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Flashcards · 9640 · A Level Topic 4
Economic development and the global economy (A Level) flashcards
30 cards on A Level Topic 4, subtopics 3.4.1 to 3.4.3. Pick a subtopic or study them all.
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3.4.1 Globalisation and trade
- Globalisation
- Deepening links between national economies through cross-border movement of goods, services, finance, labour, technology and information. Signs: trade growing faster than output, rising FDI, production split across borders, larger TNCs.
- Transnational corporations (TNCs): benefits and costs to a host country
- Benefits: capital, jobs, skills, technology transfer, tax revenue, exports. Costs: profit repatriation, crowding out of local firms, footloose exit, weak standards, political influence and transfer pricing to cut tax.
- Absolute versus comparative advantage
- Absolute advantage: producing a good using fewer resources than another country (compares outputs). Comparative advantage: producing a good at a lower opportunity cost than another country (compares opportunity costs).
- Country C makes 90 chairs or 30 lamps; Country D makes 40 chairs or 20 lamps. Who has the comparative advantage in lamps?
- One lamp costs C 90 ÷ 30 = 3 chairs and D 40 ÷ 20 = 2 chairs, so D has the comparative advantage in lamps and C in chairs. Both gain if one lamp trades for between 2 and 3 chairs.
- Terms of trade: formula and example with an export price index of 132 and an import price index of 110
- Terms of trade = export price index ÷ import price index × 100. 132 ÷ 110 × 100 = 120: an improvement, so each unit of exports buys more imports. The effect on the trade balance depends on how responsive volumes are.
- Effects of a tariff, and evaluation
- The domestic price rises, consumers buy less, domestic firms supply more, imports fall and the government gains revenue. But other countries may retaliate, firms using imported inputs face higher costs, and long-run competitiveness may suffer.
- The infant industry argument for protection, and its condition
- Protect now, the firm gains scale and learns, costs fall, then protection is removed. It works only if protection is temporary and the industry could really become competitive.
- Free trade area, customs union, common market and monetary union
- Free trade area: no internal trade barriers. Customs union: adds a common external tariff. Common market: adds free movement of labour and capital. Monetary union: adds a single currency.
- The WTO: role and limitation
- It lowers trade barriers and settles disputes, but relies on members accepting its decisions, and it is slow to reach agreements.
3.4.2 The balance of payments, exchange rates and financial markets
- The accounts of the balance of payments
- Current account (goods, services, primary and secondary income), capital account, financial account (FDI, portfolio investment, bank lending), and net errors and omissions. The whole balance of payments sums to zero; a current account deficit is financed by net inflows on the financial account.
- Expenditure-reducing versus expenditure-switching policies for a current account deficit
- Expenditure-reducing: cut total demand (higher taxes, lower spending, higher interest rates), so fewer imports; costs growth and jobs. Expenditure-switching: move spending from imports to home goods (lower exchange rate, tariffs, quotas); risks imported inflation and retaliation.
- FDI versus portfolio investment
- FDI: real operations abroad with control; long-term and hard to reverse. Portfolio investment: shares and bonds without control; can leave quickly.
- Appreciation/depreciation versus revaluation/devaluation
- Appreciation and depreciation: a rise or fall in a floating exchange rate caused by market forces. Revaluation and devaluation: a deliberate rise or fall in the official rate under a fixed or managed system.
- Diagram in words: a rise in home interest rates in a floating exchange rate market
- Axes: exchange rate (foreign currency per unit of home currency) and quantity of home currency. Higher returns on home assets attract inflows, so demand for the currency shifts right. The new equilibrium is at a higher exchange rate: an appreciation.
- Does a depreciation always improve the current account?
- No. Exports become cheaper abroad and imports dearer at home. The balance improves only if export earnings rise by more than import spending, which needs price-elastic demand for exports and imports. With low elasticities (often in the short run) it can worsen first.
- A currency falls from 1 ar = 2.00 bel to 1 ar = 1.50 bel. What are the percentage changes?
- The ar changes by (1.50 − 2.00) ÷ 2.00 × 100 = −25%. The bel rises from 0.50 ar to 1 ÷ 1.50 = 0.667 ar, a rise of 33.3%.
- Free float, fixed and managed float exchange rate systems
- Free float: set by demand and supply with no intervention. Fixed: pegged and defended by the central bank (needs large reserves). Managed float: the market sets the rate but the central bank intervenes to smooth or steer it.
- The four functions of money
- Medium of exchange, unit of account, store of value, standard of deferred payment. Inflation weakens money as a store of value.
- Bond yield and its link with the bond price. A bond pays 4 a year; its price rises from 90 to 125.
- Yield = coupon ÷ price × 100. Price and yield move in opposite directions. At 90 the yield is 4.44%; at 125 it is 3.20%.
- Liquidity versus solvency, and moral hazard
- Illiquid: a bank cannot meet withdrawals now. Insolvent: its assets are worth less than its liabilities. Moral hazard: taking more risk when someone else bears the cost, for example expecting a rescue.
- Functions of a central bank
- Issues currency, banker to the government and to banks, sets the policy interest rate, manages reserves, supervises banks, and acts as lender of last resort to a sound but illiquid bank.
3.4.3 Economic growth and development
- Economic growth versus economic development
- Growth: a rise in real national output over time (one number). Development: a lasting improvement in well-being, including health, education, income and fairness. Sustainable development improves the well-being of current and future generations.
- GDP, GNI and NNI
- GDP: value of production within a country's borders, whoever owns the firms. GNI = GDP + income from abroad − income paid abroad. NNI = GNI − capital depreciation.
- Why use PPP exchange rates to compare countries?
- Market exchange rates reflect trade and capital flows, not local prices. A PPP rate equalises the cost of the same basket in both countries, so it compares real purchasing power.
- The Human Development Index (HDI) and its main weakness
- A composite of health (life expectancy), education and income per head at PPP, combined by a geometric mean. It goes beyond income but ignores inequality, the environment and freedom (the IHDI adjusts for inequality).
- Harrod-Domar model: formula and example with s = 10% and k = 2.5
- g = s ÷ k (savings ratio ÷ capital-output ratio). g = 10 ÷ 2.5 = 4.0%. Limits: assumes fixed k and that saving becomes investment; ignores technology, skills and institutions.
- Primary product dependency and the Prebisch-Singer hypothesis
- Dependency: volatile prices (inelastic demand and supply) give unstable export earnings and tax revenue. Prebisch-Singer: the terms of trade of primary exporters tend to fall over time because income elasticity of demand for primary products is lower than for manufactures.
- Market-based versus interventionist development strategies
- Market-based: trade liberalisation, privatisation, deregulation, encouraging FDI, low taxes, floating exchange rates. Interventionist: protection, public ownership, industrial strategy, spending on infrastructure and human capital. They can complement each other; the best mix depends on the country.
- Aid: role and problems
- Role: fills the savings gap, funds infrastructure and health, relieves emergencies. Problems: dependency, corruption, tied conditions, short-term focus and donors' interests. The effect depends on targeting and monitoring.
- Microfinance and fair trade
- Microfinance: small loans, savings and insurance for people excluded from banks; helps small enterprises but interest can be high and debt traps form. Fair trade: a guaranteed minimum price plus a premium; gives farmers income security but only members gain and consumers pay more.