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Macroeconomics
Theme 2: Demand-Side Polices
Monetary Policy:

Involves using interest rates and qualitative easing to influence the levels of consumer spending
and aggregate demand
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Another aim of monetary policy is to keep stable economic growth
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The BoE set the base rate of
interest rates and this is the rate commercial banks borrow from the BoE
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If there is higher than expected inflation and higher growth the BoE will
increase interest rates as this will discourage spending and investment as it
will cost more to do so thus shifting AD inwards reducing inflation
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Quantitative Easing:

QE involves creating money electronically to buy assets (such as government bonds from banks)
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Changing interest rates effect the exchange rate - increasing interest rates will cause an
appreciation in the exchange rate which will make exports less competitive
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Eg if people have a two year fixed mortgage they would not notice until
they remortgaged
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Macroeconomics
Fiscal Policy:

Fiscal policy involves the governments changing the levels of taxation and government spending
in order to influence aggregate demand and the level of economic activity
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Expansionary Fiscal Policy:

This involves increasing AD, therefore the government will increase spending and cut taxes
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This
will tend to worsen the government budget deficit and the government will need to increase
borrowing
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Higher taxes will reduce consumer spending as people have less disposable income
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Evaluations:

Time lags - to increase government spending will take time and could take several months for the
decision to filter through into the economy and actually effect AD

Crowding out - expansionary fiscal policy may not increase AD because the higher government
spending will crowd out the private sector
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Higher borrowing costs under expansionary fiscal policy can lead to higher bond yields,
increasing the cost of debt repayments
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In theory supply side policies should:Lower inflation, Lower unemployment,
Improve economic growth, Improve the trade
and balance of payments
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For instance, privatisation, deregulation, low
income tax rates, reduced power of trade
unions
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Deregulation - reducing barriers to entry to
allow new firms to enter the market
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Competition
tends to lead to lower prices and better quality of goods/services
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This increases the
productivity of the nation and increases encomium growth while also reducing unemployment
through incentivising people to work as they get more personal profit
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Reducing unemployment benefits - low benefits may encourage people to take up jobs or work
for more hours as they are getting less money from the government to live on and need to find
another source of income
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Increasingly important are non-tariff barriers such as trade blocs which allow
frictionless trade
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Such as higher government spending on infrastructure, education, healthcare
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Often there is under-provision of education in the free market leading to market failure
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Infrastructure - creating more infrastructure links such as HS2 will increase geographical mobility
and allow people in more rural areas of the country gain access to work opportunities thus
increasing the supply of the labour force
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There is no limit to which thee government can accelerate growth of
technological change and improvements in working practices
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For example firms could take the extra profits they
receive from lower corporation tax and give to their shareholders rather than workers
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Macroeconomics
Theme 4: International Economics
Globalisation: globalisation is the process by which economies have been draw deeper together
and have become more inter-connected and inter-dependent through global networks of trade,
capital flows and spread of technology
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OECD defines the globalisation as the ‘Geographic dispersion of industrial and
service activities, four example research and development, sourcing of inputs, production and
distribution and the cross-border networking of companies, four example through joint ventures
and sharing assets’

It can also be defined as the increasing integration of the world's local regional and national
economies into a single international market
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International financial markets have provided the ability to raise money and move money around
the world necessary for international trade
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They sell and produce their goods all around the world and
have the power to lobby governments
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D
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Economic growth-globalisation increases investment within countries investment TNCs
represents an injection and into the economy and which will have a larger impacts due to the
multiplier effect it creates an incentive the countries to make supply-side improvements to
encourage TNCs to operate countries such as reducing corporation tax

TNCs may bring world-class management techniques and technology which can have a knock-on
benefits to all industries of these techniques and technologies are available for them to

Trade will increase output as it allows exploitation of comparative advantage

However TNCs Power can cause political instability as they may support regimes which
unpopular and undemocratic but that benefit them I could hinder regimes which don't support
them

Comparative cost advantages will change over time so companies may leave the country when it
is the advantage which will cause structural unemployment and reduced growth
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Countries can benefit from socialising in and exporting the products
for which it has the lowest opportunity cost of supply
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If they are the same there will be no game from trade
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Comparative advantage assumes there are no transport costs and these could lower prevent any
comparative advantage

It also assumes costs are constant and that there are no economies of scale

In the model goods seem to be homogenous, which is unlikely to hold in real-life
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Specialisation

The Advantages of specialisation

The Disadvantages of specialisation

Comparative advantage shows how world output
can be increased if countries specialise in what
they are best at producing this in turn will increase
global economic growth

However trade can lead to overdependence, are
some countries become dependent on particular
exports whilst others become dependent on
particular imports this can cause problems if there
are large price falls and exports or if imports are for
political reasons

Trading and specialising allows countries to benefit
from economies of scale which reduces costs and
therefore decreases prices globally

It can cause structural unemployment as jobs are
lost to foreign firms who are more efficient and
competitive
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This
creates new goods and services a new production
methods increasing consumer welfare lowering
costs respectively
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Change in the
comparative advantage will affect the pattern of trade
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Emerging economies-countries grow at different rates and when they grow they are likely to need
to import more goods and services than before as well as exporting what to pay for this
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China contributes towards 20% LDC economies convert to 8%
of the US economy
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Joining the EU member the UK traders a lot more with
European countries than previously however now that we are leaving the EU we are more likely to
trade with country such as Canada the US Australia New Zealand
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Relative exchange rates-the exchange rate of externality price of goods between countries prices
are an important factor in determining whether consumers buy goods and so are changing price
will likely effect the pattern of trade
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However the Marshall Lerner condition states that the trade balance will move towards a surplus if
the combined PED for imports and exports is elastic, and if demand is inelastic this could cause a
deficit to worsen with the depreciation and thus increasing imports rather than exports leading to
an appreciation of the currency including larger trade deficit and reducing economic growth
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It
tells us the quantity of exports that need to be sold in order to purchase a given level of imports
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This is called an improvement in the
terms of trade
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Factors influencing the countries terms of trade:

An improvement in the terms of trade will be caused by a rise in export prices or a fall in import
prices
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In the short run exchange rates inflation and changes in demand/ supply of imports or exports
affected the terms of trade since these affect the relative price of imports and exports
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Another long-run factor is changing incomes
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Macroeconomics
Balance of payments:

The balance of payments is a record of countries transactions with the rest of the world it shows
receipts from trade
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Balance of trade in goods-visible

2
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Net income flows
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Not current transfers
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Factors affecting the balance of
payments:

1
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International competitiveness

3
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Structure of economy

Evaluations

1
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Cause of deficit-high growth or
uncompetitiveness

3
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Can the country devalues the currency


The U
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's current account has a cyclical nature
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Hi economic growth leads to Higher consumer spending and
therefore more spending on imports
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Macroeconomics
Types of trading blocs:

Preferential trading areas-tariff and other trade barriers are reduced on some but not all goods

Free trade areas-reduction or elimination of trade barriers on all goods thank and pose their own
barriers on imports from countries not in the trading bloc

Customs unions-removal of tariff barriers between members and acceptance of common external
tariffs against nonmembers
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There may also be common policies affecting key industries such as the common
agricultural policy

Monetary unions-two or more countries with a single currency and exchange rate that is
monitored and controlled by one central-bank or several central banks close record needed
management policy e
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EU

The Eurozone-European Central bank distributes notes and coins sets interest rates maintain
stability managers foreign currency reserves
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Freedom of all economic
resources to travel within the zone and include fiscal transfers from one country to another when
one countries performing poorly
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If a country follows to fail its agreements a country a group can file a complaint to the WTO will
attempt to solve the issue through negotiations

One example of the WTO ruling is Boeing being allowed to impose tariffs Airbus for illegal
subsidies in Europe in 2018
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Macroeconomics
Theme 4: Protectionism
Tariffs:

Tariffs are a taxed played by the government on imports
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They could be a specific amount - £1 per unit or an Ad Valorem tax - 10% of the price

Tariffs are important barriers to free trade and they are often imposed to protect domestic
industries from cheaper imports
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Pros:

Raise revenue for the government to use to either
balance the budget or spend on government
programmes

Environmental as a tariff could be placed on
goods which have negative externalities and
would also prevent as much shipping around the
world
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Cons:

Free trade areas will have no tariffs between
member states

Lower prices for consumers

Increase in specialisation and benefits from economies of scale
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Subsidies can be given to domestic firms there
compete with imports usually in the form of taxbreaks what cheap loans
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Pros:

Allows domestic firms to become more competitive

Creates larger profits to innovate and invest in research and development

Cons:

Firms can become reliant on subsidies and reduces incentive for firms to cut costs
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Quotas:

Governments can introduce a quota on the amount of goods/ value of goods that may be
imported or exported

Pros:

Can keep volume of imports in check to
balance the trade deficit
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Impacts of protectionist policies:

Consumers -

Higher prices

Less choice

Producers -

Domestic producers benefit

May suffer from higher costs if controls on imports they need for production

Foreign producers lose out as limited places they can sell

Government -

Gain tariff revenue

Can invest in gov spending etc


Macroeconomics

Constraints on growth and development:
Economic factors:
Primary products with dependency-primary products include agriculture/raw materials
...
These can
cause issues for a number of reasons:

Natural disasters can wipe out production of the primary product and so means that farmers are
left with no income
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They tend to have low income elasticity of demand which means as people get well period they
don't continue to increase the amount of primary products they buy whereas they are unlikely to
increase their demand for manufactured goods
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However in recent years
there has been a rise in the price of some key commodities such as food and falling the price of
summer manufactured goods due the expansion of places like China
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This is when a country becomes a significant
commodity producer in short amount of time causing an increase in the demand for the currency
to enable people to buy the goods which pushes its value up
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This occurred in for the non oil sectors in Venezuela and Nigeria
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It is suggested that countries should use primary product revenue to invest in manufacturing
and other industries
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One example of a country that suffers from this is Ghana
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Volatility of commodity prices-primary products tend to have inelastic demand and supply
curves which means relatively small changes in demand and supply leads to huge fluctuations in
price
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When prices of commodities rise for a number of years, there tends to be over-investment in the
production of the commodity causing long term risk when the price eventually falls
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This means there is less
money from banks to lend reducing borrowing and thus reducing investment/consumption
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The savings rate in Africa is around 17% compared to 31% on average
from medical middle income countries
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This is problematic because the lack of saving will lead to a lack of investment
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(PPF inward shift)
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Economic growth is not the same as economicdevelopment it is difficult for individuals to save when they have little income and borrowing from
overseas causes problems with that it is possible that the investment could be wasted
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One country which suffers from this is Ethiopian - in 2018 public debt was
around 60% of GDP most of its foreign currency so it is possible that they will not have enough

Macroeconomics
foreign currency to repay the debt
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Household may struggle to buy/afford foreign imports and reduced
the standard of living
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Capital flight-Large amounts of money is taken out of the country rather than being left there for
people to borrow and invest
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This can occur because of a lack of
confidence in the country stability to hide it from government authorities or simply for profit
repatriation
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Moreover there can be human
capital flight which is when high school workers and leave the country for opportunities in better
developed countries as these will be better paying and have better working conditions this leaves
the undeveloped country with low skilled workers
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If the population grows by 5% of the economy needs to grow by 5% to even
maintain living standards
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A high population growth is caused by high
birth rates which increases the number of dependents within a country that does not immediately
increased those of working age
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The population of Africa is expected to more than double by 2050 complicating
efforts to reduce hunger
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Now they suffer from high levels of interest repayment sometimes even higher than the
loans they received from developed countries meaning money is flowing from developing to
developed countries
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Borrowing for growth makes
sense, just as firm borrow to expand but the problem occurs when a government takes on too
much debt and does not spend it well on things such as infrastructure and education
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Access to credit and banking-Developing countries have unlimited access to credit and banking
competitor developed countries
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Infrastructure-In a developed country there is a complex network of buildings, hospitals, roads,
ports, railways, airports, utilities, schools and electricity cables
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However the
development of infrastructure can be expensive and tends to conflict with their environmental
goals
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Education/skills-Poor education within these countries means that workers are low skilled
sometimes unable to read and write so they have low levels of productivity
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Countries like Ethiopia suffer from high illiteracy rates of around
49% of the population
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A lack of rights means that individuals and businesses cannot
use the law to protect their assets leading leading to reduced investment
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The loss of property rights in Zimbabwe led
to economic collapse
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Corruption means individuals will make
decisions which maximise the brides they received as opposed to which maximise development

Macroeconomics
and output
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Diseases such as HIV and malaria have had a negative impact on economic growth as more
people are sick and less likely to be productive working
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Many countries suffer from civil wars for example Syria and Iraq this causes high levels of poverty
and destroys infrastructure making it very difficult cult countries to rebuild even after the war ends

Strategies influencing growth and development:

Strategies to improve development and growth:
Market orientated strategies:
Trade liberalisation-countries can aim for export led growth
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Resources will be allocated to their best use where the country has comparative
advantage countries such as Hong Kong Singapore in South Korea have benefited from this
method
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It includes direct acquisition of a foreign firm, construction of
the facility, investment in a joint venture with the local firm or licensing of intellectual property
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- offshoring and outsourcing
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It also involves transfers of knowledge from one country to
another with the company bringing production management techniques and training for staff
which will benefit the country is a whole
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Labour productivity tends to increase and wages are often higher it is a source of
investment that can help to fill the savings gap
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The country will also lose some sovereignty
and become dependent on other firms
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Environmental
damage and expectation of natural resources tend to overcome problems
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Removal of government subsidies-subsidies are placed on essential items within a country
such as food fuel
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there are often poorly tightfitting
subsidies on basic goods like rice which will benefit everyone in the country not just the poor
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Subsidies to farmers and producers
tend to lead to inefficiency and if they are given a large amount over a long period of time the
subsidy can become ineffective in the increasing development
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They represent a large amount of government spending
incurring an opportunity cost and often leading to high levels of debt
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Removing subsidy can
be very politically unpopular and some governments have even been thrown out because of
attempting to do this
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Floating exchange rate system-In these systems market forces determine the currency the
country does not have to worry about their gold or foreign currency reserves I'm the government
does not intervene however there are problems with this
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Macroeconomics
Micro finance schemes-these schemes aim to give the poor access to permanent ranges of
financial services including loans savings insurance and transfer funds it is used to refer to loan
from providers known as micro finance institutions who delivers small loans to unsalaried
borrowers
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it allows borrowers
to investing their businesses or start up new businesses in infant industries
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Usually women in order to facilitate the buying of capital/development
I'm small businesses
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Another example of a micro finance scheme is M-PESA
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This is a mobile banking service that facilitates saving and spending intern
Space consumption and investment while also finding things like education healthcare in capital
do increase economic growth
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Selling off a firm particularly
if it is making losses Will improve government finances and reduced levels of debt
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On top of this it
can be associated with corruption were Politicians or officials sell the company at below market
price to a friend or family member
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Interventionist strategies:
Human capital flight-providing workers and skills and training would help entice them to remain
in the country and thus improve efficiency and productivity as more workers were higher skilled
this was also encourage foreign direct investment as the country has seen to be increasing in
productivity
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Both China and South Korea have developed their human capital massively in order to better
develop their nations through building more schools and giving teachers more training to improve
the quality of education children receive which in the long run will improve the productivity of the
country and shift out demand for jobs as more people be qualified
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Making use a policy of import substitution where they
deliberately attempt to replace imported goods with domestic reproduce goods by adopting
protectionist measures such as putting tariffs on goods that are also produced in the country
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Managed to exchange rates-the central bank may choose to intervene in the foreign exchange
markets to affect the value of a currency to meet specific macroeconomic objectives
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Manage floating exchange rates might also be used as a tool for
government to restore or improve the price of competitiveness of exporters in the global markets
or perhaps respond to an external economic shop affecting our economy
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Interventionists believe the government should provide
these systems whilst a market base system would be good for the private sector to provide them
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Infrastructure can solve development issues as it can
increase geographical mobility within country which can increase the supply of labour as well as
improving education and healthcare can make the population more productive in the long run one
problem with the infrastructure development however is that the government may not have the
funds and it has time lags as things such as education take a long time to see the benefits in
society and the economy
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Buffer stock schemes-this is where the government imposes both the maximum and minimum
price for goods, buying up stocks when there is excess supply and selling them off when there is
excess demand as a result it should be self financing: money is raised when selling the products
which allows the government buy the next lot of stocks
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When it works
effectively it is beneficial because it stabilises prices and thus encourages investment since
producers can plan for the long-term
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It can solve some of the issues relating to primary product
dependency
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They require a huge
start-up costs as well as administration costs and problems of storage
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The biggest issue is that minimum prices maybe set
too high encouraging producers to become inefficient
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The Ivory Coast and Ghana
implemented a buffer stock scheme for coca in 2017 due to low prices
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It is
suggested that the modern industrial sector would attract workers from rural areas by offering a
higher wages
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Instead of
industrialising India went from agricultural to services as this is where they had comparative
advantage this shows that not all countries developed in the same way
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this provides them with the funds to develop
their economy and improve living standards
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This can help to fund improvements and infrastructure such as roads
reliable electricity clean water and airports
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However the tourism industry is seasonal as the climate is only reliable inside and
times the year as well as cyclical as people don't go on holiday during recessions
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Tourism development has been
seen to work in Morocco were seven UK resorts were being built on the north coast where
unemployment was 40%


Macroeconomics
Development of Primary Industries-some countries such as Saudi Arabia Norway and Australia
were able to develop because of an abundance of natural resources the development of a primary
industry provides funds to allow a country to diversify
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However primary products are volatile and primary product dependency
causes many issues primary Industries also suffer from corruption
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Fair trade schemes-fair trade schemes promote fair prices typically meaning that arrangements
were made to buy a guaranteed amount of produce over a period of time at a price which is
above the market price which gives producers stability and raises their income moreover this
system means that child labour is not used and that production is sustainable and does not take
place at the expense of the environment
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However it is argued that this system has insignificant impact in
benefits fair trade producer is but can leave others worse off since non-fair trade produces fearful
than demand in the long term at a higher price for fair trade goods will increase supply and thus
could bring the price backdown but this will depend on price elasticity of supply
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On the other hand this allows parents to send their children to school as they are
no longer expected to stay home and to work on the land and this will allow them to games skills
which in the future allow them to move away from agriculture into more higher wage to jobs which
in turn will increase economic growth
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Bilateral aid is directly from one country to another

Multilateral aid is when countries give a twin international organisation and distributes it to other
countries

Concessional loans are loans given on lower or no interest rates

Egypt's Afghanistan and Vietnam are the biggest recipients of aid, while the EU and US are the
largest donors
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Aid can also fill the savings
gap as outlined by the Harrod Domar and thus provides funds for investment whether this be in
infrastructure or in human capital
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However some argue it results in dependency culture where
countries are unconcerned by their finances as they know they can receive aid
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It limits the growth in some of the poorest countries whilst being relatively small for the
countries and agencies that are owed the money
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It will ease government finances and allow more money to
be spent on provision of services and infrastructure to aid development
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