Flashcards · YEC11 · A Level Topic 4

Developments in the global economy (A Level) flashcards

40 cards on A Level Topic 4, subtopics 4.3.1 to 4.3.6. Pick a subtopic or study them all.

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4.3.1 Causes and effects of globalisation

Globalisation: The growing integration of national economies through flows of goods, services, capital, labour and ideas.
Causes of globalisation: Trade liberalisation and trading blocs, lower transport costs (containerisation), better communications and IT, growth of TNCs, and freer capital flows.
Openness ratio: formula and example: (X + M) ÷ GDP × 100. Exports 45, imports 55, GDP 250: 100 ÷ 250 = 40%. Use exports and imports, not exports alone.
Transfer pricing: Setting the internal prices charged between parts of the same TNC; it can shift profit to low-tax countries. It is a pricing practice, not illegal by definition.
Effects of FDI on a host country: Benefits: jobs, capital, technology and skills, tax revenue. Costs: profits repatriated (GDP rises more than GNI), crowding out local firms, footloose plants that may leave.
Trade vs FDI: Trade moves goods and services between countries. FDI moves capital into productive assets, such as a factory, in another country.

4.3.2 Trade and the global economy

Absolute vs comparative advantage: Absolute: using fewer resources to make a good than a rival. Comparative: giving up less of other goods (a lower opportunity cost). Trade can benefit both even if one has an absolute advantage in everything.
Terms of trade: formula and example: Index of export prices ÷ index of import prices × 100. Export prices 110, import prices 100: 110. A rise is an improvement: more imports for each unit of exports.
Is an improvement in the terms of trade good for the trade balance?: Not necessarily. Dearer exports may sell less; whether export revenue rises depends on price elasticity of demand. Terms of trade compare prices, not values.
Trade creation vs trade diversion: Creation: a switch from higher-cost home output to lower-cost imports from a bloc partner. Diversion: a switch from a lower-cost outside supplier to a higher-cost partner because of the external tariff.
Customs union vs common market: Customs union: free trade between members plus a common external tariff. Common market: a customs union plus free movement of factors (labour and capital).
Diagram: effect of a tariff: The domestic price rises from the world price to world price + tariff. Domestic supply extends, demand contracts, imports fall. Government gains tariff revenue on the remaining imports; there are two deadweight-loss triangles (production and consumption).
Tariff vs quota: Tariff: a tax on imports; raises revenue. Quota: a legal limit on the quantity imported; raises no government revenue, but foreign suppliers may gain a quota rent.

4.3.3 Balance of payments, exchange rates and international competitiveness

The current account: four parts: Trade in goods, trade in services, primary income (investment income and pay) and secondary income (transfers). Current + capital + financial account + net errors = 0.
Goods −30, services +18, primary income −6, secondary income +2. Current account?: −30 + 18 − 6 + 2 = −16, a deficit of 16.
Expenditure-switching vs expenditure-reducing policies: Switching: makes imports dearer or exports cheaper (depreciation, tariffs). Reducing: cuts total spending and so imports (higher taxes, higher interest rates), at the cost of lost output and jobs.
Appreciation vs revaluation; depreciation vs devaluation: Appreciation and depreciation: market-driven rise or fall in a floating currency. Revaluation and devaluation: an official rise or fall in a fixed or target rate.
Marshall-Lerner condition and the J-curve: A depreciation improves the current account if PED for exports + PED for imports (in size) is above 1. In the short run elasticities are low, so the balance worsens first and then improves: a J-shape over time.
Unit labour cost and competitiveness: Unit labour cost = wage ÷ output per worker. ULC rises only if wages grow faster than productivity; rising ULC raises export prices and reduces price competitiveness.

4.3.4 Poverty and inequality

Absolute vs relative poverty: Absolute: income below a fixed level needed for basic needs, fixed in real terms. Relative: income far below the typical income in the same society (often below 60% of median). Absolute poverty can fall while relative poverty rises.
Lorenz curve: Cumulative share of income (vertical) against cumulative share of households, poorest first (horizontal). The 45° line is perfect equality; the further the curve bows below it, the greater the inequality.
Gini coefficient: A ÷ (A + B), where A is the area between the line of equality and the Lorenz curve and B the area under the curve. 0 = perfect equality, 1 = total inequality.
Income vs wealth inequality: Income is a flow of earnings over a period; wealth is a stock of assets less debts. Wealth is usually more unequally distributed because it accumulates and is inherited.
A worker earns 50 more, loses 30 in benefits and pays 10 in tax. Effective marginal tax rate?: (30 + 10) ÷ 50 = 80%. The worker keeps 10: an example of the poverty trap.
Causes of changes in poverty: Economic growth and who gains from it, education and training, the level of welfare benefits, the tax structure (progressive or regressive), structural change, aid and conflict.

4.3.5 The role of the state in the macroeconomy

Fiscal deficit vs national debt: Deficit: spending exceeds revenue in a year (a flow). National debt: the total owed by the government at a point in time (a stock). New debt = old debt + deficit.
Cyclical vs structural deficit: Cyclical: due to output below potential; disappears as the economy recovers. Structural: the part that remains when output is at potential; needs a policy change.
Automatic stabilisers: Tax and benefit rules that change the budget balance as output changes, with no new decision. In a downturn tax receipts fall and benefit spending rises, cushioning AD.
Progressive, proportional and regressive taxes: Progressive: the average tax rate rises as income rises. Proportional: the average rate is constant. Regressive: the average rate falls as income rises. Judge by the average rate, not the amount paid.
Laffer curve: Tax revenue first rises and then falls as the tax rate rises, because very high rates reduce incentives to work and increase avoidance. It does not show where any country actually is.
Tax avoidance vs tax evasion: Avoidance: legal reduction of tax paid. Evasion: illegal non-payment of tax owed.
Crowding out: A fall in private spending caused by public spending or borrowing: higher government borrowing raises interest rates (financial) or uses resources the private sector would have used (resource).

4.3.6 Growth and development in developing, emerging and developed economies

Economic growth vs economic development: Growth: an increase in real GDP. Development: a rise in living standards and wellbeing, including health, education and choice. A country can grow with little development.
Human Development Index (HDI): An index from 0 to 1 combining health (life expectancy), education (mean and expected years of schooling) and income (GNI per capita at PPP), calculated as the geometric mean of the three.
Prebisch-Singer hypothesis: The prices of primary products tend to fall relative to manufactured goods over the long run, so the terms of trade of primary exporters deteriorate. It is a hypothesis, not a fact.
Harrod-Domar model: growth formula and example: g = s ÷ k (saving ratio ÷ capital-output ratio). With k = 4, a 5% growth target needs s = g × k = 20% of GDP. A savings gap arises if domestic saving is lower.
Debt service ratio: Annual interest plus repayment ÷ export earnings × 100. Debt service of 150 with exports of 600 is 25%.
Lewis model of industrialisation: Surplus labour with zero marginal product moves from traditional farming to modern industry at a wage just above subsistence. Profits are reinvested, creating more jobs, until surplus labour runs out (the turning point).
Tied aid: Aid whose use is restricted to goods or services bought from the donor country, which reduces its real value to the recipient.
Market-orientated vs interventionist development strategies: Market-orientated: trade liberalisation, FDI, privatisation, floating exchange rates, microfinance. Interventionist: infrastructure, education and health spending, protection of infant industries, buffer stocks. Most real packages mix both.