for a rise in relative poverty

economic consequences of brexit

wages not rising in proportion to inflation

increase in tuiton fees

increase in zero hour contracts

increase in automation

austerity

lorenz curve

used to compare inequality between countries

gini coefficient

A/A+B

value of 0 is total equality (line of perfect equality)

value of 1 is total inequality

higher the gini coefficient the more unequal

causes of inequality for a developed economy

austerity

automation

access to higher education

unemployment

deindustrialisation (lack of secondary sector)

inheritance tax

causes of inequality for a developing economy

corruption

access to finance

property laws

TNCs (monopsony power to set wages)

access to primary/secondary education

prevalence of subsistence farming

savings gap

causes of inequality

war/conflict

tax system

social protection (pensions + benefits)

trade unions

healthcare

globalisation

austerity

deliberate cuts to government spending

rises in taxes to reduce national debts

kuznets curve

as income per capita increases in a developing economy then income inequality increases

as income per capita increases in a developed economy then income inequality decreases

human development index (HDI)

measurement of how developed an economy is

Human development indicator

life expectancy index - long and healthy life - life expectancy at birth

education index - knowledge - expected years of schooling and mean years of schooling

GNI index - decent standard of living - GNI per capita

advantages of HDI

takes into account remittances

disadvantages of HDI

doesnt take into account

\-distribution of income

\-gender equality

there is a risk of missing data

primary product dependence (PPD)

when an economy main exporter is primary product

extreme price fluctuations (PPD) COR

primary products experience high levels of price volatility

PED inelastic (neccessity)

PES inelastic (havest once a year)

large fluctuations in price

uncertainty about revenue

lack of investment in capital good

lower productivity

lower growth

extreme price fluctuations (PPD) EV

buffer stock scheme to reduce price volatility

when there is a good harvest and the supply is high the government buys up the stock to increase the price

when there is a bad harvest and the supply is low the government releases the stock to decrease the price

fluctuations in foreign exchange (PPD) COR

PPD price fluctuations

export revenue fluctuates

fluctuates in foreign exchange

hard to import capital goods

limits growth of secondary sector

lower productivity

lower growth

fluctuations in foreign exchange (PPD) EV

countries like saudi arabia have successfully used export revenue from oil to diversify their economy into sectors such as tourism

natural resource curse (PPD) COR

countries with high reserves of commodities

and have weak legal institutions (due to colonialism)

have a high risk of corruption

can lead to rent seeking govt officials that retain oil revenue for themselves

this increases corruption levels

makes it harder for the govt to enact supply side policies

lower growth and economic development

natural resource curse (PPD) EV

legal institutions can be strengthened through IMF or world bank reforms

prebisch singer hypothesis (PPD) COR

demand and price of primary product rises slower relative to the demand and price of secondary products

this means the terms of trade for PPD countries fall

which makes it challenging for the country to import capital goods

this constraints the growth of the secondary sector

which limits economic growth

prebisch singer hypothesis (PPD) EV

some countries have successfully specialised in cash crops which have seen an increase in demand so TOT would not fall

dutch disease (PPD) COR

discovery of natural resources

more exports of that good

more demand for that currency

appreciation

makes non mining exports more expensive

less competitive so countries stay reliant on primary sector

low growth

dutch disease (PPD) EV

the growth of the primary sector can attract FDI which can provide funds for diversitification

barriers to household form accessing financial services

lack of education

lack of assets

costs

travel distance

the harrod domar model (savings gap)

low incomes

low savings rate

less funds available

low investment

low capital accumulation

low productivity

low income and output

harrod domar model equation

growth rate = savings ratio / capital output ratio

g=s/k

fixing the savings gap

attract FDI to boost investment

use aid to boost income

challenges to accessing a good quality education in a developing country

cost of education

infrastructure

lack of teachers

needing children to work or care for siblings

gender inequality

information gap

quality of education

corruption : lack of legal institutions

government officials may be rent seeking

results in an inefficient allocation of resources

can increase the cost of doing business (bribs)

transfer pricing (tax avoidance) : lack of legal institutions

TNC artificially records profits as being made in a tax haven

subsidiary company trade and sell at a low price to a subsidiary company in a tax haven

then they would sell at a high price to other countries

the resources are never transported to the tax haven

property rights : lack of legal institutions

intellectual property rights (patents) - lack of enforcement so less innovation

assets (land and housing) - cant use this for collateral so they struggle to access financial services

informal lender : lack of financial institution

''loan sharks''

IR becomes very high leading to more debt

lack of regulation