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Theme 4

Terms in this set (99)

Globalisation
This involves the increased integration and interdependence of national economies.
contributors to globalisation
technology- e.g. internet speeds
containerisation- movement of goods on container ships
Lower transport costs- due to larger planes and container ships
Trade agreements and trading blocs
growth of global businesses- MNCs and TNCs
Financial systems making it easier to move money
absolute advantage
the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
Limitations of comparative advantage
Transport costs may outweigh any comparative advantage
Increased specialisation may lead to diseconomies of scale
Governments may restrict trade
Comparative advantage measures static advantage but not any dynamic advantage for example in the future India could become good at producing books if it made the necessary investment
Advantages of Specialisation
Higher output: Total production of goods and services is raised and quality can be improved
Variety; Consumers have access to a greater variety of higher quality products
A bigger market: Specialisation and global trade increase the size of the market offering opportunities for economies of scale
Competition and lower prices: Increased competition acts as an incentive to minimise costs, keep prices down and therefore maintains low inflation
Disadvantages of specialisation
Monotony means boredom which can affect productivity. Quality may suffer. We often see dissatisfied workers becoming less punctual at work and the rate of absenteeism increases.
Staff turnover may be high. costing the firm to recruit new staff
workers receive little training and may not be able to find alternative jobs if they find themselves out of work
mass-produced standardized goods lack variety for consumers
emerging economies
economies which are making the transition from a low income / developing economy to a high income 'developed' economy. Key emerging markets include: China, India, Brazil, Mexico.
terms of trade
A country's terms of trade measures a country's export prices in relation to its import prices, and is expressed as: index of export prices/ index of import prices x100.
factors influencing terms of trade
Exchange rate. A fall in the exchange rate should reduce the terms of trade. And an appreciation in the exchange rate should improve the terms of trade.
Competitiveness of firms. Export prices will be affected by the cost of raw materials and productivity.
Relative inflation rates in different countries. Higher UK inflation would cause deterioration in the terms of trade
Profit margins - do firms pass the effects of devaluation on to consumers in the form of lower prices
trading bloc
A group of neighboring countries that promote trade with each other and erect barriers to limit trade with other blocs
free trade area
A group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies.
customs union
eliminates trade barriers between member countries and adopts a common external trade policy
Common Market
allow the free movement of goods, services, capital, and labour.
monetary union
a group of countries that use a common currency
The World Trade Organisation
is responsible for dealing with the rules of trade between nations at a global level.
The WTO helps to resolve conflicts between nations.
The aim of WTO is to help trade flow as freely as possible- reducing trade barriers
trade liberalisation
the move towards free trade and away from trade barriers
Reasons for restrictions on free trade
infant industries
senile industries
protect the environment
avoids dumping
helps current account of balance of payments
raise government revenue
tariff
tax on imports
quotas
a limit on the amount of imports allowed in to a country
Subsidies
a cash grant aid to encourage production/ consumption
non-tariff barriers
a restriction on trade which does not include a charge/ tax
Components of the balance of payments
The current account, capital account, financial account
current account
the section in a nation's international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers
capital account
The capital account measures transfer in assets and liabilities. Sale/transfer of patents, copyrights, franchises, leases and other transferable contracts, and goodwill
Transfers of ownership of fixed assets
financial account
This includes transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents
Net balance of foreign direct investment flows (FDI)
Net balance of portfolio flows (e.g. inflows and outflows of debt and equity)
Balance of banking flows (e.g. hot money flowing in/out of banking system)
deficit on the current account
Where the outflows of payments on the current account exceed the inflows.
surplus on the current account
Where the inflows of payments on the current account exceed the outflows.
trade imbalance
where the level of exports and imports are unequal
fixed exchange rate system
a system in which governments try to keep the values of their currencies constant against one another
floating exchange rate system
When a currency's exchange rate is determined by supply and demand in the market.
managed exchange rate system
Usually refers to a floating system in which authorities (central banks) intervene whenever they consider the movement of the exchange rate undesirable
revaluation
an increase in the value of a currency that is set under a fixed exchange rate regime
devaluation
lowering a currency's value in relation to other currencies under a fixed exchange rate system
depreciation
a decrease in the value of a currency
appreciation
An increase in the value of a currency
Marshall-Lerner condition
States that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.
J-curve
after a depreciation, initially the trade balance worsens before improving again.
International competitiveness
International competitiveness measures the relative cost and value of a countries exports.
Relative unit labour costs
Unit labour costs compared to those in other countries
relative export prices
Prices of a country's exports compared to that of their main trading partners, expressed as an index
factors affecting international competitiveness
relative inflation rates
exchange rates
real exchange rates
labour productivity
absolute poverty
where individuals are unable to meet their basic needs
relative poverty
A condition where household income is a certain percentage below median incomes.
poverty line
those earning below $1.90
relative poverty rate
those earning below 50% or 60% of median income
Wealth Inequality
the unequal distribution of assets within a population
income inequality
the unequal distribution of income
Lorenz curve
A diagrammatic illustration of how national income is distributed within the population of the country.
Gini Coefficient
A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.
HDI
a measure of a country's standard of living, including resources (GNI PPP) health (life expectancy) and education (mean years of schooling expected and mean years of schooling for adults)
market-orientated strategies
policies involving less government involvement and more emphasis on the market
primary product dependency
occurs in countries where the value of production of primary products accounts for a large proportion of GDP
infrastructure
includes physical capital such as transport networks, energy, power and water supplies and telecommunications networks.
volatile commodity prices
where commodity prices rise and fall dramatically linked to changed supply and demand
capital flight
the movement (flight) of capital from one nation to another
foreign currency gap
a situation in which an LDC is unable to import the goods that it needs for development because of a shortage of foreign exchange
saving gap
A savings gap is a situation where the existing level of savings is insufficient to achieve required economic growth rate
Harrod-Domar model
a model of economic growth that emphasises the importance of savings, investment, capital accumulation and growth
trade liberalisation
The removal or reduction of trade barriers, more free trade
microfinance
schemes allowing small amount of finance to be borrowed
privatisation
movement from government control to private sector control of an organisation
interventionist strategies
policies involving an active role by the government and manipulation of the workings of the markets in the economy
human capital
the skills, knowledge, and experience possessed by an individual or population
protectionism
increasing the number of tariffs and quotas to protect domestic firms
joint ventures
where global companies have to work with local firms to be able to enter a market
buffer stock schemes
where the government sets a floor and ceiling price and intervenes by buying and selling stock to keep the price between these price levels.
industrialisation
moving from agricultural production to manufacturing
development of tourism
where the tourism sector is encouraged
Fairtrade schemes
where the farmers receive a fair price in a reasonable time for their produce.
bilateral aid
government assistance that goes directly to third world governments as state-to-state aid
tied aid
aid given to a foreign country with conditions attached
multilateral aid
Government foreign aid from several states that goes through a third party, such as the UN or another agency
debt relief
the reduction or cancellation of debt that LEDCs owe to either the World Bank or developed nations
World Bank
an international bank that offers low-interest loans, advice, and information to developing nations
IMF (International Monetary Fund)
Its primary aim is to help stabilise exchange rates and provide loans to countries in need
NGO
non-governmental organisation
role of financial markets
to facilitate saving
lend to businesses
lend to individuals
facilitate exchange of goods and services
to provide forward markets
to provide markets for equities
Moral Hazard
When the act of insuring an event increases the likelihood that the event will happen
market bubbles
Occurs when prices are grossly overvalued due to speculation.
market rigging
when a group of investors work together to stop a financial market functioning as it should, to gain an advantage for themselves
functions of central banks
implement monetary policy
banker to the government
banker to the banks- lender of last resort
regulation of banking industry
capital expenditure
money spent by the government on capital goods
current expenditure
Government spending on the day-to-day running of the public sector, including raw materials and wages of public sector workers.
transfer payments
Benefits given by the government directly to individuals.
crowding out
government borrowing leaves less money for private sector firms
progressive tax
a tax where those on higher incomes contribute a higher proportion of their income
regressive tax
a tax where those on lower income contribute a greater proportion of their income in tax
proportional tax
A tax in which the average tax rate is the same at all income levels.
automatic stabilisers
Factors that automatically, without any actions by the government, work toward stabilizing the economy by reducing the short term fluctuation of the business cycle.
discretionary fiscal policy
fiscal policy that is the result of deliberate actions by policy makers, such as changing tax and government spending
fiscal deficit
Government expenditure is greater than the tax revenue
national debt
The sum of government deficits over time.
structural deficit
where the government plans to run a deficit even in a boom
fiscal policy
A government policy for dealing with the budget (especially with taxation and borrowing)
monetary policy
Government policy that attempts to manage the economy by controlling the money supply, interest rates or quantitative easing
demand side policy
where governments try to influence AD
transfer pricing
Transfer pricing is a method of pricing goods and services transferred within a multinational or trans-national company in order to reduce tax burdens and maximise profits
cyclical deficit
a fiscal deficit caused by the downturn/ recession in the economic cycle
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