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![www.tutor2u.net 2120 A LEVEL ECONOMICS YEAR 2 (A2) Revision Workshop
In response, Labour Shadow Chancellor John McDonnell told BBC Radio 4's
World at One programme the decision by the FCA was "shocking" and could
prove a "dangerous and costly mistake", continuing "This will be a huge blow
to customers and taxpayers who are all still paying the price for the failed
culture in the banking sector that's been widely attributed to be among the
main causes of the crash and the scandals over Libor and price-fixing." He
said that the FCA’s proposal to work individually with banks could still result
in "cultural mispractice" in banking.
Many critics of the FCA’s change of heart have said that this is further evidence
that regulators and the government have decided to take a softer line with
the banks, ending the "banker bashing" era. Although UK growth figures
have picked up since the height of the financial crisis, the UK government
is keen that the UK doesn't lose its appeal as a place for global banks to
do business and employ highly paid people, who can contribute to the
government’s tax coffers. Supporting this view is the fact that the former
chief executive of the FCA, Martin Wheatley, was sacked in mid-2015 for
being an overly-fierce critic of the banks.
Some economists are now accusing the FCA of regulatory capture,
whereby the regulator ends up being too friendly and sympathetic to the
industry which it is meant to be regulating. Such action isn’t unheard of.
Dave Hartnett, the former head of the HMRC, was what he liked to call
“non-confrontational in dealing” with large [especially corporate] tax
avoiders. Since his retirement in 2012, Mr Hartnett has become a
director of a large lobbying group that campaigns against heavy taxation
of tobacco.
Reasons
for
Regulatory
Failure
Regulatory
Capture
Additional Activities
£
Activity 1: Game Theory
Question 1 – The cement industry is dominated by two large firms, Castle Cement and
Blue Circle. Each can select a high-output or low-output strategy.
The payoff matrix below shows their profits in each possible situation.
Castle High
Low
Blue Circle
High Low
(1 , 1) (3 , 0)
(0 , 3) (2 , 2)
Does Castle have a dominant strategy? Does Blue Circle have a dominant strategy? What will be the outcome of this situation?
Question 2 – Nestle and Cadbury are the two dominant firms in the UK chocolate
market. They face the decision whether to raise prices using their market power, or to
leave prices unchanged.
The payoff matrix below shows their profits in each possible situation.
Cadbury Raise price
Remain Unchanged
Nestle
Raise Price Remain Unchanged
(2 , 2) (-12 , 12)
(10 , -10) (0 , 0)
Identify if a Nash Equilibrium exists in the game above.](https://image.slidesharecdn.com/a2economicsrevisionworkbook2016-160324042149/85/A2-economics-revision-workbook-2016-11-320.jpg)
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A2 economics revision workbook 2016
- 1. A Level Economics Year2 (A2) Revision Workshop Summer 2016 Note the resource download link for this workshop:Student Name www.tutor2u.net/economics @tutor2uEcon @tutor2u_Jon @tutor2uGeoff More Economics revision and support at: Follow tutor2u Economics on Twitter:
- 2. 2 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 3 6 Services 7 Manufacturing A01 Knowledge Definition, basic theory A02 Application Examples, evidence A03 Analysis Explanation of theory, diagrams A04 Evaluation Using judgement, weighing up Exam Advice PEEEL Evaluation Paragraphs P Point E Explanation E Evidence/Example E Evaluation L Link back to the question Evaluation Reminder T Timescale W Wider Context E Efficiency E Equality/Equity P Priority Exam Advice The command words ANALYSE or EXPLAIN require a student to produce some explanation of the theory in their answer. You should develop CHAINS OF ANALYSIS, making 3 or 4 links using connectives to develop your point. *This means that... *This leads to... *This has an impact on... *Therefore... *This can cause... *This is because... *On the other hand... *Which in turn... The command words EVALUATE, JUSTIFY, EXAMINE or ASSESS require a student to demonstrate a judgement in their answer. You will need to weigh up the evidence from your analysis and pass a judgement on the original question. *It depends on... *In the short run... *In the long run... *The most important point *The effect on equity/equality is *The most cost effective… *The best solution in the circumstances is... 1 Costs, Revenues, Business Objectives & Competition 2 Concentrated Markets and Government Intervention 3 International Trade and Exchange Rates 4 Economic Development 5 Current UK Policies and Global Economic Performance At the back of the booklet you will find a glossary of key A2 economic terms and concepts. Skills at A2 Theory of the Firm Revision Blast Short Run Definition: Examples: Long Run Definition: Examples: This first session is a revision blast of the costs, revenue streams, types of efficiencies and business objectives that firms face. We will also look at applying these concepts to a competitive market, and examine contestability, followed by some insights in to the type of questions asked under examination conditions, and focuses on improving examination technique at A2 level. The Extension Activities aim to give you an opportunity to further your revision at home or at school at a later date. Session 1 Costs, Revenues, Business Objectives and Competition Business economics at A2 is all about how firms conduct themselves in the market place, and economists are concerned with each firm’s performance and its efficiency of use of scarce resources to produce the goods and services consumers desire to purchase. In order to ensure a firm is profit maximising, it must be aware of its costs and its revenues. However this section of the specification also covers other business objectives of firms such as sales maximisation, but then assumes most firms ultimately aim to profit maximise. A LEVEL ECONOMICS YEAR 2 (A2) REVISION WORKSHOP 2016 Welcome to our 2016 A2 revision workshop which will consist of five revision sessions. Whilst it is impossible to cover the entire A2 economics specification in just one day, we aim to focus on key concepts and ideas, embedded in examination technique and advice. Some areas will inevitably be considered with a light touch, however we aim to equip you with the tools to be able to continue in depth revision under you own steam. Today’s sessions will cover:
- 3. Costs Complete the diagramto illustrate the shape of cost curves: Business Objectives Complete the following diagrams to illustrate revenue curves in both perfect and imperfect competition: Output Average cost: cost per unit Marginal cost: the additional cost of producing one more unit Fixed cost: costs that are incurred even when the level of output is zero Variable cost: costs that vary directly with the level of output Falling Average Cost Increasing Marginal Returns: Economies of Scale: Rising Average Cost Diminishing Marginal Returns: Diseconomies of Scale: Short-Run Perfect Competition Imperfect Competition Long-Run Revenue Revenue Definition: Formula: Average Revenue Definition: Formula: Marginal Revenue Definition: Output Revenue Output Revenue Profit Maximisation Economic theory usually assumes that businesses aim to maximise their profits. Complete the following definitions: Normal Profit: Supernormal (abnormal) Profit: The Profit-Maximising Condition: The Role of Profit? 4 A LEVEL ECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 5 Costs & Revenue
- 4. 6 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 7 Alternative Business Objectives The table below shows a range of alternative business objectives: in reality, many businesses are profit-seeking but not profit-maximising. Or, they may follow a strategy in the short-run that is not profit maximising but that allows them to maximise profits in the long-run. Annotate the diagram to illustrate as many of these objectives as possible. Competition Perfectly Competitive Markets Note down the characteristics of perfectly competitive markets: Revenue Maximisation MR = 0 Productive Efficiency Lowest AC Product differentiation This could link with entering new markets, increasing consumer satisfaction etc Normal Profit (= Limit Pricing and Sales Volume Maximisation) AR = AC Dynamic Efficiency Being innovative with products or the production process to lower costs – requires supernormal profit Satisficing Behaviour Achieving a minimum acceptable level of revenue / profit Social responsibility The inclusion of social and environmental considerations Predatory Pricing Producing at a loss in order to drive out competition Allocative Efficiency AR = MC Costs & Revenue £ Output MC AC MR AR = D What objectives might the following types of business have? A charity An energy firm A new tech start-up A nationalised firm Price Costs & Revenue £ Quantity traded P P Q OutputQ S MC AC AR = MR D Annotate the diagram below to show the long-run equilibrium in a perfectly competitive market: Should the government aim to make all markets perfectly competitive? Arguments in favour Arguments against 1 2 3 4 1 2 3 4
- 5. 8 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 9 Contestable Markets Exam-Style Question What is meant by a contestable market? Discuss the impact on consumers of the mobile network market becoming more contestable. Types of barriers to entry Structural Legal Strategic The outcome in a contestable market In a market in which barriers to entry (and exit) are low, there is the potential for hit and run competition. This forces incumbent firms to behave competitively. In other words, the POTENTIAL FOR COMPETITION causes firms – even if there is just small number of firms – to behave as they would in a competitive market. This results in firms operating at a point where they earn low supernormal or even just normal profits. To what extent are the following markets contestable Market Contestable Not Contestable Tour Guiding Low Cost Airline High Street Banking Point... Increasing contestability forces firms to operate at a point where normal profits are earned - this lowers prices and raises output, therefore increasing consumer surplus. ...this is because... Firms must aim for normal profit so as not to attract new firms to the market risking “hit and run” competition and a loss of market share. ...in the case of mobile networks... There is a small number of network providers, each of which has brand loyalty due to lengthy contracts - this allows prices to be high. A more contestable market could lower prices for consumers and make contracts less confusing. ...however... Difficult to see how barriers to entry in this market could be lowered because handset prices may be dictated by phone manufacturers such as Sony and Apple. ...furthermore... There are large economies of scale needed for good national network coverage - so consumer experience could be worse with increased contestability. ...link back to the question... Consumer satisfaction may actually be reduced rather than increased as a result of increased contestability in the mobile network provider market.
- 6. Additional Activities 10 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 11 Activity 3: Essay Planning FramesActivity 1: Costs Quiz Output 2 3 4 5 6 Total Cost Marginal Cost Average Total Cost Average Fixed Cost Average Variable Cost Total Variable Cost Clues 1 Average fixed cost for 6 units of output is £9 2 Average variable cost for 2 units of output is £30 3 Total cost is increased by £28 when the third unit of output is added 4 Average total cost of 4 units of output is the same as the average total cost of 3 units of output 5 Total cost for 5 units of output is £258 6 Total variable cost is increased by £100 when the sixth unit of output is added 7 Total cost increases by £8 when the second unit of output is added Think of 3 possible barriers to entry for each of the following markets: Activity 2: Barriers to Entry Market Coffee Shop Barriers to Entry Supermarket Pharmacist Market Space Tourism Barriers to Entry Hand Car Washing App Design Discuss the view that profit maximisation is always the sole aim of businesses Discuss the extent to which a perfectly competitive market is always efficient Define profit: Role of profit for businesses: Alternative objectives, with their formula and an example of each: Could these alternative objectives simply allow firms to maximise profits in the long-run? Examples? Profit maximising condition: Diagram to illustrate alternative objectives: What types of organisation might not seek profit at all? Overall conclusion: Overall conclusion: Explain what is meant by a perfectly competitive market and examples: Explain what is meant by efficiency (productive, allocative, dynamic, X, Pareto): Draw the short-run diagrams for perfect competition: Types of efficiency achieved in the short-run: Draw the long-run diagrams for perfect competition: Types of efficiency achieved in the long-run: Evaluation 1 - can firms in perfect competition achieve economies of scale? Evaluation 2 – can firms in perfect competition be dynamically efficient?
- 7. www.tutor2u.net 1312 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Session 2 Concentrated Markets and Government Intervention This session will explore the area of imperfect competition, focusing on the interaction between firms in oligopolistic market structures, and the behaviour of monopolies. We will assess the advantages and disadvantages of these imperfectly competitive market structures, comparing them to outcomes in more competitive markets. The session will conclude with a closer look at the latest issues in competition policy. Time to Think 1 Match each key term to its correct definition Exploring Monopoly Characteristics of concentrated markets 2 Calculate the 3 firm concentration ratios for each of the following industries National Newspapers The Sun 24.1% Daily Mail 20.6% Daily Mirror 20.1% Evening Standard 9.8% Daily Telegraph 6% Daily Express 5.6% C3 = Broadband Providers Talk Talk 14% Virgin Media 20% BT 32% Sky 22% Plusnet 2% EE 4% C3 = Supermarkets The Co-Operative 6.3% Aldi 5.6% Asda 16.4% Morrisons 10.9% Tesco 28.5% Sainsburys 16.5% C3 = Barriers to Entry Any profit earned that is over and above the level of normal profit (where normal profit is the minimum profit required to keep a firm operating) Marginal Revenue Falling long run average costs as the level of output in a firm rises Supernormal (Abnormal) Profit A type of competition in which firms compete in areas other than price, for example, differences in product quality, delivery times etc Economies of Scale A market structure in which two firms dominate the market Monopoly Power Any factor that makes it difficult for new firms to enter the market – these can be strategic, innocent or legal Duopoly The addition to total revenue from the sale of an extra unit of output Vertical Merger An illegal activity in which firms, usually in an oligopoly, work together to restrict output and/or set prices high Non-Price Competition The ability of a firm to set prices Collusion The buying of a firm either further back or further forward in the supply chain Monopoly characteristics 1 2 3 4 Oligopoly characteristics 1 2 3 4 Note down some examples of monopoly market structures:
- 8. www.tutor2u.net 1514 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Assessing the efficiency of a monopoly Monopoly diagram Indicate the output level, the price, and the area representing supernormal profit on the diagram shown here. Natural Monopoly A natural monopoly is a market structure in which only one firm can exist, because the sunk costs and/or economies of scale are so large that it would be inefficient to have more than one firm in the industry. Often, natural monopolies are associated with large networks, such as railway networks, water supply, or postal services. In many cases, the profit-maximising level of output for a natural monopoly would result in the firm actually making a loss – in this case, we often find that the firm is either nationalised or heavily subsidised by the government, because if the firm was allowed to “fail” or exit the market, then there would be a missing market and complete market failure. Price Competition We often see price stability in an oligopoly involving homogeneous goods. We can explain this phenomenon using the kinked demand curve: Indicate the stable price on the diagram below: Oligopoly The behaviour of firms in an oligopolistic market is difficult to predict, because it depends on whether they are selling homogeneous or differentiated products, the strength of entry barriers, and whether there is enough trust between firms for them to collude. We can use a variety of techniques for analysing the behaviour of firms in an oligopoly. Natural monopoly diagram On this diagram below, indicate a the profit maximising level of output and associated price b the level of output and price when the firm is nationalised and has the objective of allocative efficiency According to the diagram, is this monopoly firm… Evaluation: In “reality”… Productively efficient? Allocatively efficient? Dynamically efficient? X-efficient? Costs & Revenue £ Output MC AC MR AR = D Costs & Revenue £ Output AC MC MR AR Royal Mail – a natural monopoly? The Royal Mail has a legal obligation to provide a postal service in the UK – by law, it must deliver letters to all UK addresses at an affordable, standard price at least once per day, 6 days per week. This Universal Service Obliga- tion is important in allowing information to flow easily around the economy without disadvantaging certain groups of people. The only way that the Royal Mail can meet the requirements of its Universal Service Obligation is to have a huge network of post boxes, postmen and postwomen, delivery vans, sorting offices and so on.There are nearly 120,000 red post boxes up and down the UK. Royal Mail also has to continually strive to take advantage of economies of scale. In recent years, Royal Mail has invested heavily in sorting machinery – its new machines can read the addresses on 11 let- ters every second and send them to the right pile for delivery; this means each machine can sort over 30,000 pieces of post every day.And, these machines sort them in to the right order for the route for each postman or postwoman, saving time and reducing errors. Royal Mail’s profitability is under threat, however. Its peak delivery period was in 2005-2006, when it handled 84m pieces of mail, compared with a little under 60m today. In an attempt to slash costs, it made 3000 employees redundant in 2015. Pre-tax profits in 2015 were £116m, down from £167m a year earlier – these are slim margins in a firm where revenue is not far from £10bn annually. Since Royal Mail was fully privatised in October 2015 (when the government sold its final 13% stake, after initially selling shares in October 2013), there has been increased competition particularly in the parcels sector – the global retail giant Amazon has dipped its toe into the water with its own parcel delivery service. Output Price MR AR = D What happens if the oligopolist raises the price? What happens if the oligopolist lowers the price? What happens if the firm’s costs rise or fall? How realistic is this model?
- 9. www.tutor2u.net 1716 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Occasionally, however, we may see periods in which there is collusion or periods in which there are price wars. Examples of price wars Examples of collusion£ Why do firms collude? What market conditions make it more likely that firms will collude? Using game theory to explain why collusion is usually unstable Game theory is a mathematical technique for helping us to analyse the decision-making process. In A-level Economics, we use it to help us analyse behaviour in duopoly. The payoff matrix below is an example of the Prisoners’ Dilemma. Collusion Dynamo’s Pizza High Price Low Price Papa Joe’s Pizza High Price Low Price (10 , 10) (3 , 12) (12 , 3) (6 , 6) a On the payoff matrix, indicate each firm’s dominant strategy and the Nash equilibrium b Is there a “better” option for each firm, other than the Nash equilibrium? c How could Dynamo’s and Papa Joe’s reach that “preferred” option? d Why is this option “unstable”? e How can competition authorities take advantage of this instability to help tackle collusion? Non-price competition London to New York airlines High Street Pizza Chains Supermarkets Tablets Chocolate Market Types of non-price competition
- 10. 18 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop Competition Policy Regulator Tools of competition policy Regulator Industry Examples of Regulation? Regulatory Failure In May 2015, the news agency Reuters reported that 20 global banks had paid £152bn in fines and customer compensation since the start of the 2008 financial crisis, following intervention by banking regulators in a number of countries including the UK and the US. In an attempt to tackle the root causes of banking scandals and crises, the UK’s banking regulator, the Financial Conduct Authority (FCA), had announced an inquiry that was intended to have looked at whether the pay and incentives structures in banks contributed to scandals in UK and overseas banks. However, at the end of 2015, the Financial Conduct Authority (FCA) decided to drop this inquiry into the culture, behaviour and pay in banking institutions. In its announcement, the FCA said that it had decided a “traditional thematic review” would not help it to achieve improvements in the banking sector, and that it would work individually with banks to deliver “cultural change”. www.tutor2u.net 19 Anti- Competitive Practices
- 11. www.tutor2u.net 2120 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop In response, Labour Shadow Chancellor John McDonnell told BBC Radio 4's World at One programme the decision by the FCA was "shocking" and could prove a "dangerous and costly mistake", continuing "This will be a huge blow to customers and taxpayers who are all still paying the price for the failed culture in the banking sector that's been widely attributed to be among the main causes of the crash and the scandals over Libor and price-fixing." He said that the FCA’s proposal to work individually with banks could still result in "cultural mispractice" in banking. Many critics of the FCA’s change of heart have said that this is further evidence that regulators and the government have decided to take a softer line with the banks, ending the "banker bashing" era. Although UK growth figures have picked up since the height of the financial crisis, the UK government is keen that the UK doesn't lose its appeal as a place for global banks to do business and employ highly paid people, who can contribute to the government’s tax coffers. Supporting this view is the fact that the former chief executive of the FCA, Martin Wheatley, was sacked in mid-2015 for being an overly-fierce critic of the banks. Some economists are now accusing the FCA of regulatory capture, whereby the regulator ends up being too friendly and sympathetic to the industry which it is meant to be regulating. Such action isn’t unheard of. Dave Hartnett, the former head of the HMRC, was what he liked to call “non-confrontational in dealing” with large [especially corporate] tax avoiders. Since his retirement in 2012, Mr Hartnett has become a director of a large lobbying group that campaigns against heavy taxation of tobacco. Reasons for Regulatory Failure Regulatory Capture Additional Activities £ Activity 1: Game Theory Question 1 – The cement industry is dominated by two large firms, Castle Cement and Blue Circle. Each can select a high-output or low-output strategy. The payoff matrix below shows their profits in each possible situation. Castle High Low Blue Circle High Low (1 , 1) (3 , 0) (0 , 3) (2 , 2) Does Castle have a dominant strategy? Does Blue Circle have a dominant strategy? What will be the outcome of this situation? Question 2 – Nestle and Cadbury are the two dominant firms in the UK chocolate market. They face the decision whether to raise prices using their market power, or to leave prices unchanged. The payoff matrix below shows their profits in each possible situation. Cadbury Raise price Remain Unchanged Nestle Raise Price Remain Unchanged (2 , 2) (-12 , 12) (10 , -10) (0 , 0) Identify if a Nash Equilibrium exists in the game above.
- 12. 22 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 23 Activity 2: Monopoly Analysis Activity 4: Price Regulation Essay Frame Complete the following table Types Explanation Pure Monopoly Example Statutory Monopoly Natural Monopoly Regional Monopoly My own example Activity 3: Concentrated Markets Exam Practice Suppose you are given the following essay title: Discuss the view that concentrated markets are always bad for the economy. 1 Write a plan that incorporates all of the following 25 words and phrases: 2 Now add in at least 10 examples to your plan. 3 Write your essay, incorporating all of the following connectives words and phrases Concentration Ratio Regulator Price Regulatory Capture Employment Monopoly Output Contestability Supernormal Profit Exploitation Consumer Surplus Price Competition Natural Monopoly Tax Revenue Innovation Barriers to Entry Economies of Scale Limit Pricing Dynamic Efficiency Regional Monopoly Allocative Efficiency Deadweight loss Quality Diseconomies of Scale Collusion However By way of illustration Assuming that By the same token Although It depends For instance Hence Furthermore Accordingly What is more Notwithstanding Conversely Since It is worth noting that Moreover In summary Because A key aspect is In contrast Discuss the view that freezing energy prices will be beneficial to consumers Context – explain these terms Oligopoly (can you name the big energy companies?): Concentrated market: Pricing power: Regulation: Price-capping: Outline 3 advantages to consumers of freezing energy prices: 1 2 3 Outline 3 disadvantages to consumers of freezing energy prices: 1 2 3 Wider issues: • Other examples of successful or unsuccessful price-capping? • How do we decide on the right “level” of price-capping? • Who monitors the behaviour of energy firms? - • Are regulators always effective? Conclusion – answer the question and reach a supported judgement! Analysis – explain how price-capping works (use a diagram if you can)
- 13. 24 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 25 Activity 5: Rail Fares and Regulation At the start of January 2016, the Rail Delivery Group or RDG (which represents train operators and Network Rail) announced that rail fares would rise on average by 1.1%, the smallest annual rise in 6 years. Peak- travel and commuter fares are regulated and can only rise by RPI + 1% at the most. However, off-peak fares are not regulated, and can therefore be increased by as much as train operators want. Rail fares now pretty much cover the running cost of Britain’s railways – for many years they didn’t, and heavy subsidies were needed to ensure that trains were kept running. The diagram below shows where the money is allocated, on average, when train tickets are bought: A spokesperson for the Campaign for Better Transport said that more needed to be done to ensure that train travel remained affordable for most people, and that rail fares in the UK were amongst the highest in Europe already – Brits pay 6 times more to commute than people elsewhere in Europe. Labour’s shadow transport secretary said that people are typically paying £2000 more for a commuter ticket now than when David Cameron became Prime Minister in 2010. The Labour Leader, Jeremy Corbyn, described the situation as scandalous, saying that commuters’ money was being used to boost the profits of private firms such as Stagecoach and Virgin, and foreign-owned operators; he went on to reaffirm his view that the railways should be renationalised. His view is supported by the union-backed pressure group Action for Rail, which recently calculated that on average, a commute into London costs 13% of a worker’s salary, compared with just 2% for a commute into Rome for an Italian worker. The rail regulator, ORR (Office of Road and Rail), is itself under scrutiny by the House of Commons Public Accounts Committee, accused of having failed to adequately scrutinise Network Rail’s improvement plans or to take tough enough action when Network Rail failed to deliver. For example, the electrification of the Great Western Line from London Paddington to Cardiff is now £1.2bn over the initial prediction of £1.6bn. MPs have described this as “staggering and unacceptable”.The Committee said that the Department for Transport “should carry out a fundamental review of the regulator’s role and effectiveness in rail infrastructure planning. A Define the following key terms: i. RPI + X regulation ii. Nationalisation iii. Privatisation iv. Regulator v. Regulatory capture vi. Infrastructure B Explain why Network Rail (the organisation responsible for the UK’s railway network and many stations) is considered a natural monopoly. C Discuss the view that train operating companies, such as South West Trains, have monopoly power. D Assess the advantages and disadvantages of renationalising the railways, as proposed by Jeremy Corbyn. E Discuss the view that lower rail fares will be good for the economy. F Discuss the reasons why the Office of Road and Rail (ORR) might be an ineffective regulator. Notes
- 14. www.tutor2u.net 2726 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Session 3 International Trade and Exchange Rates An analysis of the key trends in the nature and pattern of international trade, and the changing nature of globalisation, is how this session will start, followed by a close look at the structure of the Balance of Payments. We will then evaluate the advantages and disadvantages of free trade versus protectionism, looking at the role of trade blocs and organisations such as the WTO. The final part of the session will consider the pros and cons of different types of exchange rate systems. The changing pattern of global trade The existing pattern How is the pattern changing? Before the 2008 financial crisis, world trade volumes were growing at more than twice the rate of GDP due to: Trade volumes continue to grow more quickly than GDP but at a slower rate because: The geographical centre of trade is shifting towards emerging economies. By 2060, the share of global trade amongst present OECD members will be: And by 2060 the share of global trade amongst Asian economies will be: The share of global trade amongst OECD members is currently: And the share of global trade amongst Asian economies is currently: Drivers of change in the global trade pattern Factors causing change in global trading patterns What is meant by globalisation? What causes globalisation? Is there evidence of deglobalisation? The Balance of Payments The Balance of Payments is a record of all international financial transactions between consumers, firms and the government in one economy with all other economies. A simplified outline of the structure of the Balance of Payments: BalanceofPayments Current Account Capital Account Financial Account Trade in Goods Trade in Services Net Investment Income Current Transfers Direct Investment Flows Hot Money Flows Reserve Assets
- 15. www.tutor2u.net 2928 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Does it matter if an economy runs a current account deficit? Reasons why a current account deficit can be detrimental: Protectionism The tariff diagram Discuss the benefits of strengthening protectionist measures in the UK Structural issues - Unemployment and slow growth Over reliance on other countries Financed by Hot Money Reasons why a current account deficit may not be harmful: Benefits of free trade More choice Lower prices Productive efficiency Higher output Promotes peace Technology diffusion May be cyclical May be importing technology and capital Accompanied by strong inward FDI Theory of Comparative Advantage Countries should specialise in producing the goods that they can produce at a lower opportunity cost than other countries and then trade. Total world output will rise as a result of the increase in productivity. Problems with the theory: 1 2 3 4 On the Tariff Diagram, indicate: a The volume of imports before the tariff b The volume of imports after the tariff c The tax revenue earned from the tariff d The gain in domestic producer surplus as a result of the tariff e The loss of domestic consumer surplus as a result of the tariff Quantity Price Pw+t Pw Sd Sworld + t Sworld Dd Possible benefits of increasing protectionism could include: 1 2 3 Let’s develop one of these arguments in more detail to practise exam technique: Point Explanation Example / evidence Evaluation 1 Evaluation 2 Link back to the question
- 16. www.tutor2u.net 3130 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop International Agreements? What am I?: What has been happening to the value of major currencies? Floating exchange rate A decrease in the price of a currency compared to other currencies, in a floating exchange rate system Fixed exchange rate An exchange rate system in which the price of the currency is determined entirely by the forces of demand and supply Speculation A decrease in the price of a currency compared to other currencies, engineered by a government in a fixed exchange rate system Hot money A risky activity in which investors anticipate/predict a change in the exchange rate which could lead to a financial gain if they buy or sell the currency at the right time Depreciation International monetary flows in which investors seek a short-term return; usually affected by changes in interest rates Appreciation An exchange rate system in which the price of the currency is determined and controlled by the government Devaluation An index that measures the relative price of a currency against a basket of other major currencies Effective exchange rate An increase in the price of a currency compared to other currencies, in a floating exchange rate system Exchange Rate Systems Match the 8 key terms below to their correct definition / explanation: Revise the topics of the World Trade Organisation, trade blocs and the UK’s relationship with the EU in depth by using the Extension Activities at the end of the Session 3 Chapter in this workbook. Pick out 3 significant features from the chart showing the Effective Exchange Rate of the £: 1 2 3 Australian Dollar Euro Japanese Yen Swiss Franc US Dollar Which currency has seen the largest appreciation over the time period shown? Which currency has seen the largest depreciation over the time period shown? Which currency has been the most volatile over the period shown? Study the chart showing the Effective Exchange Rates for 5 major global trading currencies, and then answer the questions below: Decide whether each of the following scenarios is likely to lead to an increase or decrease in the exchange rate of the £ Scenario Increase Decrease 1 An increase in the Bank of England’s base rate of interest 2 A reduction in desirability of British exports 3 A belief amongst currency traders that the £ will appreciate in the near future 4 A fall in demand for imported raw materials 5 A significant rise in the value of outwards FDI
- 17. 32 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop Classify the following statements as advantages of either FLOATING exchange rate systems or FIXED exchange rate systems: If the economy is running a large current account imbalance, then the exchange rate adjusts to allow automatic correction of the imbalance Fixed or Floating? There is minimal volatility in the prices of exports and imports, making costs and revenues easier to predict for businesses and investors Fixed or Floating? The economy is able to adapt quickly to economic shocks that occur either in the domestic or the global economy Fixed or Floating? There is a reduction in uncertainty in international trade and portfolio management Fixed or Floating? Inflation in other countries is less likely to be “imported” Fixed or Floating? The Central Bank is free to focus on achieving other objectives, such as low and stable inflation, and so there are fewer policy conflicts Fixed or Floating? The government or Central Bank does not need to keep a large quantity of foreign exchange reserves or gold (which incur an opportunity cost) Fixed or Floating? There is a reduction in destabilising, unproductive speculation if the monetary authorities are credible Fixed or Floating? The government may be prevented from following overly-radical or irresponsible economic policies Fixed or Floating? Additional Activities Activity 1: The Changing nature of International Trade Activity 2: Comparative Advantage - Numbers and PPFs www.tutor2u.net 33 Take a look at the OECD report “Global Trade and Specialisation Patterns over the next 50 years”: www.oecd.org/economy/Trade-and-specialisation-patterns-for-the-next-fifty-years.pdf and summarise the key findings on one page of A4. Question 1 a Which country has an absolute advantage in both goods? b What is the opportunity cost ratio of 1 car in X? And one car in Y? c What is the opportunity cost ratio of 1 lorry in Y? And one lorry in X? d Which country has the comparative advantage in car production? e Draw the relevant PPFs to show the non-trade situation, and the post-trade situation at an exchange rate of 1 car = 3 lorries. Country X Y Cars 4 3 Lorries 20 6 OR Question 2 a Which country has an absolute advantage in both goods? b What is the opportunity cost ratio of 1 cheese in the UK? And 1 cheese in France? c What is the opportunity cost ratio of 1 wine in France? And 1 wine in the UK? d Which country has the comparative advantage in cheese production? e Draw the relevant PPFs for this example to show the non-trade situation, and the post-trade situation at an exchange rate of 1 cheese = 2 wine. Country UK France Cheese 50 60 Wine 20 240 OR
- 18. 34 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 35 Activity 3: The Role of the WTO Activity 5: Should the UK leave the EU? Read this World Trade Organisation Booklet “What the WTO can do” and summarise the 10 key roles into a mindmap: www.wto.org/english/res_e/publications_e/wtocan_e.pdf As a further extension activity, evaluate each of those 10 roles, examining whether you think the WTO does or does not achieve its roles using as much evidence as you can to support your claim. Decide whether each of the following statements represents a reason for the UK to stay in the EU or to leave the EU. Then rank them in order from most to least persuasive reasons. Fill in the blanks in the passage below, using the words provided Activity 4: Optimal Currency Areas Euro Mundell Fiscal looser wages geographical destiny visas inflation labour monetary efficiency cultural cycles production An Optimal Currency Area is a _______________ area, usually larger than a single country, in which sharing a single currency allows economic __________ to be maximised. The theory was properly developed by the economist Robert _________. There has been significant debate about whether the countries using the ________ actually form an OCA. We can assess whether a region is an OCA against 4 key criteria: 1 Free movement of _________ in the region, including a lack of “physical” barriers such as ________ , a lack of ___________ barriers such as language and qualifications, and institutional barriers such as pension and benefits transferability. 2 Free movement of capital, combined with flexibility in prices and _______, in order to allow demand and supply in both product and labour markets to easily adjust. 3 A __________ transfer mechanism to allow the tax and benefit system to reduce inequalities cross the OCA 4 Countries in the OCA need to have similar patterns in their economic ________ in order to benefit from having a shared __________ policy set by a Central Bank. For example, in times of recession, then monetary policy needs to be _________ in order to stimulate growth and in times of boom, monetary policy needs to be tighter in order to prevent ____________. Since Mundell proposed the theory of the OCA, other economists have suggested some additional conditions for an area to be regarded as a functioning OCA. These include all member states believing in a shared _________, for example the “ever closer union” of the EU, and diversity in ____________ across the member states in order to reduce risk in case of economic shocks. British exporters do not have to contend with tariffs when they export to the EU; over 50% of UK exports go to the EU Because of EU regulations, any EU fishermen can fish in UK waters UK companies can find the skilled workers that they need from the EU if they cannot find them in the UK, improving labour market efficiency The influence of the British military abroad is high because of its EU-affiliation The UK must pay high annual membership fees to be part of the EU (around £10bn) UK companies can find the skilled workers that they need from the EU if they cannot find them in the UK, improving labour market efficiency Because of the free movement of labour around the EU, it makes it difficult for the UK to manage its borders and maintain security Over 90% of UK companies carry out no trade with the EU but must still abide by EU rules, causing a huge cost burden British farmers gain large subsidies from the EU’s Common Agricultural Policy (CAP) – total UK subsidies are around £4bn EU regulations require the UK to invest more in renewable energy sources UK workers can find the jobs that they want either in the UK or in the EU countries – this improves labour market efficiency UK companies can find the skilled workers that they need from the EU if they cannot find them in the UK, improving labour market efficiency Many firms, such as banks, in the City of London, carry out a huge amount of trade with the EU The UK has had to adopt many EU Regulations and Directives into UK law, diminishing “parliamentary sovereignty” The UK has already negotiated an opt-out clause for membership of the Euro Activity 6: The Levels and Types of Economic Integration Types of integration: Free Trade Area; Monetary Union; Customs Union; Preferential Trade Agreement; Single Market; Fiscal Union Names of integrated areas: NAFTA, European Union, Eurasian Customs Union, Mercosur, SACU, CEFTA, COMESA, GAFTA, USA, ASEAN, ECO 1Find out which countries are involved in each of the agreements listed above. 2Use the words above to complete the table below. Example(s) This exists when a number of countries decide to reduce or eliminate tariffs on certain goods that are imported from other countries of the area. Agreements can be between 2 countries (bilateral) or many counties (multilateral) A scenario in which a number of countries agree to eliminate all barriers to trade e.g. tariffs, quotas etc, on all traded items within that area When countries agree to have a Common/Unified External Tariff against non-members of the agreement, in addition to the removal of trade barriers between counties in the agreement. This allows countries to negotiate as a single bloc or group. A situation in which member states trade freely in all their economic resources – labour and capital, for example, and not just goods and services. There may also be some common microeconomic policies relating to things such as competition policy. This exists when countries abandon their own currency and share a currency, in order to build a closer union. This stage usually comes after establishing a Common External Tariff and complete freedom of movement of labour, capital, goods and services When countries agree to harmonise tax rates and rates of public spending and borrowing, agreeing on the allowed size of budget deficits and budget surpluses Type of Integration Description
- 19. 36 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop Activity 7: Changes in Exchange Rates - Evaluation Practice Discuss the extent to which a currency appreciation is likely to have a negative economic impact Wider issues: • What is meant by an appreciation? • Can you give examples of currency appreciation? • How do we assess “economic impact”? (hint – consider macro objectives) Key Points: • Currency appreciation causes exports to be relatively more expensive and imports to be relatively cheaper, which could worsen the trade balance and reduce AD (therefore slower growth and higher unemployment) because of the reduction in competitiveness • Could lead to regional inequality as some industries struggle to compete; could lead to imposition of tariffs and tit-for-tat strategies? • Could reduce corporation tax revenue if exporting firms have less profit, and could increase the need for government subsidies to maintain competitiveness, worsening the fiscal balance Examples: consider the Resource Curse / Dutch Disease, or the appreciation of the Swiss Franc when confidence in the Euro fell Evaluation: how would the Marshall-Lerner condition influence the impact of the appreciation? How desirable will exports continue to be, regardless of their price? Evaluation: how could inflation be positively impacted if a country is a heavy importer of raw materials and other goods? How might this help countries needing to import capital and technology? Evaluation: does the impact of the appreciation DEPEND ON what caused it? Could it be simply a self-correction if caused by a large current account surplus? Is it temporary if caused by an inflow of hot money or speculation? Could it have a positive effect on LR growth if caused by an inflow of FDI? Overall conclusion – can you directly answer the question in 2 sentences? Evaluation: why might the appreciation cause exporters to be more efficient? How could this benefit the economy? www.tutor2u.net 37 Session 4 Economic Developme In this session we will examine different ways of measuring economic development, poverty and inequality, before considering some of the theoretical and practical reasons why different countries are at different stages in their development, for example a lack of savings, the resource curse and trade. We will also assess policies such as debt relief, market liberalisation, and aid, which can be used to stimulate growth and development in LEDCs. nt The difference between economic growth and economic development Economic Growth Economic Development Measuring economic development Why is simply using GNI per capita (i.e. income) not adequate in helping economists to assess the level of development in a particular country? Components of the Human Development Index The HDI – three dimensions and four indicators The Human Development Index (HDI): a United Nations measure of economic development; a combined index that takes account of life expectancy at birth, the number of years of schooling, and GNI per capita at purchasing power parity.
- 20. www.tutor2u.net 3938 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Estimate the degree of development of each of the following countries, and place it in the appropriate box: Alternative development measures Match the development measure to its correct description: Niger Morocco China Nepal Zambia Argentina Tunisia Malawi Indonesia Norway UK Mexico You can find more detail on the HDI for each country here: http://hdr.undp.org/en/composite/HDI The table below lists some of the common concerns about using the HDI to measure economic development. Read each concern, and then award it an “importance score”, where 0 = really not an important concern, and 10 = highly important concern. Very High Human Development (HDI = 0.8 to 1.0) High Human Development (HDI = 0.7 to 0.8) Medium Human Development (HDI = 0.55 to 0.7) Low Human Development (HDI = 0 to 0.55) Problems with using the HDI to measure development Importance Score Countries have similar HDI scores but may have very different development concerns e.g. the US and Japan have similar scores but Japan gains its high ranking from high life expectancy whereas the US gains its high ranking from high GNI per capita. It isn’t always possible to verify the information / statistics from all countries, so data quality could be poor Not all countries collect data every year – a national census may only take place once every decade, for example, or data may be based on small, unrepresentative surveys The methodology and calculations of the HDI have changed many times since the measure was first introduced in 1990, making time-series comparisons rather meaningless The notion of human development is more complex than can be captured in the 3 simple components used in the HDI (GNI/capita, years of schooling, life expectancy) Time to think - note down 10 other possible development indicators that you think would help an economist to assess the level of development in an economy: Inequality-adjusted HDI (IHDI) Measures Descriptions This measure uses the same three main components as the HDI (life expectancy, number of years schooling, GNI per capita) but takes into account the differences between men and women in these components – it shows female HDI as a proportion of male HDI Gender Development Index (GDI) This measure looks at 3 components: reproductive health (maternal mortality rate and teen birth rate), female empowerment (% of parliamentary seats occupied by women and % of female over-25s with secondary education) and economic status (female labour force participation rate) Gender Inequality Index (GII) This measure focuses on the least developed countries, looking at deprivation in health (malnourishment & child mortality), education (% of children enrolled in school), and living standards (access to water, electricity, fuel, toilets etc) Multidimensional Poverty Index (MPI) This measure uses the same three main components as the HDI (life expectancy, number of years schooling, GNI per capita) but also takes into account the distribution of those characteristics across the population Essay technique To what extent does economic growth lead to an increase in economic development? Explain Example Evaluation 1: GNI per head may not actually increase by much despite economic growth Explain Example Evaluation 2: Development is more than an increase in the HDI Explain Example Point 1: An increase in economic growth leads to an increase in the value of HDI
- 21. www.tutor2u.net 4140 ALEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Why are countries at different stages in their development? Complete the flow chart below with examples that support and refute the development constraint suggested: Policies for increasing the level of economic development Complete the table below:Constraintsondevelopment Primary export dependency Geographical difficulties Poor governance Savings gaps / capital flight Infrastructure weaknesses Conflict Low value-added Resource curse / Dutch Disease Landlocked Remote Communities Post-Colonial issues Weak financial institutions Weak confidence Limited FDI Civil War Terrorism Strategy Specific Policies Examples Improve education / raise human capital Strengths: long-term benefits, increases LRAS, greater chance of employment, healthier population Weaknesses: Protectionism / Import Substitution, and fixed exchange rates Strengths: increases employment, tariffs raise tax revenue, more confident investors, value-added Weaknesses: Develop infrastructure Strengths: positive multiplier effect, increases LRAS, environmental benefits, predictable production Weaknesses: Supporting microfinance Strengths: grassroots level / well-targeted, relatively inexpensive, low risk, promotes gender equality Weaknesses: Encouraging FDI and trade Strengths: improves productivity, greater choice, technology transfer, can lead to more infrastructure Weaknesses: Privatisation Strengths: less government corruption, raises revenue for government, profit incentive, shared wealth Weaknesses: Aid Strengths: can be targeted, humanitarian, bridges the savings gap, technology transfer Weaknesses: Debt relief Strengths: tax revenue used more productively, less post-colonial influence, don’t pay for past mistakes Weaknesses: Promote tourism Strengths: improved infrastructure & transport, creates employment, better political relations Weaknesses: Fairtrade Strengths: reduces corruption, better quality of life for producers – enough income to save Weaknesses: GreaterGovernment Intervention FreeMarket Approaches AlternativeApproaches
- 22. Creative solutions toimproving economic development Case Study 1 – Cambodia’s Lucky Iron Fish 42 A LEVEL ECONOMICS YEAR 2 (A2) Revision Workshop Chocolate is a treat that so many people in the developed world take for granted, yet cocoa bean cultivation can destroy forests thousands of miles away from the shops selling the end product. Financially, it’s tempting for smallholder cocoa farmers, unaware of the impact their actions have on a global scale, to expand their plots into forest areas. According to the Forest Carbon Partnership Facility (FCPF), deforestation and forest degradation have been identified as the causes of more than 15% of global greenhouse gas emissions, more than the entire global transportation sector. REDD+ (Reducing Emissions from Deforestation and forest Degradation) provides a financial incentive to forested countries that protect their forests and stem the rate of forest loss. In Côte d’Ivoire, a three-way partnership with the government, the World Bank and Mondelēz International, the world’s biggest chocolate maker, aims to eliminate deforestation linked to the country’s cocoa production by educating farmers to preserve forest areas through trainings carried out by Mondelēz as part of its $400m Cocoa Life Programme.The boss of Mondelēz says “Through Cocoa Life, we already work with more than 17,000 Ivorian farmers. We provide them good agricultural practice trainings so they can increase the productivity of their existing plot and their resulting income, and we also work with the cocoa communities to make them thriving, attractive environments for the next generation of farmers.” Case Study 2 – the UN’s REDD+ programme Additional Activities Activity 1: Measuring Inequality Activity 2: Understanding Poverty - key terms www.tutor2u.net 43 Lorenz Curves and the UK’s redistribution of income a Complete the table b Plot Lorenz curves for a) original income, b) income after benefits, and c) income after tax and benefits Research and note down definitions of the following terms: Now explore the following website: www.economicswebinstitute.org/glossary/poverty.htm Average per household per year 1st decile 2nd decile 3rd decile 4th decile 5th decile 6th decile 7th decile 8th decile 9th decile 10th decile Original income 3 738 7 304 11 411 16 051 21 609 28 074 36 105 45 654 59 239 102 366 Cumulative original income 3 737 11 041 (3 737 + 7 304) 22 452 (11 041 + 11411) 331 550 Cumulative % of income 1.13 (3737 ÷331550 x 100) 3.33 (11041 ÷331550 x 100) 6.77 (22452 ÷331550 x 100) 100.00 Income after benefits 9 524 16 307 20 341 23 947 28 957 34 277 41 123 50 026 62 721 104 779 Cumulative income after benefits 9 524 25 831 (9 524 + 16 307) 392 022 Cumulative % of income after benefits 2.43 (9524 ÷ 392022 x 100) 6.59 (25831 ÷ 392022 x 100) 100.00 Income after benefits and tax Cumulative income after benefits and tax Cumulative income after benefits and tax 12 050 18 958 22 450 23 895 27 230 29 486 33 700 39 102 46 372 73 682 392 022 100.00 Relative poverty Poverty Trap Absolute poverty Gini Coefficient Income Equity Wealth Labour Immobility Deprivation LEDC
- 23. 44 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 45 Activity 3: The Importance of Work for Development Study the following diagram and read the accompanying case study (adapted from Chapter 1 of the 2015 United Nations Human Development Report - http://hdr.undp.org/sites/default/files/chapter1.pdf). Write an essay answer to the following question: Discuss the extent to which increasing job opportunities in an LEDC will always lead to economic development. Activity 6: Evaluating Microfinance Read the extracts below, and construct a list of the advantages and disadvantages of microfinance schemes in promoting economic development in a country such as Cambodia. Activity 4: Creative Solutions to Achieving Economic Development Take a look at each of the following case studies which identify innovative ways of achieving greater levels of economic development, and make brief notes. The role of urban planning in eradicating malaria: www.bbc.co.uk/news/health-32690123 Lima’s life-saving shipping container: www.bbc.co.uk/news/health-32434568 Bangladesh’s playpens to prevent drownings: www.bbc.co.uk/news/health-31045033 Riders for Health - motorbike couriers in Malawi tackling AIDS: www.bbc.co.uk/news/science-environment-30005764 Palestinian textile company bridges the gender divide: www.theguardian.com/global-development/2016/jan/15/ palestinian-artextile-company-gender-politics-israel World Bank Survey on Chicken Parties and other unusual ways to save: www.theguardian.com/global-development- professionals-network/2015/jan/29/chicken-parties-poor-raise-money Activity 5: The Sustainable Development Goals Take the Guardian’s Sustainable Development Goals quiz to test your knowledge – you can find it here: www.theguardian.com/global-development/2015/sep/25/sustainable-development-summit-2015-quiz global-goals Work enables people to earn a living and therefore achieve “economic security”. But it is also good for development in a wider sense – people get to improve their capabilities, improve their health and education, and by giving people greater choice, allows them to participate more fully in society, providing dignity, social cohesion, and creating multiplier effects and positive externalities – this can be really important when looking at countries post-conflict. When measuring “development”, economists should consider that “work” is more than just “jobs” – it can include voluntary work, caring for others, creative work (drawing, writing and acting, for example).The quality of work is often as important to people as the quantity. Not all work is necessarily good for development – many jobs are dangerous, tiring or repetitive. Many children are forced to work, rather than gain an education, or have the chance to be a child. Many people are forced into “bonded labour” which is exploitative and often cruel, deprived of basic rights.Work can also perpetuate inequality, if the gains go to a small minority. The microfinance delusion – who really wins? Jason Hickel – professor of anthropology, LSE What’s so fascinating about the microfinance craze is that it persists in the face of one unfortunate fact: microfinance doesn’t work. Of course, there are some lovely anecdotes out there about the transformative power of micro-loans, but as David Roodman from the Center for Global Development said “The best estimate of the average impact of microcredit on the poverty of clients is zero.” In fact, it turns out that microfinance usually ends up making poverty worse. The reasons for this are fairly simple. Most microfinance loans are used to fund consumption – to help people buy the basic necessities they need to survive. In South Africa, for example, consumption accounts for 94% of microfinance use. As a result, borrowers don’t generate any new income that they can use to repay their loans so they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt. When micro-loans are used to fund new businesses, budding entrepreneurs tend to encounter a lack of consumer demand. After all, their potential customers are poor and low on cash, and what little money they do have gets spent on basic goods that tend already to be available. In this context, new businesses end up displacing already-existing ones, yielding no net increase in employment and incomes. And that’s the best of the likely outcomes. The worst – and much more likely – is that the new businesses fail, which then leads, once again, to vicious cycles of over-indebtedness that drive borrowers even further into poverty. The only consistent winners in the microfinance game are the lenders, many of whom charge exorbitant interest rates that sometimes reach up to 200% per annum. In the past we would have called such people loan sharks, but today they’re called microfinance providers, and they crown themselves with the moral halo that this term carries. Microfinance has become a socially acceptable mechanism for extracting wealth and resources from poor people. Why is microfinance such a resilient idea? Because it promises an elegant, win-win solution to the problem of poverty. It assures us that we – the rich world – can eradicate poverty in the global South without any cost to us, and without any threat to existing arrangements of political and economic power. In other words, it promises revolution without the messiness of class struggle. And, what is more, it promises that we can help save the poor while making money from it. If we expand our view to encompass the actual causes of poverty, it becomes clear that microfinance just won’t do. Structural problems require structural solutions. What might this look like? We could start by democratising the World Bank and the IMF, renegotiating trade agreements, clamping down on capital flight, rebuilding labour rights, and so on. If we want to eliminate poverty, rich countries and rich individuals are going to have to feel the pinch – there’s no way around it. Unfortunately, the missionaries of microfinance are unlikely to be happy about this. This is not to say that we should abolish microfinance altogether, but simply that microfinance will never work until we address the background conditions that produce poverty in the first place. We also need to set up the right systems for small businesses to succeed, such as strong subsidies, state assistance, and welfare support to prop up entrepreneurs when they fail – the very systems that neoliberalism has convinced us to abandon. There’s also a much more immediate solution we could try. Why not just give money to the poor, for free? A growing body of evidence suggests that direct cash transfers, with no strings attached, not only deliver success where microfinance fails, they appear to be the single most impactful anti-poverty intervention available. Experiments with basic income grants have been conducted in Namibia, Mexico, South Africa, Indonesia, and elsewhere, all with astonishingly good results. They smooth out consumption deficits, improve health indicators, and allow people to start small businesses that are successful because they can take advantage of increased local demand. Cambodia’s microfinance crisis – drowning in debt For years the world has patted itself on the back about the rapid growth of Cambodia’s microfinance market. Over the past decade, Cambodia’s market has been one of the fastest-growing globally, recording a 127% portfolio increase between 2013 and 2014. Forty-five microfinance institutions (MFIs) now serve some 1.8 million borrowers, out of a total population of over 15 million. A study by the Institute of Development identified Cambodians who have as many as 6 loans, while 51% reported having made a sacrifice (such as eating less or poorer quality food) in order to make a loan repayment. Are reckless lenders pushing debt on to poor people who lack the knowledge they need to grasp the real risks? Regulation is needed to limit the number of loans taken out by Cambodians, and to determine the maximum safe loan size. However, rising competition and an increasing number of MFI providers makes this harder to achieve – and many say that borrowers need to take some responsibility for themselves and their borrowing.
- 24. 46 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 47 Session 5 Current UK Policies and Global Economic Development This final session of the day will focus on economic data and examples that can be used to great effect in exams to really raise the quality of answers. We will assess the state of the UK, EU and global economies, before exploring the likely economic impact of current UK government policies in areas as diverse as the environment, infrastructure development, the fiscal balance, inflation-targeting and trade agreements. Assessing the state of the UK and EU Economies Indicator Measure 2015 UK EU 2016 (forecast) Trend Economic Growth Change in real GDP Unemployment Unemployment rate (ILO measure) Inflation The annual change in the CPI Current Account Balance Value of exports – value of imports Inequality Gini coefficient Budget position Budget balance as a % of real GDP National debt Total amount owed by the gov’t as % of real GDP Exchange rate Value of the currency against a basket of others Interest rates Overnight cost of borrowing from the Central Bank 10 year bond yield The annual return on owning gov’t debt Confidence Proportion of optimists to pessimists Savings ratio The proportion of income saved UK EU UK economic outlook summary Watch the PWC Economic Outlook video (found here: www.pwc.co.uk/services/economics-policy/insights/uk-economic- outlook/ukeo-nov-15-summary.html), and jot down notes under the headings below: How might changes in the global economy affect the UK economy? Headwinds: Factors that are offsetting the headwinds: Why might interest rates be back at around 3% by 2020? Why is the rate of increase in consumer spending expected to slow down? How is the pattern of consumer spending expected to change over the coming years? How is the pattern of UK exports expected to change? China’s slowdown in growth Advantages for the UK economy: Disadvantages for the UK economy: Possible UK exit from the EU Advantages for the UK economy: Disadvantages for the UK economy: Increasing “multipolarity” of global power Advantages for the UK economy: Disadvantages for the UK economy:
- 25. 48 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 49 Global economy snapshot Fiscal Policy exam-style question Summary of current UK Macroeconomic policies US - a bright spot in a weak global economy Asia Pacific - stalling growth Latin America - losing the race Africa - positive but uncertain Euro Area - improving recovery Labour Market Policies International Policies Supply Side Policies Monetary Policies Fiscal Policies Increased Personal Allowance Forward Guidance National Living Wage UK Single Market Centre Fixing the Foundations Lower Corporation Tax Inflation Targeting Universal Credit - Youth Work TTIP Negotiations Help to Buy Bank Profits Tax FPC New Apprenticeships Renegotiate EU Stance 30hrs Childcare Discuss the likely effects of raising the Personal Allowance to £11,000, from £10,800, in April 2016. Possible Points: Example/Evidence/Data: Analysis: Supporting Diagram: Evaluation 1: Link back to the question: Evaluation 2: Evaluation 3: Monetary Policy exam-style question Discuss the likely impact on Euro Area economies of the European Central Bank’s approach to monetary policy. Possible Points: Example/Evidence/Data: Analysis: Supporting Diagram: Evaluation 1: Link back to the question: Evaluation 2: Evaluation 3:
- 26. 50 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop Supply Side/Labour Markets policy exam-style question Discuss the likely effectiveness of possible policies that the UK government could use to incentivise the economically inactive and the unemployed into work. Policy 1: Example/Evidence/Data: Analysis: Supporting Diagram: Evaluation 1: Link back to the question: Evaluation 2: Evaluation 3: Policy 2: Example/Evidence/Data: Analysis: Supporting Diagram: Evaluation 1: Link back to the question: Evaluation 2: Evaluation 3: Additional Activities Activity 1: Comparing the performance of the UK Economy to other countries www.tutor2u.net 51 Go to the World Bank’s DataBank website: http://data.worldbank.org/indicatore a Use the information that you find there to help you complete the table below (choose 3 of your indicators, and also choose your own country in addition to those already listed in the table). Indicate the trend in the data using the following symbols: ↑ ↓ ≈ b Write one page on the following theme: “How is the UK economy performing compared with other major economies?” UK GDP growth rate USA China Germany Australia Brazil Japan South Africa My Choice: GDP per capita (PPP) Gross savings (% GDP) Gov’t debt (% GDP) FDI (net inflows, $) CPI inflation rate Unemployment rate Budget deficit (% GDP) CO2 emissions (tons per capita) Income share held by highest 10% pop’n My choice 1: My choice 2: My choice 3:
- 27. 52 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 53 Fill in the blanks in the passage about Quantitative Easing, using the 20 words/phrases listed below: Activity 2: Understanding Quantitative Easing Read this report from PWC on the prospects for the UK, and summarise its findings into a two-page report: www.pwc.co.uk/assets/pdf/uk-economic-outlook-full-report-november-2015.pdf Activity 4: Prospects for the UK Economy Identify, analyse and evaluate possible policies to tackle each of the economic problems suggested in the table below: Activity 5: Developing Knowledge of Wider Policies Central electronically lend growth inflationary monetary transmission assets de-leveraging yield banks bonds pension interest price unemployment liquidity hoarding opportunity 375 billion Each of the phrases below are either an advantage or disadvantage of four important UK macroeconomic policies. These policies are: inflation targeting, increasing tax on bank profits, National Living Wage, and, Funding for Lending. Your task is to link as many phrases as possible to each of the four policies. Activity 3: Evaluating Macro Policies Encourages too much lending Encourages price stability Helps to anchor inflation expectations Hurts the best-run banks Reduces competition to big banks Helps small businesses Reduces impact of economic shocks Higher earnings for those in work Could lead to wage-price spiral Tax will be passed on to customers Popular with the general public Can cause unemployment Will add £12bn to public funds Reduced lending to SMEs Lowers Central Bank ability to handle shocks Doesn’t affect the very poorest Collected alongside corporation tax Difficult to choose the right target Incentivises people to work Won’t tackle excessive risk-taking May cause unemployment Can lead to higher employment Businesses unwilling to borrow Has pushed down interest rates on savings Quantitative Easing, or QE for short, is a relatively new type of ______________ policy, which was developed in response to the breakdown of the traditional interest rate _____________ mechanism. In QE, the __________ Bank buys government ___________, using money that it has created _______________. Many of these bonds are owned by financial institutions such as __________ or _____________ funds. When these institutions sell their bonds to the Central Bank, they receive the newly-created cash in return – in other words, the _________ of the banking system is increased. This should encourage these institutions to ________ to more businesses and households. By increasing the supply of money, __________ rates should also fall, further encouraging lending. Similarly, the injection of liquidity and the resulting increase in demand for bonds leads to an increase in the ______ of bonds, which corresponds to a fall in the bond ________. This stimulation to lending should, in turn, lead to an increase in economic __________ and a fall in _____________. However, some economists dislike the idea of QE because they argued that in the longer term it will simply lead to _____________ pressure. Others argue that by boosting lending, the price of other ________ such as houses have increased, which potentially causes dangerous “bubbles”. These potential drawbacks have not been seen yet. QE has not had the full impact that was initially intended. One reason for this is that many banks have been _________ the additional cash – having been criticised for over-lending and causing the financial crisis, it is easy to see why banks have moved in the opposite direction. Furthermore, many banks have been ________________, or reducing their debts with the additional cash, rather than lending out. Many have also questioned the _____________ cost – would there have been a better use for the £______ spent by the Bank of England? Economic problem Policy How it tackles the problem Evaluative points High unemployment in the North East A lack of UK business confidence, which is reducing investment An ageing population leading to increased strain on public finances, especially pensions and the NHS Overseas-based MNCs deciding to move their production facilities out of the UK A housing bubble in the London and South-East of England Huge debts incurred by households living in flood-affected areas because of inadequate insurance An increase in the proportion of children classified as living in relative poverty in the UK Falling oil prices leading to a fall in revenue from oil exports, and a widening trade deficit
- 28. 54 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 55 The following boxes contain descriptions of the analytical stages in building up an explanation of the Long Run Phillips Curve (LRPC). Your task is to put the stages in the best order. Activity 6: Policy Conflicts and the Phillips Curve However, because of the increase in inflation, the real value of the initial stimulus to the economy starts to fall. If the inflationary expectations of households and businesses have remained unchanged, then those who took up employment following the stimulus will become unemployed again, and the economy will move back to point A – the movement along the SRPC was temporary, and the economy returns to the NRU. The 1970s brought periods of stagflation – a combination of high inflation rates AND high unemployment rates. This suggested that the inverse relationship between unemployment and inflation had broken down. If, however, workers do not suffer from “money illusion”, then they will ‘expect’ inflation, and will build their expectations of inflation into their wage negotiations – they understand that inflation erodes the real value of their wages. Higher wage demands will cause businesses to lay off workers, and the economy moves from point B to point C i.e. back to the NRU, but with higher inflationary expectations. Professor Phillips analysed data on wage inflation and unemployment rates in the UK for the year 1860 to 1957, and then plotted them onto a scatter diagram, demonstrating empirical evidence for a inverse relationship, or trade-off, between wage inflation and unemployment. Before long, the diagram was simplified to show inflation against unemployment. Phelps and Friedman also believed that the economy would continue to return to a natural rate of unemployment – no matter what policies the government employed (fiscal or monetary), the economy would “self correct” and always return to this NRU. At this point, they said that there was no long-run trade-off between inflation and unemployment, and so the Long Run Phillips Curve (LRPC) would be vertical. The economists Edmund Phelps and Milton Friedman realised, however, that the Phillips Curve did actually still exist – but instead of there being just one curve, there was actually a series of curves. Each of the newly- discovered “Short Run Phillips Curves” (SRPC) was associated with a different level of inflationary expectations. The diagram shows an economy initially in equilibrium at point A. Suppose that the electorate or government feels that unemployment is too high – the government could undertake an expansionary monetary or fiscal policy. The resultant increase in AD would cause an increase in GDP – and a corresponding decrease in unemployment – along with an increase in the rate of inflation. This would cause the economy to move to point B. Following publication of the Phillips curve, economists attempted to explain its shape. The general view taken in the 1960s was that as the unemployment rate fell, the bargaining power of workers relative to employers increased, and this pushed up wage demands, leading to wage inflation (and in turn, price inflation). The opposite effect occurred when the unemployment rate was high. The only way that the rate of unemployment can be permanently lowered i.e. shifting the LRPC permanently to the left, is through the use of supply-side policies relating to the labour market. For example, such policies could include increased flexibility of work patterns and hours, increased mobility of labour, improved transferable skills, and so on. Inflation Rate Unemployment Rate LRPC NRU SRPC3 SRPC2 SRPC1 B C A The Long Run Phillips Curve and the NRU Inflation Rate Unemployment Rate A series of Short Run Phillips Curves Wage Inflation Rate Unemployment Rate The original Phillips curve looked as follows: Notes
- 29. 56 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 57 Tips for strong marks in A2 Economics Exams Building an Essay Answer Command Word What does it mean Analyse Consider causes or effects of something using theoretical ideas and relationships. Assess Express the meaning of, translate, exemplify (give examples of), solve, or comment upon the subject. Usually you will give your judgement or reaction to the problem, but always make use of evidence. Define Give concise, clear meanings of a specific term or concept. Discuss Give reasons or present facts for and against an issue; try to provide by giving reasons or evidence for and against. Distinguish between Identification of certain differences / contrasts between ideas / causes. Evaluate Give reasons or present facts for and against an issue; try to provide by giving reasons. Examine Consider in depth and using evidence the validity / strength of an argument, significance of effects arising from a policy measure. Explain Present in brief, clear form an idea or a theoretical relationship. Identify Pick out appropriate/ significant features from a data set (chart, table, extract). Outline Similar to explain, provide an outline of a concept, measurement. State Clarify and interpret the material you present. State the ‘how’ and ‘why’, the results, and where possible causes. Understanding the key command words in a question Important Note: • Define, Identify, Explain, Analyse, ‘Distinguish between’ and ‘Outline’ require no evaluation • Evaluate, Assess, Discuss, To what extent, Examine do require evaluation Important Note: • It is more important to write clearly and legibly • Don’t forget to write the part number of the question clearly in the left-hand margin • If you think that you might wish to add to your answer later, leave enough space before you start the next part of the question. It won’t matter if you don’t use that space Crisp and accurate definitions 1 key point per paragraph + Supporting examples / evidence / diagrams + evaluate as you go Evaluate conclusions Good Evaluation – Reaching the Top Grade • Evaluation is about making critical judgements and coming to reasoned conclusions • Strong evaluative answers use supporting evidence to justify an argument. Some of that evidence might be found in the stimulus material that accompanies a data response question. Frequently the evidence can come from your own knowledge and awareness having studied a subject for nearly two years. • Justifying an argument carries more marks than making the argument since stating an argument is often a relatively simple task. The key piece of advice is this: Make / build /analyse one key point per paragraph and then evaluate that argument in the same paragraph Here are ten more strategies for improving your evaluation skills in A2 macro data response and essay questions (a) Make good use of your final paragraph – try to avoid just repeating previous arguments (b) Look for key stem words in the question – build evaluation around this (c) Put an economic event, a trend, a policy into a wider context, be aware of the world around you (d) Be familiar with different schools of thought e.g. Keynesian, Free-Market approaches (e) Be aware that a singular event never happens in isolation – our globalised world is inter-connected (f) Question the reliability of the data you have been given (for data questions) is it up to date? Incomplete? (g) Draw on your wider knowledge to provide supporting evidence and examples (h) Consider both short-term and longer-term effects of shocks or policies (i) Are you assuming ceteris paribus in your analysis? What happens when all else is not constant? (j) Try to challenge conventional views – don’t just accept things at face value Economics is rather like a jigsaw, if you do enough reading, thinking and revision, eventually the pieces really start to fit together and finally you can see the whole (bigger) picture. Make good use of your final paragraph • This is really important – A2 examiners now place high importance on how you conclude an answer • Try not to summarize points that have already been made. This scores no extra marks and is a waste of time. • Instead try to come to a reasoned conclusion – e.g. selecting your main argument and then justifying it • Perhaps look forward, e.g. is it too early to come to a definitive conclusion? • If you are really pushed for time, add in some final evaluation points as bullets – relevant content will be credited by the examiner
- 30. 58 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 59 General Advice from the Examiners (a) Make your diagrams large enough to be read! Many students sensibly use half of one page to draw a graph (b) Use the data! If, in both questions the phrase ‘using the data’ is included, there will be a mark constraint imposed if there is no explicit reference to the data (a direct quote or stating, ‘as in line…’). (c) The command words in questions are important to note e.g. in 10 mark questions, ‘analyse’ should suggest a deeper explanation than for the first part of the question when ‘explain’ is used. (d) Both A2 economics papers are synoptic. In ECON 4, questions do offer good opportunities for candidates to use material from the AS units as well as from the other A2 unit (ECON3). (e) Examiners are keen to reward a good awareness of recent or current economic events (f) Candidates can help themselves by making sure handwriting and diagrams are legible (use more paper rather than less) and, for the diagrams, ensure they are supporting the text and are labelled in such a way that an appropriate message is being conveyed. (g) Candidates should spend sufficient time in making their choices of questions to answer. This might be more important for the context questions but is also pertinent to the choice of essay. There is evidence that a number of candidates see a word or phrase, such as ‘unemployment’ or ‘fiscal policy’, without giving due consideration to the actual question asked. They might therefore be making a wrong choice. Abnormal profit Profit in excess of normal profit - known as supernormal profit or monopoly profit. Abnormal profits may be maintained in a monopoly because of barriers to entry Agency problem Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm Anti-competitive behaviour Strategies designed to limit the degree of competition inside a market Asymmetric information Where different parties have unequal access to information in a market Average cost Total cost per unit of output = Total cost / output = TC/Q Average cost pricing Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maximization Average fixed cost Total fixed cost per unit of output = TFC/Q Average revenue Total revenue per unit of output Average variable cost Total variable cost per unit of output = TVC/Q Backward vertical integration Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a brewer buys a hop farm Barriers to entry Ways to prevent the profitable entry of new competitors Bi-lateral monopoly Where a monopsony buyer faces a monopsony seller in a market Brand extension Adding a new product to an existing branded group of products Brand loyalty The degree to which people refuse to or are reluctant to change to other brands Break-even output The break-even price is when price = average total cost (P=AC) Business ethics Social responsibility of management towards the firm’s major stakeholders, the environment and society in general Capacity The amount that can be produced by a plant, company, or economy Capital intensive When an industry or production process requires a relatively large amount of capital (fixed assets) or proportionately more capital than labour Cartel An association of businesses or countries that collude to influence production levels and thus the market price of a particular product Collusion When rival companies cooperate for their mutual benefit. When two or more parties act together to influence production and/or price levels, thus preventing fair competition. Common in an oligopoly /duopoly Competition Commission Body that conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries such as water, electricity and gas Competition Policy Government policy which seeks to promote competition and efficiency in different markets and industries Competitive advantage When a company has an advantage over another in the provision of a particular product or service Complex monopoly A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of suppliers who, deliberately or not, act in a way designed to reduce competitive pressures within a market Concentration ratio Measures the proportion of an industry's output or employment accounted for by the largest firms.Share can be by sales, employment or any other relevant indicator. Conglomerate merger Joining together of two companies that are different in the type of work they do - the acquisition has no clear connection to the business buying it Consolidation Consolidation refers to the reduction in the number of competitors in a market and an increase in the total market share held by the remaining firms. Constant returns When long run average cost remains constant as output increases because output is rising in proportion to the inputs used in the production process Consumer surplus The difference between what consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay Consumption tax A tax imposed on the consumer of a good or service. This can be levied at the final sale level (sales tax), or at each stage in the production Contestable market Where an entrant has access to all production techniques available to the incumbents and entry decisions can be reversed without cost. The crucial assumption for a contestable market is that businesses are free to enter and leave the market Cooperative outcome An equilibrium in a game where the players agree to cooperate Corporate governance Practices, principles and values that guide a firm and its activities Corporate strategy A company's aims in general, and the way it hopes to achieve them - strategic objective which supports the achievement of corporative aims Cost synergies Cost synergies are the cost savings that a buyer aims to achieve as a result of taking over or merging with another business Cost-plus pricing Where a firm fixes the price for its product by adding a fixed percentage profit margin to the average cost of production. The size of the profit margin may depend on factors including competition and the strength of demand Cost-reducing innovations Cost reducing innovations causing an outward shift in market supply. They provide the scope for businesses to enjoy higher profit margins with a given level of demand Countervailing power When the market power of a monopolistic/oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up Creative destruction The dynamic effects of innovation in markets - for example where new products or business modelslead to a reallocation of resources. Some jobs are lost but others are created. Established businesses come under threat Credit Union Financial co-operatives owned and controlled by their members Cross-subsidy A cross subsidy uses profits from one line of business to finance losses in another line of business e.g. Royal Mail and 2nd class letters Deadweight loss Loss in producer & consumer surplus due to an inefficient level of production A2 MICRO Key Term Glossary
- 31. 60 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 61 De-layering Removing one or more levels of hierarchy from the organizational structure. For example, many high-street banks no longer have a manager in each of their branches De-merger The hiving off of one or more business units from a group so that they can operate as independently managed concerns Deregulation The opening up of markets to competition by reducing barriers to entry. The aim is to increase market supply, stimulate competition and innovation and drive prices down Diseconomies of scale A business may expand beyond the optimal size in the long run and experience diseconomies of scale.This leads to rising (internal) LRAC. For example, a firm increases all inputs by 300 %, its output increases by only 200%. Dis-synergies Negative or adverse effects of a takeover or merger. These are the disruptions that arise from the deal which result additional costs or lower than expected revenues Diversification Increasing the range of products or markets served by a business. Divorce between The owners of a company normally elect a board of directors to control the business’s resources for them. However, ownership and control when the owner of a company sells shares, or takes out a loan to raise finance, they sacrifice some of their control Dominant market position A firm holds a dominant position if it can operate within the market without taking full account of the reaction of its competitors or final consumer Dominant strategy A dominant strategy in game theory is one where a single strategy is best for a player regardless of what strategy the other players in the game decide to use Due Diligence Due diligence is the process undertaken by a prospective buyer of a business to confirm the details (e.g. financial performance, assets & liabilities, legal ownership & issues, operations, market position) of what they expect to buy Duopoly Any market that is dominated by two suppliers. Proctor & Gamble and Unilever took 84 per cent of the UK market liquid detergent sales in 2005 Duopsony Two major buyers of a good or service in a market each of whom is likely to have some buying power with suppliers in their market. Dynamic efficiency Changes in the choice available in a market together with the quality/performance of products that we buy. Dynamic efficiency linked to the pace of innovation in a market Economies of scale Falling long run average cost as output increases in the long run Economies of scope Where it is cheaper to produce a range of products Equilibrium output A monopolist is assumed to profit maximise, in other words, aims to achieve an output equal to the point where MC=MR Excess capacity The difference between the current output of a business and the total amount it could produce in the current time period. Experience curve Pattern of falling costs as production of a product or service increases, because the company learns more about it, workers become more skilful External diseconomies When the growth of an industry leads to higher costs for businesses that are part of that industry – for example, of scale increased traffic congestion External economies When the expansion of an industry leads to the development of ancillary services which benefit suppliers – causing a of scale downward sloping industry supply curve. First mover advantage The idea that a business that creates a new product and which is first into the market can develop a competitive advantage perhaps through learning by doing Fixed cost Business expenses that do not vary directly with the level of output Forward vertica integration Acquiring a business further up in the supply chain – e.g. a vehicle manufacturer buys a car parts distributor Franchised monopoly When the government grants a company the exclusive right to sell or manufacture a product or service in a particular area Freemium Business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content Game Theory When there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome (known as a pay-off.) Herfindahl Index A measure of market concentration. The index is calculated by squaring the % market share of each firm in the market and summing these numbers. Hit-and-run competition When a business enters an industry to take advantage of temporarily high (supernormal) market profits. Common in highly contestable markets. Horizontal collusion Where there is agreement between firms at the same stage of the production process to charge prices above the competitive level. Horizontal integration When companies from the same industry amalgamate to form a larger company - firms are at the same stage of the production process Hostile takeover A takeover that is not supported by the management of the company being acquired - as opposed to a friendly takeover Innovation Making changes to something established. Invention, by contrast, is the act of coming upon or finding. Innovation is the creation of new intellectual assets Innovation-diffusion The extent and pace at which a market as a whole adopts new products, or improved versions of existing products Interdependence When the actions of one firm has an effect on its competitors in the market. Interdependence is a feature of an oligopoly. In simple terms - when two or more things depend on each other (i.e. business and society) Internal growth Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses Inventories Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business Joint-venture Agreement between two or more companies to cooperate on a particular project or a business that serves their mutual interests Kinked demand curve The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price or another variable Last mover advantage The advantage a company gains by being one of the last to sell a product or provide a service, when technology has improved and costs are very low Light-touch regulation An approach of government to managing business behaviour - prefers to “influence” rather than “legislate/regulate” Carrot or stick? Limit pricing When a firm sets price low enough to discourage new entrants into the market Marginal cost The change in total costs from increasing output by one extra unit – the formula for MC is ‘change in total cost divided by change in quantity Marginal profit The increase in profit when one more unit is sold or the difference between MR and MC. If MR = £20 and MC = £14 then marginal profit = £6 Marginal revenue The change in total revenue from selling one extra unit of output Merger A merger is a combination of two previously separate organisations. Merger integration The process of bringing two firms together once they have come under common ownership. Often regarded as the most difficult part of any takeover or merger. The integration process needs to cover “hard” areas such as IT systems and marketing strategy as well as “soft” issues such as different business cultures Metcalfe’s Law Coined by Robert Metcalfe, Metcalfe's law says that the usefulness of a network equals the square of the number of users. This is linked to the concept of network economies of scale Minimum efficient scale Scale of production where internal economies of scale have been fully exploited. Corresponds to the lowest point on the long run average cost curve Monopolistic competition A market structure characterized by many buyers and sellers of slightly different products and easy entry to, and exit from, the industry. Firms have differentiated products and therefore the demand is not perfectly elastic Monopoly profit When a lack of viable market competition allows a business to set its prices above the equilibrium price for a good or service without losing profits to competitors Monopsony When a single buyer controls the market for a particular good or service, in essence setting price and quality levels, normally because without that buyer there would not sufficient demand for the product to survive Moral Hazard When someone pays for your accidents and problems, you may be inclined to take less effort to avoid accidents and problems Multinational A company with subsidiaries or manufacturing bases in several countries Nash Equilibrium In a Nash Equilibrium, the outcome of a game that occurs is when player A takes the best possible action given the action of player B, and player B takes the best possible action given the action of player A Nationalization When a government takes over a private sector company Natural monopoly For a natural monopoly the long-run average cost curve falls continuously over a large range of output.The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available NGO Non-governmental organization (e.g. WWF, Greenpeace) Non-price competition Non-price competition assumes increased importance in oligopolistic markets. Competing not on the basis of price but by other means, such as the quality of the product, packaging, customer service, etc. Normal profit Normal profit is the transfer earnings of the entrepreneur i.e. the minimum reward necessary to keep her in her present industry. Normal profit is therefore a fixed cost, included in the average, not the marginal, cost curve Oligopoly A market dominated by a few producers. Oligopoly is best defined by the conduct (or behaviour) of firms rather than its market structure Optimal plant size Optimal plant is the size where costs are minimized, i.e. when all economies of scale have been obtained, but diseconomies have not set in. Sometimes the size of a firm or plant is also limited by the size of the market Pareto efficiency Where it is not possible for individuals, households, or firms to bargain or trade in such a way that everyone is at least as well off as they were before and at least one person is better off. Also known as an efficient outcome Patent Right under law to produce and market a good for a specified period of time Pay wall Blocking access to a website which is only available to paying subscribers Peak pricing When a business raises its prices at a time when demand has reached a peak might be justified due to the higher marginal costs of supply at peak times Penetration pricing A pricing policy used to enter a new market, usually by setting a very low price Perfect competition A market where prices reflect complete mobility of resources and freedom of entry and exit, full access to information by all participants, relatively homogeneous products, and the fact that no one buyer or seller has any advantage over another. Perfect price When a firm separates the whole market into each individual consumer and charges them the pricethey are willing discrimination and able to pay Predatory pricing Setting an artificially low price for a product in order to drive away competition - deemed to be illegal by the UK and European competition authorities. When predatory pricing is happening it is likely than Price <Average Cost in the short run, but in the long run there will be a rise in prices as competition is reduced. Price capping A government-imposed limit on the price charged for a product - otherwise known as price capping. Often introduced as a way of controlling monopoly pricing power Price ceiling Law that sets or limits the price to be charged for a particular good Price discrimination When a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs Price fixing Price fixing represents an attempt by suppliers to control supply and fix price at a level close to the level we would expect from a monopoly Price leadership When one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing changes prompted by the dominant firm Price regulation Government control of prices, normally for utilities and other essential services Prisoners’ dilemma A problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so. In the classic game, cooperating is strictly dominated by defecting, so that the only possible equilibrium for the game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by playing defect. Private equity Injection of funds by specialized investors into private companies with the aim of achieving high rates of return Private Finance Initiative The PFI is a means of obtaining private funds for public sector projects Privatization The sale of state-owned companies to the private sector, normally through a stock market listing.The opposite of nationalization Procurement collusion Where companies illegally bid for large contracts by rigging bids to decide which one of them gets the contract in advance. Producer surplus The difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price
- 32. 62 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 63 Product differentiation When a business seeks to distinguish what are essentially the same products from one another by real or illusory means Production function The relationship between a firm’s output and the quantities of factor inputs (labour, capital, land) that it employs Productivity How much is produced per unit of input Profit The excess of revenue over expenses; or a positive return on an investment. Profit margin The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control costs Profit maximization Profit maximization occurs when marginal cost = marginal revenue Profit per unit Profit per unit (or the profit margin) = AR – ATC Public utility A company that provides public services, such as power, water and telecommunications. Regulated by government, not necessarily state-owned Regulated industry An industry that is closely controlled by the government Regulatory capture When industries under the control of a regulatory body appear to operate in favour of the vested interest of monopoly producers rather than consumers Rent seeking behaviour Behaviour by producers in a market that improves the welfare of one but at the expense of another.A feature of monopoly and oligopoly Retained profit Profit retained by a business for its own use and which is not paid back to the company’s shareholders or paid in taxation to the government Revenue maximization Revenue maximization is an output when marginal revenue = zero (MR=0) Revenue synergies The ability to sell more products and services or raise prices after a business merger e.g. marketing and selling complementary products; cross-selling into a new customer base and sharing distribution channels. RPI-X Pricing Formula This formula encourages efficiency within regulated businesses by taking the retail price index (i.e. the rate of inflation) as its benchmark for the allowed changes in prices and then subtracting X – an efficiency factor – from it. Satisficing Satisficing involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit. An alternative to profit maximising behaviour. Saturation To offer so much for sale that there is more than people want to buy Second degree price Businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously discrimination published/advertised price – also volume discounts Shareholder return Total return (dividends + increases in business value) for shareholders Short run A time period where at least one factor of production is in fixed supply Short-termism When a business pursues the goal of maximizing short-term profits because of a fear of being taken over or having the stock market mark down the value of the company. Short-termism may make it difficult for a business to follow longer-term objectives Shut down price In the short run the firm will continue to produce as long as total revenue covers total variable costs or price per unit > or equal to average variable cost (P>AVC) Social enterprises Businesses run on commercial lines with profits reinvested for social aims – often said to be built on three pillars – profit, people and planet Socially responsible Also known as ethical investing; shareholders pursuing investment strategies which seeks to maximize both financial investing return and social good Spare capacity Spare, surplus or excess capacity is the difference between current output (utilized capacity) and what can be produced at full capacity Stakeholder Any party that is committed, financially or otherwise, to a company and is therefore affected by its performance.This would normally include shareholders, employees, management, customers and suppliers.Their interests do not always coincide Stakeholder conflict Stakeholder conflict occurs when different stakeholders have different objectives. Firms have to choose between maximizing one objective and satisfactorily meeting several stakeholder objectives, so called satisficing Static efficiency How much output can be produced now from a given stock of resources, and whether producers are charging a price that reflects the cost of the factors used Strategic behaviour Decisions that take into account the market power and reactions of other firms Sub-normal profit Any profit less than normal profit Sunk costs Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable. Supernormal profit A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost Synergy When the whole is greater than the sum of the individual parts Tacit collusion Where firms undertake actions that are likely to minimize a competitive response, e.g. avoiding price cutting or not attacking each other’s market. Tacit collusions is when firms co-operate but not formally, e.g. price leadership, or quiet or implied co-operation, secret, unspoken cooperation Takeover Where one business acquires a controlling interest in another business.Takeovers are much more common than mergers. Technical efficiency How well and quickly a machine produces high quality goods. When measuring the technical efficiency of a machine, the production costs are not considered important Total cost Total cost = total fixed cost + total variable cost Total revenue Total revenue (TR) is found by multiplying price (P) by output i.e. number of units sold. Total revenue is maximized when marginal revenue = zero Variable cost Variable costs are business costs that vary directly with output since more variable inputs are required to increase output. Also known as prime costs Vertical integration Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain Welfare economics The study of how an economy can best allocate scarce resources to maximise the welfare of its citizens Whistle blowing When one or more agents in a collusive agreement report it to the authorities X-inefficiency A lack of real competition may give a monopolist less of an incentive to invest in new ideas or consider consumer welfare Zero-sum game In a zero sum game, the gain of one player is exactly offset by the loss of the other players. If one business gains market share, it must be at the expense of the other firms in the market A2 Macro Key Term Glossary AAA Credit Rating The best credit rating that can be given to a corporation's or a government’s bonds (loans), effectively indicating that the risk of loan default is negligible Absolute advantage The ability to produce a product (good or service) at a lower unit cost Absolute poverty Those people who do not have adequate nutritional intake per day, or do not have adequate shelter or clothing in order to survive.The World Bank reports the number of people in countries below a $1.25 or $2 a day Accelerator effect When planned investment is linked positively to past & expected growth of demand Accession Countries Countries in the process of joining the European Union Accommodatory policy A neutral policy stance in the face of an economic shock. For fiscal policy, generally means keeping tax and government expenditure rates unchanged. For monetary policy, generally means keeping (real) interest rates unchanged. Adjusted net savings The true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution Advanced economies According to the IMF, 35 economies are ‘advanced economies’. 24 in Europe + USA, Canada,Australia, New Zealand, Israel, Japan and South Korea Age dependency ratio The ratio of the nonworking population- people under 15 or over 65-to the working population- people 15-64 Ageing population A rising average age and a growing number of people living beyond the standard working ages Aggregate supply Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce shock output and increase inflation Aid A voluntary transfer of money and/or resources from one country to another Aid effectiveness Quality of aid delivery and impact on poverty reduction and development Appreciation An increase in the external value of a currency in a floating exchange rate system Appropriate technology A technology that complements the factor endowments of the country ASEAN Association of Southeast Asian Nations – a regional trade bloc Asymmetric bargaining When the bargaining power in trade between one or more countries is imbalanced – this can lead to shifts in the measured power terms of trade Balanced growth Balanced growth occurs when output and the capital stock grow at the same rate Balassa-Samuelson Where countries with higher per capita real incomes have a higher real exchange rate.A rise in productivity in the tradable Effect goods sector will drive up wages in this sector and, as labour is assumed to be mobile across sectors, push up wages in the non-tradable sector and thereby lead to a rise in inflation Beggar my Neighbour A policy that seeks to promote a country's economy at the expense of another country.An obvious example is the use of tariff barriers. Birth rate The number of live births in a year as % of the population or per 1,000 people. Bond Debt issued by companies and government and traded in bond (capital) markets Brain drain The movement of highly skilled or professional people from their own country to another country where they can earn more money BRIC economies The BRIC grouping – Brazil, Russia, India and China – has become short hand for the rise of emerging markets in the global economy Budget deficit Known as a fiscal deficit, the annual excess of state spending over tax revenue Capacity building Growing the capacity of businesses, organizations and communities to produce, invest and consume – includes a broader definition of capital Capital accumulation Using investment to build capital assets such as roads, ports, buildings Capital deepening Development process involving a transition from traditional agriculture, which is labour-intensive, to more capital-intensive modern manufacturing. Leads to an increase in the capital stock per worker employed Capital flight The rapid movement of large sums of money out of a country. Reasons include a lack of confidence in a country's economy and/or its currency and political turmoil. Capital flight occurs when owners of liquid assets move them to other countries perceived as safe havens or as offering better returns. It can be legal or illegal Capital flows Movements of capital between countries – important part of balance of payments Capital output ratio The value of a nation’s capital stock relative to the size of GDP. Capital-output ratios are usually around 2 or 3. Poor countries have lower capital-output ratios because they have less capital-intensive economies. Capital stock The total amount of physical capital available in the economy Carbon tax Tax on the consumption or production of products which cause carbon emissions Carbon trading Pollution control that uses the market mechanism to change relative prices and the incentives of producers and consumers Carry trade A strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. Cash crops A crop produced for commercial revenue & profit rather than for use by the grower Catch-up effect Countries that start off poor tend to grow more rapidly.The result is some convergence in the standard of living as measured by per capita GDP Child mortality rate The probability that a newborn baby will die before reaching age five. Expressed as a number per 1,000 live births Chronic hunger The chronically hungry are undernourished.Their undernourishment makes it hard to study, work or otherwise perform physical activities CIVETS Group of high growth emerging countries comprising - Columbia – Indonesia – Vietnam – Egypt – Turkey – South Africa Clean float Currency that floats according to market forces, free from government intervention Common external tariff Import tariff on a product applied equally by all countries inside a customs union Comparative advantage Comparative advantage refers to the relative advantage that one country or producer has over another. Countries can benefit from specializing in and exporting the product(s) for which it has the lowest opportunity cost of supply Competitive devaluation When a country tries to devalue its currency to increase its international competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports Concessional lending Loans given through the International Development Association. IDA provides long-term loans at zero interest to the poorest of the developing countries.
- 33. 64 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 65 Conditional cash transfers Attempts to cut poverty by giving cash transfers to households in need; and by tying these transfers to certain conditions, such as sending children to school Conditionality When donors require their partners to do something in order to receive aid. Convergence A coming together of economic indicators i.e. a narrowing of the gap in per capita incomes between the poorest and the richest nations of the world Corruption The abuse of entrusted power for private gain, government failure Cost benefit analysis Technique to determine the feasibility of a project by quantifying costs and benefits Countervailing tariffs Tariffs imposed by a country to counteract subsidies provided to a foreign producer Creditor nations Those nations that have a balance of payments surplus Creeping protectionism Where import tariffs rise + quotas and barriers to the mobility of labour and capital Currency union A group of countries (or regions) using a common currency Currency war Competitive devaluation of currencies, a scenario where various nations try to devalue their currencies in an attempt to gain an advantage over each other Current account deficit The amount by which money relating to trade, investment income and transfers going out of a country is more than the amount coming in Debt burden Debt that a business or country has normally expressed as a share of GDP Debt deflation High levels of debt leading to falling asset prices Debt forgiveness The cancelling by a creditor of a debt to a country or a company Debt relief Cancellation, rescheduling, refinancing of a nation’s external debts Debt rescheduling Increasing the length of time over which a loan has to be repaid Debt servicing The repayment of interest and principle to external creditors Debt sustainability Debt sustainability is the ability to manage debts so they do not grow and impede economic stability and growth Debtor nations Those nations that have a balance of payments deficit De-coupling Where output rises and environmental impacts fall De-development When a range of development indicators start to worsen, linked to a depression De-industrialization A decline in the share of national income and jobs from manufacturing industries De-leveraging Reducing long-term debt as a % of shareholder equity, seen recently in banks Demographic dividend The demographic dividend happens when most of a country’s population is in the 15-to-64 working-age range.This increases productivity if supported by policies that promote health, family, labour and financial and human capital Demographic transition Changes in population growth rates due to changes in birth and death rates Dependency ratio Ratio of dependent population (young and the elderly) to working age population Deprivation Deprivation takes into account whether people have access to things essential for a basic standard of living.These include: clean drinking water, electricity, clean fuel for cooking, education, toilet facilities, basic transport with a bicycle, basic communication with a radio and basic income and wealth Development Assistance Loans, grants, and technical assistance provided to developing countries Development Banks Development Banks which serve particular regions e.g. the African Development Bank or European Bank for Reconstruction and Development Development diamonds Development diamonds show four key indicators in a country compared with its income-group average i.e. gross primary enrolment, access to safe water, GNP per capita and average life expectancy Development Goals Targets which aim to reduce poverty, hunger, maternal and child deaths, disease, inadequate shelter, gender inequality and environmental degradation by 2015 Disguised unemployment Hidden unemployment, where part of the labour force is either left without work or is working in a redundant manner where worker productivity is essentially zero Domestic remittances Money received from family or friends living in a different city of their own country Domestic savings Savings accumulated by domestic households, businesses and government Dual exchange rate A system where there is a fixed official exchange rate and an illegal market-determined parallel exchange rate Dumping When a producer in one country exports a product to another at a price which is below the price it charges in its home market or is below its costs of production Eco-innovation Products and processes that contribute to sustainable development Ecological deficit Depleting natural assets faster than these can be replenished Economic Freedom 1 Size of Government: Expenditures,Taxes, and Enterprises Index 2 Legal Structure and Security of Property Rights 3 Access to Sound Money 4 Freedom to Trade Internationally 5 Regulations of Credit, Labour, and Business. Economic growth An increase in real GDP or increase in the productive potential of an economy Economic nationalism Protection for industries from competition e.g. through tariffs or capital controls Economic shocks Unpredictable outside events such as volatile prices for commodities Economic structure The balance of output, incomes and employment drawn from different sectors – ranging from primary (farming, fishing, mining) to secondary (manufacturing and construction) to tertiary and quaternary (tourism, banking, software industries) Embargo An import ban, an import quota of zero Emerging markets Financial markets of developing countries Environmental tax An environmental tax is a tax on a good or service or a factor input, which is judged to be detrimental to the environment. Euro Area Member nations of the single European currency bloc Expenditure-reducing Measures to curb the demand for imports by cutting real income / spending power Expenditure-switching Attempts to improve trade balance through a depreciation of the exchange rate or through a fall in the relative prices of a country’s products against other nations Export quota A restriction on the volume of exports that can be sold overseas – this acts as a supply constraint in international markets Export revenue Sales from selling goods and services overseas External debt External debt is money owed by a government to international creditors External demand Net change in demand for goods and services from international trade. Net trade is positive when a country runs a trade surplus and negative with a trade deficit. Externalities Action of one agent affects the action of another agent.Too little or too much of the good is produced or consumed than would be socially optimal Fair trade Movement dedicated to raising prices and incomes for producers in lower-income countries, also focused on linking premium prices to environmental standards FDI Foreign direct investment - long term participation by country A into country B. such as participation in management, joint-venture, transfers of technology Fertility Rate The average number of children a woman will have during her lifetime Financial inclusion The ability of a household to access credit, insurance and savings facilities Fiscal austerity Measures designed to cut the size of a nation’s annual fiscal deficit Fiscal stimulus Changes in tax and government spending aimed at boosting demand and output Fixed exchange rate An exchange rate that is fixed against other major currencies through action by governments or central banks Foreign direct investment Acquisition of a controlling interest in productive operations abroad by companies resident in the home economy. May involve creation of new productive capacity Foreign exchange gap When a country's balance of payments on current account deficit is greater than the value of capital inflows, a shortfall of money from engaging in overseas trade Foreign exchange The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their reserves national government Foreign savings Foreign savings can flow into countries and provide a supplement to domestic savings.They include overseas aid, private FDI and capital flows Fragile states Those states where the government cannot or will not deliver core functions to the majority of its people, including the poor Free trade When trade is allowed to occur without any form of import restriction GDP per capita National income per head of population Genuine progress indicator GPI is an attempt to measure whether a country's growth, increased production of goods, and expanding services have actually resulted in improved well-being. GPI advocates claim that it can more reliably measure economic progress, as it distinguishes between worthwhile growth and uneconomic growth Globalisation Deepening of relationships between countries of the world reflected in an increasing level of overseas trade and investment. Government debt Government debt is also known as public debt, national debt, sovereign debt is money (or credit) owed by a central government to creditors within the country (domestic, or internal debt) as well as to international creditors Green development A pattern of development that decouples growth from heavy dependence on resource use, carbon emissions and environmental damage, and promotes growth through the creation of new green product markets, technologies, investments, and changes in consumption and conservation behaviour Gross Domestic Product The total value of an economy's domestic output of goods and services Gross National Income This is broadly the same as GDP except that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home. GNI is affected for example by profits from businesses owned overseas and also remittances sent home by migrant workers. Gross saving rate Gross saving = GDP minus consumption by government and the private sector, expressed as a percentage of GDP.A high gross domestic saving rate usually indicates a country's high potential to invest in capital Hard commodities Commodities which can be mined, such as metals, minerals and oil Hard infrastructure Examples include power, transport, and telecommunications systems Harrod-Domar Model An idea that aggregate output (GDP) is proportional to the stock of physical capital. Heavily Indebted Poor Countries Initiative An initiative to provide debt relief to heavily indebted low income countries HIPC Abbreviation for a highly indebted poor country Hot Money Money that flows freely and quickly around the world looking to earn the best rate of return. It might be invested in any asset whose value is expected to rise or simply be placed in an account offering the best real rate of interest. Human Assets Index (HAI) HAI includes data on (i) nutrition (percentage of the population that is undernourished); (ii) health (child mortality rate); (iii) school enrolment (gross secondary school enrolment rate); and (iv) literacy (adult literacy rate) Human capital flight When a country suffers net outward migration of skilled / younger workers which causes their labour force to contract and may cause lower labour productivity Human Development HDI captures not only the level of income but also incorporates measures of health (life expectancy) and education (school Index enrolment and literacy rate). Humanitarian Aid Emergency disaster relief, food aid, refugee relief and disaster preparedness Import substitution Replacing imports with domestic production, perhaps using import tariffs Inclusive growth Growth where the benefits are spread across all sections of society - broad based growth, shared growth, and pro-poor growth Inclusive Wealth Index Assesses changes in a country’s productive base, including produced, human, and natural capital. By taking a more holistic approach, the IWI shows governments the true state of their nation’s wealth and the sustainability of its growth. Income convergence Income convergence happens when a nation’s per capita income moves closer to that of another i.e. the gap in relative income per head decreases Income distribution Income distribution is how income is divided up among all the citizens in a country.The most common measure of income distribution is the Gini Coefficient. Inequality-adjusted IHDI IHDI takes into account achievements of a country on health, education and income, and how those achievements are distributed among citizens by “discounting” each dimension’s average value according to its level of inequality. Infant (fledgling) industry Fledgling industry that requires government protection from overseas competition (for instance through import tariffs) in order to develop Informal sector The sector of the economy, normally comprising of small businesses, which is unregistered with the tax authorities Infrastructure Transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy
- 34. 66 A LEVELECONOMICS YEAR 2 (A2) Revision Workshop www.tutor2u.net 67 Intellectual Property (IP) Private property rights over ideas and inventions including copyrights, patents, trademarks and industrial designs International Monetary Fund Oversees the global financial system by following the macro policies of member countries including those with impact on exchange rates and balance of payments Interventionist policies Government intervention in markets to affect the allocation of scarce resources Inward oriented Government policy that attempts to achieve development by stimulating domestic industry and import substitution behind development trade barriers J Curve Effect When a trade deficit can worsen after depreciation, but get better in medium term. Knowledge capital The scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital Land grab Investments in agricultural land by foreign investors Least Developed Countries A group of countries that have been classified by the United Nations as least developed in terms of their low gross domestic product (GDP) per capita, weak human assets and high degree of economic vulnerability Lewis Turning Point Occurs when a country’s surplus labour evaporates, pushing up wages, consumption and inflation rates.Within a country the supply of migrants from the countryside might dry up causing urban wages to surge Liberalisation Opening up markets and industries to greater trade and competition Managed floating A floating exchange rate but subject to intervention by the monetary authorities, in order to resistfluctuations that they currency consider to be undesirable Market liberalization Removing state controls, for example, lifting price and wage controls and import quotas or lowering taxes and import tariffs. Marshall-Lerner Condition Predicts the circumstances in which a fall in the exchange rate improves the BoP.A devaluation of a currency improves the BoP only if the combined (or sum of) price elasticities of demand for imports & exports are greater than one. Mercantilism The notion that the wealth of a nation was based on how much it could export.Applied in the modern context to countries accumulating huge trade surpluses in goods or services and focusing on export-led growth Micro-credit Credit services offered to low-income individuals not traditionally serviced by the formal banking sector Middle income trap Occurs when a country's growth stagnates after reaching middle income levels Money illusion When people confuse nominal and real values when making economic decisions Moral hazard When asymmetric rewards to losses encourages risk-taking e.g. riskier behaviour because of having insurance or the belief that losses will be bailed out Multi-dimensional Poverty An international measure of acute poverty covering 109 developing countries N-11 Countries with fast-growth potential - Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines,Vietnam, Mexico, Korea,Turkey, Indonesia NAFTA North American Free Trade Agreement - a free trade area agreement signed by the US, Canada and Mexico NAIRU Non-accelerating inflation rate of unemployment, the rate of unemployment consistent with a country experiencing a stable rate of cost & price inflation National debt Total amount of debt owed by a government usually measured as % of GDP National savings Total public and private sector saving measured as a share of GDP. Saving is the difference between income and consumption. In countries such as China, the national savings rate is high in contrast to developed economies. Gross national saving measured as a percentage of GDP in 2008 for China was 54% Natural assets Assets of the natural environment - biological assets (produced or wild), land and water areas with their ecosystems, subsoil assets and air, see also natural capital Natural capital The stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future. Natural capital may also provide services like recycling wastes or water catchment and erosion control Net inward migration When number of migrants coming into a country than those who leave each year NGOs Private non-profit making bodies which are active in development work Nominal exchange rate The price of the domestic currency in another foreign currency e.g. £1 buys $1.60 Nominal interest rate The price of borrowing money unadjusted for the effects of inflation OECD Organisation of Economic Co-operation and Development Off-shore banking Banks based abroad in a country where you pay less tax Output Gap Difference between actual and (estimated) potential GDP Outward-oriented Government policy that attempts to achieve development by encouraging free trade and the unrestricted development movement of labour and capital Overseas assets Assets such as businesses, shares, property which are owned in overseas countries and which might generate a flow of investment income which is a credit item on the current account of the balance of payments. Paradox of thrift Higher saving in a recession may cause lower consumption, incomes and saving Potential output The economy's maximum productive capacity in a physical sense.The largest output that could be produced, given the prevailing state of technology Potential productivity Estimates of the productivity of the labour force. Improvements in productivity have an important effect on long run aggregate supply and trend growth Poverty line The income level below which a person or household is deemed poor. Can also be used to measure the % of a population living in extreme poverty PPP Exchange Rate The rate at which the currency of one country is converted into that of another to purchase the same amount of goods and services in each country Prebisch-Singer States that the terms of trade between primary and manufactured products deteriorate over time threatening slower Hypothesis economic growth for poorer countries Primary sector An industry involved in the production of raw materials including agriculture Property rights These are the rights to ownership of an asset such as land or ideas (intellectual property rights) Protectionism The use of tariff and non-tariff restrictions on imports Public Goods Goods that are non-rival (consumption by one person does not reduce the supply available for others) and non-excludable Public sector Central government, local government and state-owned/nationalized industries Purchasing Power Parity The current exchange rate is adjusted so that a basket of goods and services can be bought for the same amount of dollars Quantitative easing (QE) Central banks injecting extra cash into banking system through buying bonds Quota A quota imposes a physical limit on the quantity of a good that can be imported into a country in a given period of time Randomized Studies that use one randomly selected test group and one randomly selected control group to create a fair comparison – controlled trial these can be used to evaluate the effectiveness of a specific government intervention or project Real exchange rate The product of the nominal exchange rate (the dollar cost of a euro, for example) and the ratio of prices between the two countries Real interest rate Real rate of interest = nominal rate of interest – rate of inflation E.g. if the inflation rate is 2% and nominal interest rate is 6% then real interest rate is 4% Rebalancing Changing the nature of economic growth and development. For example a country might try to increase reliance on domestic demand, achieve a more equal income distribution and introduce incentives for environmental sustainability Recovery The term typically refers to a phase of above average growth after a downturn Regrettables Output which might be necessary but does not add to (and might detract from) the quality of life, e.g. expenditure on armaments and commuting Relative poverty The relative position of some economic unit (e.g. individual, household, racial group) compared to another economic unit. A person can be relatively poor but not absolutely poor – is really to do with distribution of income in a country Remittances When migrants send home part of their earnings in the form of either cash or goods to support their families. Rent-seeking Behaviour by producers in a market that improves the welfare of one but at the expense of another.A feature of monopoly behaviour and oligopoly Reserve currency A foreign currency that is held in countries' official reserves because of its global importance as a medium of exchange and its inherent stability Resource efficiency Producing more goods and services but with a lower environmental footprint Resource rent A measure of the financial return from operating in a natural resource industry – for example in the fishing sector, it is what remains after fishing costs and subsidies are deducted from revenue Revealed comparative Calculated (for example) as the share of footwear in the economy’s exports divided by the share of footwear in global exports. advantage The comparative advantage of a particular economy is ‘revealed’ when this ratio is greater than 1 Rural urban migration Migration of people from rural areas to urban areas Savings surplus Excess of aggregate savings over domestic investment, where investment is in fixed capital and inventories by both the public and the private sectors. SEZ Abbreviation for special economic zones used extensively in China Social cohesion How united, trustful, cooperative and tolerant of cultural diversity society is Social enterprises Businesses run on commercial lines but where profits are reinvested for the social good / community benefit Social exclusion When people are denied access to opportunities considered ‘normal’ in a society Soft commodities Commodities which can be grown, such as coffee, sugar, tea or maize Soft infrastructure The financial system and regulation, education system, the legal framework, social networks, values and other intangible structures in an economy Soft loan A loan made to a country on a concessionary basis with a lower rate of interest Sovereign debt crisis Widespread problem of high fiscal deficits and rising national debts in many developed countries Sovereign wealth fund A government or state run fund usually created by profits from natural resources Special drawing rights A unit of money created by the IMF. Each member country can borrow SDRs at favourable interest rates from the IMF's reserves when they are needed Specialisation When individuals, regions or countries concentrate on making one or just a few products to create a surplus to trade, linked to comparative advantage Stability and Growth Pact EU’s fiscal rules intended to control government borrowing Stagflation A combination of slowing economic growth and rising cost and price inflation Subsistence farming Farming where output is for consumption of the farmer/family, not for cash sale Sustainable development To leave future generations the option or capacity to be as well off as we are Sustainable growth Growth which meets the needs of the present without compromising the ability of future generations to meet changing needs and wants. Each generation should bequeath as large a productive base as it inherited from its predecessor Technology spillover Transfer of production technologies, ideas arising from trade and FDI Terms of Trade The terms of trade (also known as the real exchange rate) is the real value of countries exports in terms of their imports. Thus it is a function of the price levels in the domestic and foreign country and the nominal exchange rate Trading bloc A group of countries co-operating to liberalize trade between each other Transition economies Former countries of the Eastern Bloc that have been engaged in a transition from being largely command economies to market systems with a greater role for private enterprise and resource allocation via the price mechanism Trend growth Long term non-inflationary increase in GDP caused by an increase in LRAS Trickle down The process whereby the economic gains from economic growth pass down throughout the entire society eventually giving rise to development Unbalanced economy A common feature of most modern economies. E.g. imbalances between: (i) savings & investment (ii) domestic & external demand (iii) public & private sectors (iv) formal & informal economic activity (v) BoP deficits and surpluses Under-employment When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can use Under-nourishment When food intake is chronically insufficient to meet minimum energy requirements. Unit wage costs Wage costs per unit of output – determined by wage and productivity levels Urbanization Economic and demographic processes involved in the growth of towns and cities World Bank Promotes the institutional, structural and social development, providing low interest loans for domestic investment projects and technical assistance World Trade Organisation Polices free trade agreements, and decides on trade disputes between countries. It arranges trade negotiations to liberalize trade by mutually agreed reductions in tariffs & quotas and opening domestic markets up to foreign competition