Notesale: Turn your study into money

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Theme 4
4
...
1 Globalisation and its characteristics
Globalisation refers to the increasing international integration of markets for goods, services and the
factors of production
...
Furthermore, competing global resources will improve
productivity
...

Macro economic objectives on the whole will improve:
● However governments can only partly control inflation through controlling aggregate demand
...

● There will never be much wage inflation as there is such a large global labour supply
...

● The environment will be degraded to a certain extent as more production and transport
occurs
...

Globalisation causes:
● Goods trade is increasing, with increasing manufactured imports due to developing countries
inquiring more capital and knowledge, also accessing cheap labour and efficient forms of
transport
...

● Trade liberalisation, with lower barriers to trade and increasing trade growth
...
However, trade blocs prevent
other countries from participating in trade
...
Marketing techniques further spread the knowledge on these goods
...

● International financial flows increase from international capital being owned and increased
interdependence
...

● Communications and IT development have shrunk communication time e
...
the internet
...

However, arguably goods have been homogenised
...
However higher world
income means some products increase due to higher demand and inelastic supply
...

Worker impact:
● Employment has increased in the developing world as they gain more investors
...
It all depends on
labour mobility
...
This helps
to increase employment and create more jobs
...
Market failure and government failure creates barriers to this in
some cases
...

However, high skilled jobs have rising wages as demand increases for these few jobs
...


Producer impact:
● Specialization and economic dependence has increased with agents becoming increasingly
dependent
...
This creates a large dependence on exchange rates
and prices
...

● Footloose capitalism means firms operate in multiple countries moving to the best suited area
however, destroying and creating prosperity
...
This helps to exploit comparative advantage
...

Government impacts:
● It brings prosperity to some countries and takes from others resulting in the adaptation of
government policies
...

● The government loses control over inflation as monetary policy is hard to use when supply
side policies are out of hand
...

The environment:
● Increase in production due to rising demand results in environmental degradation
...

● Multinationals normally produce in the most profit maximising manner thus over degrading the
environment
...

● Economic losses occur when industry change, unemployment, cultural erosion, environmental
depletion and lower wages occur
...

● Countries may lose political freedom due to treaties or forces of globalisation
...

● The factors of production can move to activity thatearns the highest rate of return, thus
improving efficiency from comparative advantage and the rate of global economic growth
...

● LEDCs benefit from liberalisation as capital will easily move to exploit the cheap skilled
workforce that they offer also TNCs will bring world class production techniques, helping to
generate economic growth
...
g
...
Tax breaks to entice MNCs reduce government investment in
factors such as education
...

● Poor countries still have growth obstacles that globalisation does little to remove e
...
debt
...

● Most FDI goes to MEDCs (Africa receives 2% of FDI)
...
g
...
Leading to falling demand and price of LEDC commodities harming their
economies
...

4
...
2 Specialisation and trade
International trade reasons:
● Prices are cheaper in other countries mainly due to production costs
...

● Product differentiation, with some being better quality or a different type to others
...

● Political reasons with trade deals or embargos affecting trade levels
...

Comparative advantage exists when a country is able to produce a good more cheaply relative to other
goods produced domestically than another country
...

Trade pattern explanations:
● An emerging country with rapid growth will export and import more, with a growing consumer
market
...

● Trade blocs and bilateral trading agreements influence the pattern of trade between
countries
...

Absolute advantage exists when a country is able to produce a good more cheaply in absolute terms
than another country
...
(However, this can be spread across the large
amount of goods being transported, economies of scale)
...

● There are only two economies producing two goods, what and how much will be traded
actually depends on consumption patterns
...

● There are no tariffs or trade barriers and there is free trade which results in no change to the
price of the goods
...

● The external costs are identical
...

● There is effective demand for the product which a country has comparative advantage
...

The UK is moving towards the service sector (comparative advantage) which they thus invest in to
angle their factors of production towards that
...

The labour theory of valuesuggests by RIcardo that all costs could ultimately be reduced to labour
costs, so prices could be in terms of workers cost per hour of production
...
This is not true as factors such as legislation on land may change
prices
...

Commodities are homogenous so imports will mainly be dependent on prices, whilst
manufactured/services are heterogeneous based on other factors e
...
quality allowing a country to be
more in control of demand
...
Domestic
competitors have the competitive edge of knowing what their market wants
...

Comparative advantage may not always lead to larger welfare as economic growth occurs, this may be
due to the fact that happiness is subjective and the production of goods one has a comparative
advantage in may come with large externalities
...
1
...
It also allows you to focus your resources on things that you are more
productive in, further fueling growth
...

● Different countries have different factors of productionallowing them to make use of
alternative factors and gain different products
...

● Innovation as increased competition results in a more saturated market resulting in firms
searching for cut costing methods whilst improving product quality in order to remain
competitive
...

Costs of free trade:
● Overdependence may occur especially for small countries, resulting in price or demand
swings largely impacting GDP
...

● Dumping into markets, funded by the government causing unemployment unfairly in
developing countries
...

● Jobs will be lost leading to structural unemployment and output reduction, especially within
markets lacking competitiveness internationally
...

● A decline in infant industries due to them not having a chance to innovate and become
competitive due to cheaper products that have been produced for the long run
...

● Income distribution will be less equal as trade may disproportionately go to some countries
...

● Loss of culturemay occur as foreign products and ideas seep into a country
...
Furthermore, private trade gives power to foreign companies and consumers
...

4
...
4 The terms of trade
The terms of tradeis the ratio between average export and import prices
...
This trade is only mutually advantageous if the international selling price is

above the domestic price and for importers it is below the domestic price
...

The terms of trade tells us the volume of exports required to purchase a given volume of imports
...

The terms of trade are weighted averages of imports and exports
...

● Inflation in the economy in relation to other countries
...

● A rise in productivity and increase in competitiveness lowers export prices due to cheaper
production costs
...

Inelastic goods leading to price rises resulting in an improvement in the terms of trade and the current
account
...
The opposite is true of imports
...

However, a fall in import prices improving the terms of trade will lead to arise in the volume of imports
reducing inflation and improving living standards
...

4
...
5 Trading blocs and the WTO
A trading bloc is a group of countries that have signedan agreement to reduce or eliminate
protectionist barriers between them (regional trade agreement), causing interdependence
...
Member countries sign preferential trade
agreements to create the preferential trading area
...
However, each member country is able to impose its own tariffs and
quotas on goods it imports from outside the trade bloc
...
g
...

● Customs unions are where there is free trade within the trading bloc and a common external
tariff on goods coming from outside the trade bloc
...

● Common (singles) markets are custom unions where both labour and capital have freedom of
movement within the area and where product standards and laws concerning free movement
of goods and services are common between countries
...
Prices most likely harmonise
...
Economic union implies there is a sort of fiscal union with a
central body and sort of amonetary union (with a single central bank)
...
g
...
This reduces transaction costs, increasing competitive pressures and price
transparency
...

Static benefits come from specialization (shown in the free trade diagram)
...
However, this is only short term
as in the long term inefficient firms resulting in few more dominant firms, that may block
innovation
...

● Reduction in monopoly power as you are exposed to a large amount of businesses so you hold
a smaller market share thus encouraging innovation
...
It also
makes goods cheaper, economies of scale are more advantageous when there is homogenous
demand
...
However, this may result in
resource transfer like productive labour away from less developed countries creating unfair
flows
...
Meanwhile, less developed countries do primary activities resulting in
economic divergence
...
And
more FDI from other countries, also TNCs are attracted as you are part of a larger market
...

● Support for developing countries, with aid being contributed and lost by more developed
countries
...

Disadvantages:
● Through maintaining smaller trade blocs governments may be distracted from larger gains
from creating global free trade agreements
...

● All the productive resources may be moved to the most efficient economies resulting in worse
jobs and economic growth elsewhere
...
E
...
developing
countries normally lose out
...
It also may increase interdependence
...
They therefore reduce overall output even if some members of the trading bloc
are net gainers, due to us not fully exploiting comparative advantage on a global scale
...

● Inefficient competition and oligopolies may form as more dominant firms drive out the
inefficient ones
...
Their aim is to keep interest rates below 2% (deflationary bias), maintaining a stable
financial system and price stability
...

The growth and stability act was made to defend against, over borrowing and fiscal deficits that would
increase interest rates and inflation
...
This was breached in the financial crisis such as
Greece national debt being 175% resulting in financial markets being unwilling to lend
...
Furthermore, price
transparency along with this allows greater economies of scale and merger residing prices
...

● Price transparency allows a clear comparison of pricesand no price discrimination as there is
more perfect information about prices across the whole area, this reduces monopoly profits,
increasing competition and increased consumer surplus
...

● Inward investment increases as the eurozone gives countries a competitive advantage and an
ease to plan and expand encouraging confident TNCs due to there being large control and
price stability from the ECB
...

Disadvantages of a monetary union:
● Transition costs to enter the union and abandon an old currency e
...
capital change and
customer adoption to a new currency
...

● Loss of exchange rate flexibilityand thus the currency value cannot change, e
...
devaluing a
currency in a fiscal deficit to boost AD
...

● Structural problems, with some countries being better off than others with a higher GDP per
capita resulting in them not being able to change the exchange rate to influence GDP
...
Countries also react different to AD stimulus
...

An optimum currency area is one where a monetary union is beneficial to have
...

● Capital movement associated with price and wage flexibility allowing changing demand and
supply patterns
...

● Automatic fiscal transfers which do not occur such as the lack of help to Greece, this is due to
a lack of political agreement
...

● Countries should share similar trade cycles allowing the same monetary policy to suit all
...
Trade diversion is
likely to be higher if there are higher tariffs
...

They enforce these agreements and deal with complaints of anti competitive practices, enabling
negotiations between countries, with the panel ultimately creating a judgement
...
g
...


However, although there are 157 countries involved covering 97% of global trade if a country vetoes
an agreement (even for irritated reasons) it is not passed completely meaning regional trade
agreements are created
...

Criticisms:
● Allows the exploitation of workersdue to offshoring production in lower standards of
regulations
...

● It causes environmental damage, as TNCs exploit resources and operate in countries of lower
regulation encouraging a race to the bottom
...
Thus forcing developing regions to remove barriers that are kept in developed
countries resulting in unfair development terms and stops infant industries developing
...

● It leads to the impoverishment of developing countrieswhose economies are exploited, with
dumping practices and prices being pushed down of cheap goods made whilst specialist
service products appreciate
...
1
...
Protectionism is the use of economic policies to
regulate trade between countries, reducing imports
...
Thus they are able to grow and
become efficient through learning due to tariffs protecting them from competition
...

● Jobs are protected as domestic producers won’t receive reduced orders due to imports thus
maintaining demand for jobs which are derived
...

● Dumping is stopped which happens due to distressed sale to remove stocks, excess capacity
and to achieve a long term monopoly
...

● Cheap labour is arguably unfair competition (as well as other government measures to remove
the level playing field) and protects domestic countries from this
...

● The government earns revenue from a tariff that canbe reinvested into the economy thus
reducing the fiscal deficit and enabling the government to invest in long term growth
...

● Soft power losses are minimised through a reduction in international holds over strategic
industries such as the media
...
This is
really important when loads of jobs are at threat
...
This also reduces the x-efficiency of the
whole market and long run growth
...
Furthermore, they don’t experience cheaper goods due to dumping
...
This leads to a misallocation away from a country's
comparative advantage
...

● There may be retaliation and economic sanctions that prohibit domestic growth, due to the
beggar-thy-neighbour effect creating a trade war and escalating the situation with higher
tariffs
...

● The economy may become inefficient as failing sunset industries survive resulting in a loss of
tax revenue and an increased need for benefits
...

Stakeholders effects:
● Consumer effects- Limited choices with higher prices, whilst innovation of products is
reduced
...
Although they may suffer due to increased production costs reducing
competitiveness
...

● Governments- Experience increased revenues and less benefits for the unemployed
...

● Living standards- These will rise in the short term, however due to a less efficient economy in
the long run they will decline
...
It also raises
the profits of lower skilled workers jobs domestically, thus redistributing income
...
However, these impacts would cause long run
decreases in efficiency (however this is not 100% certain) and create stagnation so policies must look
at different time frames
...

Benefits:
● Raise revenues for governments (why superior to a quota)
...

● Tariffs help domestic producers as consumers substitute the imported good for a domestic
one as it rises in price due to a tariff, also creating jobs
...
However, if the UK joins a trade union the supply
will drop in price to P2 thus increasing imports to QD1 and
increasing trade overall
...
However,
this puts those from QS2 to QS1 out of businessincreasing
unemployment (structural mobility) as they cannot compete at the
lower prices
...

You would thus only do this if you have a comparative advantage in
something as it will increase your trade in certain areas
...
This also makes businesses more profitable as
raw materials are cheaper
...
Consumer surplus gain is the 1, 2, 3
and 4
...

Quotas:
A quota is a physical limit on the quantity of goodsimported
...

This is a larger barrier to trade with larger control over imports than a tariff
...

Subsidies:
These can increase exports and reduce imports
...
Domestic firms can also be made more competitive and lower the cost of
production through indirect subsidies such as cheaper loans thus decreasing
the cost of production making their productsrelatively cheaper than imports
...
g
...

This raises the costs of imports as these standards often increase production costs e
...
increased
license time and the entry of goods to a country only at certain borders
...

4
...
7 The Balance of Payments
The Balance of paymentsis a record of all inflowsand outflows of a country, consisting of the current
and capital account
...
g
...

● Net income flows, primary income flows (wages and
investment income)
● Net current transfers, Secondary income flows (e
...

government transfers to UN, EU)
The financial account is a record of all financialinvestment:
● Direct investment (net investment from abroad, FDI)
...
g
...

● Portfolio investment (financial flows), such as the
purchase of bonds, gilts or saving in banks
...
g
...

The capital account is associated with buying fixed assets such as land
...

● Capital flows are used to finance trade
...


International flows for personal reasons such as holiday house purchase or tax evasion
...

Governments encourage economic agents to buy their bonds
...

● Underlying competitiveness, showing how attractive your goods are for foreign buyers due to
quality and pricing of products
...

● Imports may be high due to large consumption domestically
...

● Inflation erodes price competitiveness and makes exports seem more expensive and imports
seem cheaper
...

● Investment and economic growth, will be exported and imported strongly in the case of a
strong economy
...

This is more effective if elasticities are high and there is a small amount of cost-push inflation,
as if there is high inflation in the long run you may switch to import from abroad
...

● Factors such as reducing government spending, will majorly affect the economy however it is
large scale to just affect the deficit which is the smallest composition of AD
...

● Increasing investment domestically from decreasing interest rates and creating subsidies
...
This will be more effective if the marginal
propensity to import is high and the relative rate of inflation falls
...
These however, take time and are not
guaranteed resulting in a fiscal deficit
...

However, this may reduce exports due to becoming uncompetitive and may result in
retaliation
...
However, this results in a black market and inefficiency
...
The UK is able to sustain its deficit due to the capital and
financial account surplus (showing a strong position), the deficit can thus easily be financed by
investors
...

This also tells us you are dependent on foreign markets, also indicating you are uncompetitive globally
decreasing longer term sustainable growth
...
However this may
not always be good as it results in lower living standards as you are producing more for others than
yourself
...

4
...
8 Exchange rate systems
●
●
●

The exchange rate is the rate one currency can be converted into another (they can be spot or forward
exchange rates)
...

Currency demand and supply on a floating exchange rate changes on the
foreign exchange market (all examples are a appreciation of a currency
value):
● Increased exports due to a rise in competitiveness result in the
currency demand increasing causing the exchange rate to rise
...

● Interest rates rising will result in hot money flows increasing the
demand for a currency and causing an increase in the exchange
rate
...
This is key in determining
long term currency value
...

● Speculation results in the sale and purchase of currencies,if investors believe an exchange
rate will rise they will purchase that currency causing it to increase due to higher demand
...

Advantages of a floating exchange rate:
● It is robust with no need for intervention, resulting in it unlikely to collapse
...

● The economy fixes itself with an automatic correction of the balance of paymentdeficit or
surplus
...
This will
thus increase the demand for the pound resulting in it to then appreciate
...

Disadvantage of a floating exchange rate:
● There is volatility in the exchange rate deterring investment due to price changes causing an
exchange rate risk, such as a currency depreciation decreasing your investment value
...

● Depreciation success on the balance of payments changesdepends on the PED
...

● A wage price cost pushes inflationary spiral may occur due to imported inflation if the
exchange rate depreciation makes costs of production more expensive
...
g
...
This may be used due to the economy being small and having to use another
countries or due to a common currency needing a common float
...

A managed/hybrid exchange rate uses a mix of bothtechniques intervening indirectly or directly:
● Adjustable peg systems are when in the short term currencies are
fixed against each other, but may be changed in the long term
...
If it went
too far away a central bank would buy up the currency or sell its
currency
...
However, the band may change over time
...

How to influence the exchange rate:
● You can buy and sell a currency to change the demand and supply of a currency
...
If a government supplies the
currency through selling it, they need to borrow or print money (inflationary)
...

● Changing the interest rate results in different levels of hot money flowsand demand for a
currency and reduces domestic consumption and investment, resulting in reduced
consumption and investment and less of the currencysupply increasing the currency value
...
This may result in different investment and consumption import prices and may lead
to a black market developing for the currency creating corruption
...

● Devaluation and revaluation in comparison to a basket of goods results in fixing a currency
against another currency with an adjustable peg
...
This stability reduces uncertainty, this all
depends if the currency is fixed at the equilibrium, which the market allows
...

● It encourages financial discipline as if governmentsoverspend when imports and exports are
out of balance the economy experiences inflation
...
This means the
economy is more dynamic over time as productivity is encouraged to increase compretivity,
which is long run orientated
...
This takes a lot of work to maintain the
currency as well as a lot of foreign currency reservesto sell and buy the pound
...
g
...
This will make households
worse off
...

● They cannot use investment tools to achieve domestic goals like economic growth and they
have to use monetary policy leading AD to reduce when you try to devalue an exchange rate
...

● Speculation may occur, with currency traders selling and buying a currency when they believe
it is at the wrong price matching trade patterns
...
g
...
’
A real exchange rate takes into account relative inflation while a nominal does not, normally inflation
results in exchange rate depreciation due to an economy becoming less price competitive this may
also be due to labour productivity levels
...

Thus a change in the exchange rate affects imports and exports volumes based on elasticity of
demand
...
A country may
competitively devalue their currency at the cost of cost pushing inflation
...
This depends
on other AD components
...

● Lower economic growth as exports will decrease causing falling economic growth
...

● Trade balance deteriorates due to relative prices
...
This depends on economic growth changes due to other factors such a employment
...

The Marshall Lerner Condition states that for a depreciation of
the currency to improve the balance of trade, the sum of the
price elasticities of demand for imports and exports must be
greater than 1
...

4
...
9 International competitiveness
International competitiveness is about the price and quality of your product in comparison to overseas
products
...

How to measure competitivity:
● Lower relative unit labour costs as it results in costs of production being lower increasing the
competitiveness of goods
...

● Export prices rising faster than import prices result in a decrease in competitiveness
compared to other factors of production
...
This is not long term as it will change your currency when demand
rises, this is superficial
...

● Lower relative inflation in comparison to countries overseas as your goods look relatively
cheaper
...
This depends on training, skills, managerial techniques,
production methods and quantity of infrastructure
...

● Wages and no wage costs rising relative to trading partners result in price rises such as
pensions thus decreasing competitiveness
...

● Regulation and changes in the barriers to trade decreases the costs of production and
decreases competitiveness
...

● The economic climate such as property rights, corruption and rule of law
...

● Taxation decreases competitiveness as it results in decrease in profits to invest and increase
factors of production
...

Benefits of competitiveness:
● Current account surplus with countries likely to export more than they import, with surpluses
freeing them from constraints of a deficit
...
A competitive economy also attracts FDI
and TNCs as a selling or export base
...
This all transfers skills, knowledge and
technology further increasing competitiveness
...

● Economic growth occurs due to greater efficiency and demand for exports encouraging
investment and larger AD and AS
...

● Wage growth, especially in developing countries where low wages allows international
competitiveness increasing demand for workers and wages
...

Problems of competitiveness sustaining (not always true e
...
Germany):
● Low wages that make countries competitive erode as they develop
...

● A current account surplus could appreciate a currency eroding their competitive advantage
...

Government policies to increase competitiveness:
● Supply side policies such as improvements in education or tax incentives which reduce costs,
increase innovation and competition through means like education
...

➔ Labour market reforms, such as the ease of hiringworkers, minimum wage levels and
retirement age
...

➔ Privatisation to increase competitiveness and efficiency
...

● Exchange rate policies to devalue a currency this is short term and does not change the
quality of your product
...

● Control of inflation and macroeconomic stability, stopping inflation and wage spirals along
with interest rate cuts
...

● Increase trade barriers
...
This depends on government policy, confidence
and costs
...

● Pricing strategies and better customer services
...

4
...
1 Inequality
●

Causes of inequality:
● Earned income especially with wages being based on education and skills, along with
minimum wage rising slower than average incomes
...

● The worker themselves and their drive, incentive and risk taking
...

● Government Policy of redistribution, such as tax cuts,privatisation and wage unions
...

● Household composition and how many people you have to support
● The degree of competitionand thus accumulation of wealth by firms due to monopoly and
monopsony powers
...
Skilled workers have higher demand due to global rising wages
...

➔ Developing countries have increasing employment increasing equality as wages also
grow due to offshoring
...
However, over time rising wages
may result in the developed countries having larger employment in lower skill
industries
...

Lorenz curve
The Lorenz curve measures the inequalities of incomein
society
...
The further from the line of equality the larger
the inequality in society
...
The larger the coefficient to 1 the more
unequal society is
...
g
...
g
...

Inequality concequences:
● Fall in MPC and domestic consumption lowering AD and decreasing the multiplier effect
lowering economic growth and the public sector finance
...

● The redistribution of spendingfrom goods and services from inequality
...

Life quality variations with less equal access to education and services also reduce cohesion
and FDI
...
2
...
g
...
This increases when incomes fall and economic development is low
...
25, although purchasing power effects this) is a way of measuring this
...
A good way of
measuring this is the percentage of people below 60% of the median income level
...

Another way of measuring relative poverty is the proportion of people that can afford a necessary
basket of goods
...

● Lack of human capital(education) results in people having less skills to sell to the market
...

● Health problems mean that people cannot work or it reduces productivity e
...
mental health or
old age
...

● The poverty and unemployment trap
...

● Inheritance results in a cycle of poverty as it reduceseducation and inheritance
...

Poverty consequences (ethical and economic dimensions):
● Fiscal deficit due to having to fund benefits and programmes for those in poverty and factors
that arise like crime destabilising growth due to the opportunity cost
...

● Education levels are lower resulting in less economic growth due to a less skilled workforce
and a better knowledge and life quality
...

● Lower standard of livinge
...
health care access and also leisure choices resulting in a less
productive workforce and less growth (with the PPF limited due to lower human capital)
...
Also it depends on how much the welfare state expands for the elders
...
g
...

Government Policy Measures to Reduce Poverty:
● Operating a National minimum wage to reduce relative poverty
...

● Increasing employment opportunities
...

● Making use of the trickle down effectby increasing taxes and encouraging entrepreneurs
...

● Increasing the provision of affordable childcareresulting in more time able to work
...
5
...

Government expenditure:
Monetary benefits and financial support (such as social security and national insurance taking 30% of
income)
...
There is a debate on the
amount of public provision e
...
Denmark and the amount of private provision allowed e
...
USA
...
g
...

● Proportional tax is where the proportion remains the same while the income of the taxpayer
changes
...

Inheritance tax (avoided easily through planning) and high tax levels on high incomes tries to stop
inequalities in wealth
...
Some believe trickle down is more effective in
increasing incomes as wealth cascades down benefitting all and stopping this would thus cause lower
growth and employment
...

Policy alternatives:
● Raising minimum wages, however this can increase unemployment and thus increase
inequality
...

● Extremely progressive tax rates allowing a large redistribution of incomes in society through
government spending
...
It also may allow a more equal distribution of the firms profits
...
Allowances,
child benefits, income support and JSA are other key benefits
...

● Increase fiscal and monetary policy that increases employment, however this depends if the
job pay is above benefits
...

● Price controls on essential goods and services can be imposed to increase minimum wage
spending power
...
This is arguably the most important in ensuring
long term equality
...

Redistribution costs:
➔ Freedom as there is less choice on what to spend your income on
...

➔ Taxation raises income tax rates and lowers the incentive to work, reducing the growth rate
...
It also may
result in immigration (income not only important factor in this) and increases the use of tax
loopholes
...
Administrative costs are also high and
inflation needs to be accounted for
...


Minimum wages discourage employers from taking on workers, increasing unemployment and
inequality
...
Some workers may just be moved up a tax bracket
...

➔ Maximum wages discourages workers from taking a more difficult job and increases workers
moving abroad resulting in a lack of employment ofkey jobs
...
Furthermore, it discourages production and investment to increase the
quality resulting in inefficiencies
...
It also
reduces incentives to work
...
Also Nordic countries show that redistribution of incomes does not stop
growth and can be achieved along with equality
...

● Increase in real GDP and redistribution
...

4
...
1 Development measures
Country classification:
● High income, middle and low income countries are related to income per capita in terms of
purchasing power
...

● First, second and third world countries
...

● BRICs have large growth prospers whilst tiger economies have high growth rates
...

● Physical capital is lower per capita in developing countries resulting in less infrastructure and
work places
...

● Human capital is lower in developing countries with lower literacy rates and also different
social opinions of who should get education in genders
...
However, affluence can bring
problems like obesity
...
This is as there is family planning and less need for children for income
...
However, underemployment may occur in
developed countries due to being overqualified
...

● Institutional structures are strong in developed countries as it is more stable with a strong
financial system and property rights that increases living standards and capital and growth of
the economy which results in development
...

➔

Economic growth and economic development are linked
...
Economic development is wider including GDP but also accounts for how it
is distributed between income earners
...
It can be measured using a variety of indicators
...
Development
is sustainable and includes investment in factors of production
...
This is a very subjective concept and the eradication of poverty is arguably important
...
HDI
HDI (human development index), this is a composite index from the UN that takes into account health
(life expectancy), education (years in schooling means, and the expected year in schooling) and
income (GNI per capita at PPP) which is equally weighted
...

● It is easy to calculate as governments normally take these statistics anyway although it is not
a precise measure
...
It also appreciates GDP per capita which is used to
make lives better
...
This matches economic aims which
is where scarce resources maximise societies life quality
...

● It however, has limitations as factors such as high life expectancy may not mean it is good
quality or education
...

● Other variables like housing, politcal empowerment and gender inequality are not accounted
for
...
Inequality reduces the potential for human development
...

2
...
This uses data from a number of ranges like health, education and life
quality that provide an index for scoring
...
This helps us to understand
future growth rates and is forward looking
...
This has harder statistics to find and also does not account
for measures like the environment (externalities)
...

3
...
It is calculated from26
different indicators grouped into categories (environmental, social and economic)
...
These, however, are biased
indexes against GDP and give normative results (hard to put a number on some factors) whilst not
showing the business cycle
...
3
...
Political and institutional factors
● Governance and rule of law arekey for growth and development
...
This means lower investment and output as the state can effectively steal
assets deterring investment due to corruption, the biggest determinant of TNC fdi
...
In authoritarian regimes corruption is endemic
...

● Democracy can also have institutional problems, such as in areas like India regulation being a
large problem resulting in it being costly and time consuming to set up a business, with high
taxes also being a deterrent
...

CASE STUDY:
Externalities from Brazil and their activities in the Amazon such as selling logging rights to create
revenue and jobs is pushing climate change
...
This tends to disproportionately
impact those who are already more relatively poor
...
Education and skills
● This is key in economic development, especially in the long term
...

● There is arguably debate over which type of educationis most important (arguably primary to
increase literacy rates)
...
This decreases the LRAS and potential output also increasing the
dependency ratio due to higher unemployment
...
Infrastructure
● This built environment is vital for development such as ports and roads, through increasing
efficiency and productivity
...

● This is also good for growth in human capital as there are goods or services to further it, if
there is infrastructure
...

4
...
This helps to improve the production
process through making it more efficient
...

5
...

● Easily preventable diseases like malaria can lead to long term illness and death, severely
impacting social and economic factors
...
Inequality

High levels of inequalityresult in absolute poverty for some societies and reduces opportunity
and incentives for the bottom resulting in lower levels of productivity
...

➔ However, inequality results in higher savings ratios from the top increasing
investment
...

7
...
The poorer it is, the less likely individuals and businesses
have access to these institutions and markets
...
Furthermore it encourages loans
with high interest rates increasing debt and reducing investment
...
This increases startups and
innovation
...
Demographic factors
● This results in changing rates of growth and structure
...

➔ This means incomes are also spread across more people, increasing the burden
...

➔ The window of opportunity is when the majority of the workforce enters the active
population
...

● The lower the level of development the higher thebirth rate tends to be, whilst this is dynamic
it also results in a large education system burden, increasing those uneducated and also
means there is underemployment and unemployment as there is not enough jobs in the
economy for the rapidly growing population
...
International trade
● This is a key way for developing countries to increase growth as they can export goods and
services with firms also being able to develop a competitive edge also encouraging efficiency
of firms due to global competition
...

● Importing goods and services allows access to technology which can encourage competition
internationally
...

10
...

They are normally capital or labour intensive
...
This is as inelastic demand results in
massively fluctuating prices as supply changes resulting in large revenue swings for
economies
...

● When prices fall, the terms of trade wosenfor export dependent countries resulting in fewer
goods being brought abroad with declining revenue
...
This depends as sometimes commodities rise
faster such as oil prices in the 2000s
...

● Raw materials have low power in markets, due to being highly competitive resulting in falling
prices
...
This results in all other goods
being less competitive and the loss of firmsgreater than the gain from increased commodity
revenue such as what happened with oil in venezuela
...

Therefore they pay as little to the government as possible along with operating cheaply with
large externalities and low wages
...

CASE STUDY (resources curse, Prebisch-Singer hypothesis, Dutch Disease and corruption):
The resource curse is when resource rich nations (problems associated with these products) grow
slower on average than poor countries
...

➔ Countries like UAE were able although resource rich to achieve high levels of growth
...

Prebisch-Singer Hypothesis is when primary products have a low YED compared to manufactured
goods
...
This means countries terms of trade worsen (struggle to achieve export
led-growth) and the global gains from trade will continue to be distributed unequally
...
The differing fortunes of Brazil andArgentina (industrialising nations) compared to areas
of Latin America where development was lagging
...

➔ The last 30 years, exports of manufactured goods haveovertaken exports of primary
commodities in most developing countries outside of Africa
...

➔ This shows the importance good governance and the importance of supply-side factorsin the
changing prices of goods over time
...
Somalia illegal funds from piracy and drugs trades have appreciated the currency
damaging international competitiveness and contributing to import dependence
...
The floating exchange rate allows us to understand which good
has the lowest opportunity cost
...

➔ Governments can alleviate these impacts by influencing the value of their currency or by using
revenue generated from growing industries to diversify their economies with effective
supply-side policies
...
The savings gap and foreign aid
The harrod domar model states that investment, saving and technological change drive economic
growth
...
The investment comes from savings making it important
...

Harrod domar equation is the RATE OF GROWTH = SAVING RATIO/CAPITAL OUTPUT RANGE
Thus poor countries are poor as there are few savings due to all money being spent on sustaining a
livelihood resulting in a vicious cycle of low savings,investment and growth, instead we need to create
a virtuous cycle of investment leading to savings and looping
...
Thus foreign aid or borrowing fills the savings gap boosting investment
...
This
is hard to attract if the country lacks legal structure and stability
...

● It may be wasted on arms (there may be corruption of aid for personal reasons)
...

● There may also be inflation resulting in little growth from savings
...
Furthermore, not all investment
being productive
...
The Dominican Republic has a savings rate
700 times higher than that of Haiti and receives 100 times more FDI
...

➔ Savings and Investment are a small part of the overallpicture related to development, the
Harrod Domar model is therefore very narrow in scope, as a reliable financial system is
needed before this is even important
...

12
...
This increases loan repayment and further
increased borrowing
...
This meant money flowed from poor to rich countries
...
This worsened the PPF
...
This creates a moral hazard problem along with
inflationary problems and a lack of trust of these countries
...
FDI
● FDI is investment by a private sector company and can be internationally done
...
This increases consumption and
exports also absorbing international techniques having a multiplier effect
...
Some argue it also increases exploitation due to lower costs and regulations
...
Remittances
● This reduces unemployment in developing countries with not enough jobs and results in
temporary work
...
Thisincreases GDP and employment for
a population internationally aiding economic development at home through injections into AD
...

Although they show there are problems in the domestic labour market
...

➔ This depends on how it is spent as demerit consumer goods will not fuel long run
economic development
...
Gender inequality
● Women in developing countries are disadvantaged so are less educated, reducing human
capital, whilst being excluded from jobs and basic needs
...

This reduces life advantages and has negative effects through disempowering the women and
reducing their human capital and potential to raise her child educated creating a vicous cycle
...
The environment
● Economic development is about increasing GDP, however using non-renewable resources is
unsustainable with developing countries, committing few resources to reducing damage
resulting in more unsustainable growth, especially as firms have high incentives to have
negative externalities as governments are focused on growth with few regulations
...

Non economic factors may include, war (loss of investmentand capital), disease and geographical
location (unable to access trade routes or grow crops) reducing supply side potential
...
3
...
This led to
developing countries promoting import subsitions
...

The larger the country the less true this is as economies of scale etc are available within the country
...

➔ The government may have poor information about which industry to support resulting in
picking losers and failure
...

Export led growth increases dependency on world growth with resources allocated for comparative
advantage of countries (highly labour intensive in developing countries)
...
Through giving short term assistance such as in
developing countries like Hong Kong may result in a move towards more productive sectors as export
led growth is aimed to be developed
...
Subsidies are normally for essential goods or to increase investment in industries, this
ensures prices remain low for essential goods increasing disposable income and HDI of lower
income families, whilst also increasing competitiveness of industries and thus export led
growth:
● This can be poorly targeted with even rich households being able to access food subsidies
resulting in a wastage of resources
...
Arguably
cash payments would be a better plan as it would give money straight to poor households
...

● They take up a large opportunity cost of governmentspending which could be used for other
more productive purposes like development)
...

● They are unpopular to remove, resulting in the best time to remove them being when there is a
fall in market price as it would result in no effect on the price of the subsidy removal
...

2
...

➔ This however creates volatility making planning hard leading to swings in
macroeconomic variables which also makes it hard to plan exports and imports for
the future
...

● Managing the exchange rate on essential goods may be key to keeping them cheap by
appreciating the exchange rate, with it varying
...
Other goods having high import prices result in the encouragement of these
industries evolving domestically
...

➔ These tiered exchange rates rarely work as it encourages a black market destabilising
the system
...

➔ Speculation may make it also hard to keep the currency within a band
...
Infrastructure development is a interventionist policy that is key in increasing efficiency and
export and import potential, whilst improving health and attracting FDl:
● You can develop key capital through factors like school, this can be state or private sector
funded (if profitable)
...

➔ Most are public goods are state provided
...

➔ The availability of resources, such as the government budget is key
...

CASE STUDY:
Niger ranked 189 out of 189 on the UN’s Human DevelopmentIndex
...
However,
productivity and yields are low due to a lack of infrastructure,including electricity, irrigation and
roads
...
This aims to increase food production, generate more electricity, boost jobs, and create
economic opportunities for households
...

Kenya spends 30% of their fiscal budget on educationas an attempt at encouraging long term growth
and development
...

➔ Improved human capital also take many years to flourish in the forms of long term economic
growth
...

➔ Unless an economy also has the potential to reward more productive workers (capital and
higher incomes) there may be a ‘brain drain’ effect
...
Developing a financial sector that helps firms and households to save and borrow money
...
Developing countries do not have these due to likely
unprofitable sectors
...

5
...
This also transfers human and physical capital to a country
...

● This can be stopped by joint ventures ensuring profits remain in the host country
...
The HDI thus increased by 0
...

●

FDI may be short term and lead to inequality along with externalities with poor worker
treatment
...
Privatisation helps to increase efficiency and results in productive efficiency due to average
costs being kept to minimum in order to maximise profit
...
They also may beallocatively
efficient in trying to meet consumers' wants
...

➔ This will be stopped if it is aprivatised monopoly (creating other inefficiencies) or if
corruption occurs with privatisation from government officials due to bribes or
underselling
...
due to profit maximising
firms which can have significant impacts on life quality
...
Buffer stock schemes to reduce the volatility of exportedcommodities
...
The government may earn revenues from the
scheme
...

➔ This may result in people free riding on the scheme or a
black market emerging
...

➔ This does not work for commodities that cannot be stored
...

➔ There may be a dumping due to the scheme failing resulting
in depressing global prices if this scheme collapses
harming the poor as they receive less income
...

CASE STUDY:
The Ivory Coast and Ghana planned to revive a buffer stock scheme for cocoa
...
In 2017, a global surplus of 371,000 tonnes arguably resulted
in plummeting prices and less export revenue, this is like a opec agreement
...

➔ If excess produce is held by the government, this oftenresults in the dumping of products
onto global markets with adverse consequences for other global producers
...
The lewis model argues growth can stem from the moving of economic sectorslike
industrialisation (long run including costs this is definitely worth it)
...

● This occurs as there is low marginal
productivity in the agricultural sector due to
large volumes of workers withdiminishing
marginal returns of output per worker
(either not working or workers' jobs being
➔

●

●

able to be replaced by the current capital and workers in the industry)
...
Higher wages are also
earnt from increases in worker productivity being reflected in the value thus reducing
absolute poverty, increasing the HDI and AD whilst also resulting in increased supply
side improvements due to worker upskilling and producing more output due to being
more productive
...

➔ Industries are arguably also more productive, due to specialisation and
training of workers
...

➔ Forced industrialisation does not always work if industriesfail or there is not
the capital to work this industrialisation
...
Arguably industrialisation is a result of
growth not a cause
...
This would also result in a increase in imports, to create this
capital
...

➔ There often is not a comparative advantage in this industry meaning a country
cannot grow through export led growth due to lacking price and quality
competitiveness also resulting in an inefficient allocation of resources
slowing global economic growth
...
Whilst these
urban areas experiencing migration are highly overpopulated with far to few
people left in the countries comparative advantage, resulting in worse
consequences
...
(five times more value),increasing their GDP
...
Although, this requires
vast sums of capital and will be hard to do initially to be competitive on prices and quality with
established brands, with them lacking the human capital
...
of
western consumers and call it a luxury charitable brand
...
Migration also
removes the supply shortage in the agricultural sector and gradually starts to push up wages in these
rural areas however slowing FDI as a result
...

➔ This sector may just be capital intensive and help TNCs profit
...

9
...

● This occurs as a country has a comparative advantage in certain primary
commodities like oil increasing income and employment
...

● This results in successful economic development occurring when revenues are
reinvested to diversify the economy and thus result in a smaller GDP proportion
coming from the sale of these commoditiesreducing vulnerability
...

● The less corruption there is also results in more inclusive growth from the
reinvestment of the revenues into the country's capital
...
Tourism can increase development through following the Lewis model and resulting in an
increase in export of services in developing countries
...
g
...
This isdependent on
government policy in ensuring there is sustainable legislation that growth is inclusive and not
existing
...
This also diversifies the economy away from more volatile sectors,
allowing the economy to grow along with global growth
...
This requires little skill so is accessible for the poor and disadvantaged
groups like women
...
This increases the supply side
potential of the economy
...

● This can have a multiplier effect on the economy such as due to tourists buying locally
made products
...

➔ This may result in inhabitants feeling inferior as they can see wealthy
lifestyles such as in hotels with many living in absolute poverty emphasising
inequality globaly
...

➔ There may be large environmental degradation from tourists such as boats, oil
spills or hotels built in habitats by TNCs that do not follow legislation, also
exploiting workers
...

11
...
This
is key in allowing development in communities internationally with
sustainable production, such as through reinvesting higher profits and
allowing children to go to school due to banning them from working
...

➔ This covers few actual categories and has limited impact
globally of 4 billion in annual sales
...

➔ This may depress non-fair trade prices and income if demand for them falls, having
significant impacts
...

➔ This discourages the Lewis model as it encourages people to stay in the primary
sector
...
Debt relief occurred when many countries could not repay or service the debt they owed for
repayments on loans
...
This
also resulted in fiscal austerity with little loans available for already in debt countries in order
to export enough to repay debts
...

This resulted in debt being written off
...

● It was massively prohibiting growth of the poorest countries with interest making
repayments exceeding original loans
...

➔ The relief results in themoral hazard problem
...
Thus strong governance is needed to make sure the debt relief
allows policies to change to encourage growth
...

They were thus unable to borrow and repayments enabled investment in human capital or other
infrastructure necessary for growth and development
...

13
...
This also allows flows to the developing world, resulting in
temporary assistance massively increasing living standards through encouraging
development whilst also increasing equality
...

● This can be through grants which is just a sum of money given to encourage
development such as free education, through loans with low interest rates, tied aid
allowing countries to take aid if they purchase goods in return
...

➔ The success of aid is based on governance, the aid may be unfairly
distributed to a narrow group such as urban dwellers, or saving these groups
needs without promoting development
...

➔ Moral hazard problem may occur
...

➔ Tied foreign aid may result in a worse buy than if they shopped around for the
cheapest project
...

CASE STUDY:
Mozambique debt payments averaged 15% of revenue through the 1980s and 1990s
...
In 2001
Mozambique qualified for significant debt cancellation through IMF initiatives
...

➔ SAPs may be designed to benefit the country
...

➔ Tied aid conditions result in a worse ‘buy’ than if they weren't lured into agreements with aid
...

MICROFINANCE
This is used to help to raise incomes, reduce unemployment, increase tax revenue investment and
development (multiplier) and empower marginalised groups through creating opportunity for
entrepreneurs and everyone (racial and gender equality/sustainability) to have the ability to access to
credit (aimed at low income groups):
● Many people take these offers but some reject them resulting in less of a impact
...

➔ Thus incomes did not improve on average in comparison to a normal borrower
...

● Households taking credit were less likely to send kids to school resulting in less success on
empowering disadvantaged such as women
...

➔ Studies of microfinance in India have found thatless than half of projects result in the
purchase of any capital/assetand are often simply spent on further consumption by the
recipient, not increasing the long term prosperity of the recipients
...

➔ Without a legal framework many schemes in deprived countries have resulting in immoral
activities from buisnesses
...

Free market strategies (Privatisation, deregulation, FDI, trade liberalisation, TNCs and floating
exchange rate)
Government intervention strategies (Fair trade, Import substitution, subsidies, government led
industrialisation, foreign aid, debt relief, development of tourism, buffer stock, development of primary
industries with a high YED, industrialisation and sector change)
4
...
1 Financial market
The financial market (genuine consumption and speculation), is where buyers and seller can can buy
and trade assets and services (money) e
...
foreign currencies, debt and risk
...
This
allows people to live a good life
...
(This may increase living standards)
● They facilitate the transfer of goods and servicesthrough enabling there to be an exchange
such as through the printing of money and cheques
...

● These can provide equity allowing a company to grow in size through earning finance for
expansion and creating liquidity in the market thus encouraging entrepreneurship
...
They also may
provide key services like mortgages
...
Investment banks engage in
activities such as buying shares or creating derivatives and advice to companies on growth
...

Savings vehicles help individuals make returns from savings are used such as through
pensions, private equity and assurance companies
...

The markets:
● A money market provides short term borrowing and lending, such as between banks
...
This helps governments to finance
a deficit and also there to be an increase in trading of shares through speculation
...

● Commodity markets often are contracts and speculative
...

● Insurance markets are from individuals where they reduce risk
...
These are:
● Asymmetric information, when financial institutions often have ​more knowledge compared to
their customers​, both consumers and other institutions
...

​The Global Financial Crisis was partially caused by banks selling packages of prime and
subprime mortgages, but advertising them as all prime mortgages​
...
Additionally, there can be asymmetric information between
​financial institutions and regulators​
...

● Externalities are a number of costs placed on firms,individuals and the government that ​the
financial market does not pay​
...
Even higher than this, was ​the long-term cost to the
economy of the crisis due to its effects on demand and growth
...
This can happen in two main ways in the
financial markets
...
​ Any problems they cause will be the problem of the company and not
the problem of the individual, the worst that can happen is to lose their job whilst the company
may lose millions of pounds
...
By selling
more mortgages, they would see higher salaries and bonuses but would not see the negative
effects if the loan was not repaid
...

● Speculation and market bubbles due to almost all trading in financial markets is speculative
and this leads to the c​ reation of market bubbles​, where the price of a particular assets rises
massively and then falls
...
This leads to prices becoming excessively high and eventually
enough investors decide that the price will fall, so they sell their assets and panic sets in,
causing mass selling
...
​ Moreover, the financial market has
also caused market bubbles in the ​housing market by lending too much in mortgages and
increasing demand for houses
...
Other bubbles included the ​dot com
bubble in the 1990s and the Wall Street Crash in 1929
...
One example of this is ​insider trading​, where an individual or institution has
knowledge about something that will happen in the future that others do not know and so can
buy or sell shares to make a profit
...
​In the Libor scandal of 2008, financial institutions were accused of
fixing the London Interbank Lending Rate (LIBOR), one of the most important rates in the
world
...
5
...

● To correct market failure, such as through reducing externalities by changing demand through
increasing costs resulting in their being increased economic efficiency or changing problems
such as a lack of merit goods (housing projects)
● To manage the economy such as through influencing variables like inflation and
unemployment, like lowering taxation to increase AD and growth in a negative output gap
...

Ideal taxes (should aim to increase economic efficiency and equity):
● The cost of collection should be lowrelative to its yield
...

● The means of timing and payment should be convenient
...

● They should aim to be compatible with foreign systems
...
This is arguably fair as it creates equity as payment is
linked to the benefit
...

● Thus lowering taxes can increase aggregate supply
...

➔ However, sometimes arguably this may result in a fall in working activity due to the
income rising resulting in a less willing to work
...
This
could thus increase tax revenues following a tax cut as
hours worked increases
...
Although
after a optimal point taxes discourage economic activity
resulting in there being a fall in tax rates, such as due to the
employment or poverty traps or encouraging tax evasion
...


If there is arise in progressive taxation there is increasing equality as the rich pay more
...

Aggregate demand
Taxes like income tax and national insurance affect aggregate demand due to reducing consumption
as there is less disposable income reducing inflation and also GDP
...

● This could however move an economy away from its productive potential resulting in a
recession and huge negative effects on the economy due to a recession
...

Aggregate supply
Through rising taxes it raises costs of firms, such as due to indirect taxes like VAT raising product
prices
...

● This may reduce the new productive potential of theeconomy
...
This may however, result in a
wage spiral to help to make up for the inflation, resulting in prices further being raised
...

● A cut in consumption may reduce aggregate demand and thus capacity firms need
investment
...

FDI flows:
FDI normally results in a 10% or more foreign acquisition or investment into a company
...
Through lowering taxes you are likely to increase FDI, this is arguably supported by earning
more tax overall even though it is lower as you will have more to tax
...
This has resulted in huge fiscal problems to many countries due
to increased transfer pricing
...
5
...

● If GDP is growing fast, there is likely to be a decrease in
debt as a proportion of GDPespecially as you are likely to
go into a fiscal surplus resulting in the ratio changing
...

A actual deficit is the cycical and the structural deficit
...

●
●

A negative structural deficit will mean that there is always a contribution to the national debt
that need to be thus eliminated
...

➔ This however, is hard to calculate as the economic cycle varies in amplitude, with the
size being hard to predict along with them varying in occurrence
...
This may be due to a positive wealth affect in a
boom, higher employment and fiscal drag (more people working, earning more such as fiscal
drag)
...

➔ This is less concerning as it fixes itself in thelong term
...

➔ This discretionary spending (up to the government to do this which is not automatic) it
is more worrying and only grows over time
...

● Unforeseen events such as a flood or an economic crisis resulting in there being a one off
event that distorts fiscal balances
...
This will depend on the interest at the
time and the credit rating
...
The national debt is dependent on the fiscal surplus and debt
...

A current deficit is when government revenues are less than current expenditure, this arguably
throughout the trade cycle needs to be in a surplus, so that there is money to finance capital
investment, otherwise they will borrow with interest rates arguably making the investment less
beneficial as it has to be financed
...
This will result in taxes rising to finance the spending as
there is economic growth
...

Consequences in fiscal policy:
● Cost inflation, if the government raises taxes inorder to prevent inflation and overheating,
then although AD is reduced, a rise in taxes may be passed on to the consumer in the form of
higher prices
...

● Equality is harmed through government spending being reduced such as cuts falling on
education, health and social security, thus not meeting the objective that a government also
has to redistribute income and maintain a certain standard of living
...

➔ Inflation may strip the debt repayment value
...
Poor families on means-tested benefits find that, on receiving a pay increase, they pay
extra tax and national insurance and they lose housing benefit and income support
...

● The national debt will increase, this is especially if interest rates are rising
...
FDI may also fall as it
indicated a weak economy with cyclical and structural problems creating the need for this
spending
...

➔ Credit ratings are relative to other countries
...

➔ This depends on the borrowing size, if there ismonetary policy counteracting this, it
may just be covering a demand side drop in a recession or the borrowing may be
external
...
5
...

Fiscal policy is used to- provide goods and services, increase equality, ensure fiscal sustainability,
correct market failure and improve macro economic positions (demand management with a multiplier)
...

➔ There was a level of austerity spending (governmentspending inefficient), although
due to reduced economic growth this also resulted in less cutting of national budget
due to lower growth and thus revenues along with lower future growth
...

Measures to reduce debt:
● Having a fiscal surplus
...

● Economic growth
...

Monetary policy in a global context;
● We have to increase interest rates, if others do ifwe want to stop a depreciation of the
currency
...

➔ Arguably we should only let central banks response to demand pull not cost push
inflation
...

➔ QE often just fuels inflation not aggregate demand due to low confidence
...

External shocks can be of two types:
● Supply side shocks, these are usually rising prices of goods and services that we import and
rely upon
...

●

Demand side shocks, the 2008 crisis was a demand side shock because bank failures meant
that there was a severe loss of credit (and therefore liquidity, borrowing, lending, consumption
,investment) and thus AD
...

➔ The government may accommodate this and just try return the economy to full
employment such as through lowering taxation and increasing aggregate demand
...

➔ Arguably they could use a mix of both, but no matter what GDP is lost and transferred
to these exporting countries that benefit
...

➔ Either fiscal austerity can be taken to combat rising national debt
...

Problems for policy makers:
● Inaccurate information makes it hard to estimate actual benefits through government action as
it has no clear picture of exactly what is going in the economy such as the extent of tax
evasion
...

● External shocks are unpredictable making it hard to adapt policies

---