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ECONOMICS THEME 4, Volatility of commodity prices - Coggle Diagram

- - - - HDI is composite index used by the United Nations. Based on combined values for:
        
        Real GDP per capita (PPP)
        
        Health - based on life expectancy
        
        Education - based on mean and expected years of schooling
        
        Human Development Index (HDI)
        
        Advantages and disadvantages
        
        Advantages of HDI
        
        It is a wider measurement than GDP per capita
        
        All components are good indicators of development
        
        Disadvantages of HDI
        
        It is still narrow measure - only three components
        
        Does not account for inequality of income
        
        Quality of education not included
        
        Does not include issues relating to human rights, freedom etc.
    - - Human Poverty Index
        
        Gender-related Development Index (GDI)
        
        Gender Empowerment Measure (GEM)
        
        Social indicators, e.g. access to doctors, access to clean water
  - - - Impact of non-economic factors in different countries
        
        Civil unrest - internal conflicts, wars
        
        Political instability - unstable political regimes
        
        Corruption - in business and political office
        
        Climate issues
        
        Colonial interference - from a more powerful economy
        
        Cultural factors - empowerment of women
    - - Primary product dependency
    - - Dependancy on primary products exports leads to lower export earnings, leading to foreign currency shortages
        
        Debt levels in developing countries often require interest to be paid in foreign currency
      - Capital flight
        
        Owners of assets and investments in developing economies may withdraw their money
        
        Demographic factors
        
        If population growth exceeds the growth of GDP, GDP per capita must decline
        
        If population is ageing, those in work will need to support larger elderly populations
        
        Future workforces may have to pay higher taxes, retire later or pension payments must fall if trend continues
        
        Debt
        
        Debt can increase due to dependency on dwindling earnings from primary exports
        
        Debt can increase due to low foreign currency earnings making it harder to repay the debt
        
        Debts may have increased on inappropriate projects. e.g. military investments rather than additions to the productive capacity of an economy
        
        Access to credit and banking
        
        Development will need a thriving business sector in an economy
        
        A financial system will need to support saving and borrowing if funds are to be channelled to those wanting to set up or expand a business
        
        Infrastructure
        
        Physical, financial and legal systems are needed to support economic activity
        
        Structures to support efficient transport, the generation of supply power, and smooth communications make it easier for development to occur
        
        Education/skills
        
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  - - - Trade liberalisation - the removal of trade barriers and other obstacles to free trade
        
        Promotion of FDI - policies to attract more FDI, e.g. the promotion of macroeconomic stability and the relaxation of rules of foreign ownership of business
        
        Removal of government subsidies - which could create inefficiency in businesses
        
        Floating exchange rates - remove the need for holding large quantities of currency reserves and allow for currency reserves and allow for currency depreciation to help competitiveness
        
        Microfinance - schemes to led relatively small sums of money for business start-ups, often aimed at women
        
        Market oriented strategies - strategies to boost development to make markets work more efficiently
        Interventionist strategies - strategies to boost development involving the government taking an active role in promoting development
        Buffer stock schemes - buying and selling stocks of a product in order to stabilise its price between low level and high level
        
        Other Strategies
        
        Industrialisation - The Lewis Model
        
        According to the Lewis Model, developing economies have two sectors:
        
        agriculture sector - rural base, low productivity, large population
        
        industrial sector - urban base, high productivity, small population
        
        Development can only occur if workers transfer from the agricultural to industrial sector
        
        Investment in the industrial sector will drive up wages and will attract workers to that sector
        
        Development of tourism - which brings jobs created by MNCs, increased tax revenue, foreign currency earnings and multiplier effects on local businesses
        
        Development of primary industries - which may attract FDI
        
        Fairtrade schemes - guarantee a fair price for local producers
        
        Aid - in monetary and non-monetary form
        
        Debt relief - either improvements in terms of debt conditions or full or part cancellation of debt
        
        Role of international institutions and non-government organisations
        
        World Bank
        
        Originally designed to provide long-term loans for reconstruction and development
        
        Now focuses on promoting poverty reduction globally
        
        Encourages countries to adopt market-based macroeconomic policies
        
        Criticised that its advice often increases inequality
        
        International Monetary Fund (MF)
        
        Designed to provide loans and financial assistance for countries in need
        
        Members pay fee to join
        
        Provides financial advice for countries struggling economically
        
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        Interventionist strategies
        
        Development of human capital - through education and training
        
        Protectionism - of infant industries or strategic industries
        
        Managed exchange rates - to maintain a competitive value of currency
        
        Infrastructure development - to increase and enhance the economy's productive capacity
        
        Promoting joint ventures with global companies - to increase FDI and learn from these companies
        
        Buffer stock schemes - to stabilise prices
- - - - Money Market
        
        Provides short-term finance to individuals, firms or governments
        
        Deals with very short-term loans (often repaid within hours, days, weeks and months)
        
        Covers interbank lending and treasury bills
        
        Capital Market
        
        Deals with medium to long-term lending to firms and governments
        
        Deals mainly with the issues of trade of bonds and shares
        
        Capital markets spilt into:
        
        primary market - for issue of new securities (bonds and shares)
        
        forward market - agreement to buy foreign currency at a specified later date
        
        Foreign exchange market
        
        Trade between different currencies
        
        Foreign exchange transactions are divided into:
        
        spot market - immediate conversion between currencies
        
        secondary market - trade in already issued bonds and shares (on 'stock markets')
    - - Facilitate savings
        
        Households and businesses save money in financial institutions
        
        Most save with commercial banks and building societies
        
        Savers receive interest
        
        Lending to businesses and individuals
        
        Savings by households allows funds to be lent to businesses, which borrow for start-up and expansion
        
        Facilitate the exchange of goods and services
        
        Without banks, transactions between consumers and businesses would be more difficult - especially if high value
        
        Transfers of money can be made involving households, businesses, employers and governments across the world easily and quickly
        
        Transactions are frequently completed without the use of notes and coins
        
        Banks can transfer money between two parties in many ways:
        
        Debit card, cheque, contactless payment, automated transfer, direct debit, standing order
        
        Provide forward markets in currencies and commodities
        
        If businesses are worried about the value of currency changing in the future, the forward market allows them to buy currency in the future but at an agreed rate
        
        Provide market for equities
        
        Financial markets allow equities (shares in companies) to be issued by businesses raising finance
        
        Equities already issued are also traded by investors
  - - - asymmetric information is where investors know less about the risks of an investment than those selling the financial assets
        
        Also refers to when people know 'inside information' about future business performance to help make better decisions about buying and selling equities (insider trading is illegal)
    - - Housing bubbles (one of the most common forms of speculative bubble) developed in the run-up to the 2008 global financial crisis
        
        Housing bubble helped to increase inequality - a form of market failure where people cannot access affordable housing due to accelerating price
      - Moral Hazard
        
        Banks will face cash shortages if those it lends to fail to repay (by defaulting)
        
        If customers think the bank is short of cash, a 'run' on the bank may occur
        
        Runs on banks become self-fuffiling - the fear of banks running out of cash encourages more customers to withdraw their cash
        
        The central bank can provide liquidity if the failure of a bank is against the public interest
        
        Knowing a bank can be 'bailed out' creates a moral hazard and banks take too many risks knowing they will not be allowed to fail
        
        Speculation and market bubbles
        
        Speculative bubbles can emerge if credit is easily obtainable for buying assets
        
        Central banks often cannot prevent the bubble developing as it is not part of their remit
        
        Once a bubble bursts, prices of the assets may collapse and this can leave banks unable to collect the amounts owing to them
        
        Bubbles often develop due to the herding instinct among investors - i.e. investors follow each other's behaviour
        
        Speculative bubble - A speculative (or market) bubble occurs when asset prices (typically houses, commodities and share prices) rise rapidly beyond what normal demand and supply conditions would predict
    - - Market rigging
  - - - The main feature of monetary policy is the setting of interest rates (the Bank rate)
        
        Other aspects of monetary policy include:
        
        size of the money supply
        
        availability of credit
        
        exchange rate
        
        The bank of England sets interest rates independently of UK governments influence
        
        Objective of monetary:
        
        inflation target (measured by changes in CPI) of 2% per year (+- 1%)
        
        inflation target is achieved through changes in the Bank rate decided by the Monetary policy committee (MPC)
        
        other objectives include full employment and steady economic growth
    - - The Bank of England acts as the banker to the government
        
        Since gaining independence in interest rates setting, some of the roles are now performed by the Debt Management office
      - The Bank of England provides money for financial institutions if they cannot gain money anywhere else
        
        The role of the 'lender of last resort' does not mean that it will always lend money; this is the case only if failure of the financial institution is against the public interest
        
        Banker to the Banks: lender of last resort
    - - Role in regulation of the banking industry
        
        Prudential Regulation Authority (PRA)
        
        Financial Policy Committee (FPC)
        
        Financial Conduct Authority (FCA)
        
        Protects consumers by ensuring healthy competition between banks
        
        Can intervene and set standards of behaviour if needed
        
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        Monitors, identities and acts to remove systematic risk from the financial system
        
        Stress tests are conducted to see how 'healthy' the banking sector is
        
        Responsible for the supervision of banks and other financial institutions
        
        Take actions to be sure these are managed properly and can make recommendations of action
        
        Allows banks to fail if it doesn't disrupt the whole financial system
        
        Liquidity and capital ratios
        
        Liquidity ratios require banks to hold a percentage of their deposits in liquid form (i.e. cash or balances held at the Bank of England) - this restricts bank lending
        
        Increases in the liquidity ratio means banks cannot create as much credit and will lend less
        
        Liquidity ratios should ensure banks have sufficient liquidity in case of a shortage
        
        Capital ratios limit a bank's lending to a percentage of the Banks's capital or equity issued. This limits lending by banks compared with their own permanent capital
        
        2019 liquidity Coverage Ratio introduced for UK banks - capital must be equal to no less than 7% of their own lending
        
        Issues with regulation
        
        Financial crises often affect the whole banking sector (or spread from one bank to others)
        
        After a crisis, a bank often become unwilling to lend
        
        Reduced lending has negative effects on the whole macroeconomy
        
        Tighter regulation should reduce chances of another crisis
        
        Tighter controls restrict people/businesses borrowing
        
        Regulation may divert financial activities contributing to GDP to other countries
        
        Regulation requires tome and money to plan, implement and monitor
        
        Penalties are needed to deter excessive risk-taking
        
        Unintended consequences are likely
- - - - Four Factors that contribute to Globalisation:
        
        Transportation and Communication Costs
        
        Increased technology, Cheaper and faster (Cargo Ships, the internet)
        
        Reduction in trade Barriers
        
        WTO, trend towards established trade areas & customs unions (EU), Trading Blocs
        
        Deregulation of Financial Markets
        
        Removal of many restrictions on movement of financial capital between countries
        
        Migration
        
        EU allows free movement within Europe for citizens, helps Labour market
        
        POSITIVE IMPACTS:
        
        Individual countries
        
        Increased specialisation and trade, more economic growth.
        
        Government
        
        Enables union of countries to tackle global issues
        
        Producers
        
        Cheaper labour costs abroad
        
        Cheaper production costs abroad, EoS
        
        Consumers
        
        More consumer choice and cheaper prices
        
        Higher standard of living
        
        Can take holidays in far off locations
        
        Workers
        
        Multinationals provide new jobs and skills
        
        Environment
        
        Allows for conjunction of countries to tackle issues such as global warming
        
        NEGATIVE IMPACTS
        
        Individual countries
        
        Can become dependant on other countries services etc.
        
        Operates mostly in interest of worlds richest countries, who continue to dominate world trade
        
        Threat to world's cultural diversity - threatening local traditions, languages, making whole world more uniform to the western model
        
        Governments
        
        Some Multinational companies within a country are more powerful than their government, therefore they have less power.
        
        Producers
        
        Multinational Companies can overpower local businesses, effecting the local economy
        
        Consumers
        
        Choice could cause danger of inappropriate products and lifestyles spreading to local cultures
        
        Workers
        
        Exploitation by Multinationals in LICs
        
        Environment
        
        Increased deforestation, movement of product causes more greenhouse gases, and plastic pollution in many NICs (India)
    - - Absolute advantage - the ability to produce a good more efficiently (e.g. with less labour)
        
        Comparative advantage - the ability to produce a good relatively more efficiently (i.e. at a lower opportunity cost)
        
        Law of comparative advantage - a theory arguing that there may be gains from trade arising when countries (or individuals) specialise in the production of goods or services in which they have a comparative advantage
        
        Limitations:
        
        Transport costs may outweigh any comparative advantage
        
        Increased specialisation may lead to diseconomies of scale
        
        Governments may restrict trade
        
        Comparative advantage measures static advantage but not any dynamic advantage for example in the future India could become good at producing books if it made the necessary investment
      - Advantages of international trade/free trade:
        
        Lower prices
        
        Specialisation and EoS
        
        Increased competitive pressures
        
        Growth of export industries
        
        Disadvantages of international trade/free trade:
        
        Some industries lose out - possible structural unemployment
        
        Developing economies may struggle to diversify their economy
      - Patterns of Trade
        
        How has it affected patterns of trade between countries?
        
        Comparative Advantage
        
        Different countries comparative advantage determine where they specialise
        
        Advanced countries tend to have CA in capital intensive or hi-tech products, whereas developing countries are more likely to specialise in land- or labour- intensive production
        
        Impact of Emerging Economies
        
        Rise of EE (including BRICS) altered pattern of trade
        
        They have moved into sectors that previously province of advanced economies, while advanced economies have shifted into service activities, especially in financial and professional services.
        
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        Terms of Trade
        
        Terms of Trade - the ratio of export prices to import prices
        
        TTI = (Index of Export prices/Index of Import prices) x 100
        
        Factors affecting a country's terms of trade:
        
        Change in Exchange rate - If appreciates, increase price of exports, reduce price of imports, therefore improvement in terms of trade. (Depreciation opposite)
        
        Changes in Demand and supply for imports/exports
        
        Changes in relative productivity
        
        Changes in relative inflation rate
        
        Decline in countries terms of trade likely to lead to decline in economic growth
        
        Trading Blocs and the WTO
        
        No trade barriers between members but members can form own agreements with non-members
        
        Free trade area
        
        Customs unions
        
        2 more items...
        
        Benefits of Joining Regional Trade Agreement
        
        trade creation
        
        Increase in FDI
        
        Increase in intra-regional trade
        
        Costs of joining Regional Trade Agreement
        
        1 more item...
        
        Role of the WTO in trade liberisation
        
        More than 100 countries are WTO members
        
        The WTO promotes trade liberation across membership
        
        Trade negations are conducted in 'rounds'
        
        The WTO has been successful in gradually reducing trade barriers
        
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  - - - protection of jobs
        
        Infant industry - protecting small domestic industries from larger efficient competition
        
        Anti-dumping - large overseas businesses selling output bellow cost to drive domestic businesses out
        
        Sunset industries - protecting industries in long-term decline
        
        Strategic reasons - protecting strategically important industries, e.g. agriculture
      - Arguments against protectionist policies
        
        Based on comparative advantage, free trade maximises global output
        
        Protecting infant/sunset industries encourages inefficiency
        
        Higher prices (and possible job losses elsewhere due to reduced spending power)
        
        Protectionist policies usually encourage retaliatory measure
        
        Types of restrictions on trade
        
        Tariffs - a tax on imports
        
        Tariffs increase import prices, encouraging a switch to domestic alternatives. As world price rises, quantity of imports falls.
        
        Quotas - a limit on the quantity of imports
        
        Exports subsidies - governments subsidising export-producing industries
        
        Red tape/artificial barriers - lengthy administrative procedures or complex legal standards for imports
        
        Impact of protectionist policies
        
        On consumers
        
        Higher prices, due to tariffs and quota
        
        On producers
        
        Less competition from low-cost producers
        
        On governments
        
        Tax revenue received from tariffs
        
        On living standards
        
        Higher prices and less efficient resource allocation means incomes may fall
        
        On equality
        
        May lead to greater equality but mainly due to incomes not rising as quickly
    - - Consist of three sections:
        
        Current account
        
        Capital account
        
        Financial account
        
        The balance on the total of the three sections affects the foreign currency reserves held by the UK Government
        
        a balance of payments deficit means reserves fall
        
        a balance of payments surplus means reserves rise
        
        A government can alternatively cover a balance of payments deficit by borrowing
        
        If foreign reserves are insufficient to finance a current account deficit, surplus must be generated on the financial or capital account
        
        The capital account contains some capital transfers and purchases/sales of non-financial assets
        
        Three components in financial account:
        
        Foreign Direct Investment (FDI) - opening up/buying existing business located outside the country of ownership
        
        Portfolio investment - trade in financial assets (e.g. shares) outside the country of ownership
        
        Short-term movements of capital - into and out of a country, often moved for speculative motives and known as 'hot money'
      - Balance on the current account
        
        Current account balance measured by difference between inflows and outflows of money into and out of a country due to:
        
        exports and imports
        
        investment income from factors of production located outside their country of ownership
        
        transfers of money between countries
        
        Current account deficit: outflows > inflows
        
        Current account surplus: inflows > outflows
        
        The UK current account is normally in deficit (surplus on services < deficit on goods)
        
        Causes of current account deficits and surpluses
        
        Cause of Deficit
        
        High/rising inflation rate
        
        High domestic/low foreign economic growth
        
        Low relative productivity
        
        High relative inflation
        
        Cause of Surplus
        
        Low/falling exchange rate
        
        High foreign/low domestic economic growth
        
        High relative productivity
        
        Low relative inflation
        
        Expenditure-reducing policies - Reducing current
        account deficits through reductions in AD
        Expenditure-switching policies - reducing current account deficits through encouraging a switch away from imports to domestic output
        
        Measures to reduce a current account deficit
        
        Achieving he balance on the current account is an economic objective
        
        Deficits on the current account can be corrected (eliminated or reduced) by;
        
        expenditure-reducing policies
        
        expenditure-switching policies
        
        Expenditure reducing policy 1: deflation
        
        How it works
        
        Reducing UK consumption are leads to fewer imports
        
        Reduction in UL consumption are achieved by:
        -higher interest rates
        -higher taxes
        -lower government spending
        
        Issues with this policy
        
        Unpopular with the population
        
        Conflicts with objectives for growth and unemployment
        
        Higher interest rates may cause a rise in exchange rate which reduces exports
        
        Expenditure switching policy 1: devaluation
        
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      - Exchange Rates
        
        Three exchange rate systems
        
        Floating - where the government doesn't attempt to influence the value of the exchange rate
        
        Fixed - where the government stabilises the exchange rate at a fixed value
        
        Managed - where the currency floats but the government will intervene and influence the exchange rate's value on occasion
        
        Revaluation/devaluation and appreciation/depreciation
        
        A rising currency is said to be strengthening
        
        A falling currency is said to be weakening
        
        When the exchange rate is fixed
        
        A rise in the currency's value is known as a revaluation
        
        A fall in the currency's value is known as a devaluation
        
        When the exchange rate is floating
        
        A rise in the currency's value is known as an appreciation
        
        A fall in the currency's value is known as a depreciation
        
        Factors influencing floating exchange rates
        
        The exchange rate of floating currencies is determined by demand and supply of the currency
        
        A rise in demand for a currency leads to rising exchange rate (and vice versa)
        
        A rise in supply of a currency leads to falling exchange rate (and vice versa)
        
        Determinants of the exchange rate
        
        Relative inflation
        
        3 more items...
        
        Government intervention in currency markets
        
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        International Competitiveness
        
        Is measured by:
        
        Relative unit labour costs: the average cost of labour per unit of output produced
        
        if this rises, competitiveness will decrease
        
        relative export prices: if these rise, it may become harder to compete internationally
        
        Factors influencing international competitiveness
        
        Productivity of the workforce
        
        Unit labour costs
        
        The real exchange rate (the exchange rate adjusted for changes in price levels over time)
        
        Non-wage labour costs, e.g. taxes on labour
        
        Labour market regulation - e.g. laws protecting workers, minimum wage rates
        
        The level of technology and research & development
        
        Benefits of being internationally competitive
        
        Boost to GDP (via exports)
        
        Lower unemployment
        
        Move towards surplus on current account
        
        Rising exchange rate (and lower inflation)
        
        Problems of being internationally uncompetitive
        
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      - Significance of global trade imbalances
        
        If governments attempt to eliminate a current account deficit, it will have knock-on effects across the world
        
        A fall in spending on imports means a fall in exports from another country
        
        Protectionist policies adopted by large economies can significantly affect the growth rate in smaller economies, if they sell fewer exports to the larger economy
        
        A large current account deficit can indicate export sector weakness
        
        Interest rates may need to rise to generate a serplus on the other parts of the balance of payments
        
        Persistent deficits may lead to diminished foreign currency reserves (unless surplus exists on financial or capital accounts)
        
        If the government has insufficient foreign currency reserves, it may need to:
        
        Borrow money
        
        deflate the economy - i.e. reduce AD
        
        Deficits often lead to falling currency values, which can boost cost-push inflation
        
        Reasons for wanting to avoid current account deficits
        
        This objective is usually seen as lower priority than achieving growth, employment and low inflation
        
        Current account deficits may be due to high economic growth, which is more desirable
        
        A surplus on the financial account - e.g. from FDI - may 'cover' the current account deficit
        
        Deficits that are large when measured in £s may be small when measured as a percentage of GDP
        
        Reasons why current account deficits may not matter
        
        Current account surplus may be due to low economic growth
        
        It may be inflationary if ecports rise quickly
        
        Foreign countries may introduce protectionist policies
        
        It may lead to rising currency
        
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- - - - Those in absolute poverty are struggling to survive daily - they cannot afford or access the basic needs for survival. basic needs for survival include food, clothing, shelter and warmth
        
        Relative poverty is where people's incomes fall below a minimum level of income in relation to the average for that country
        
        People in relative poverty can be better off than those in earlier years who were not in relative poverty
        
        In the UK, those working full-time on the minimum wage would, without any other benefits, be on the edge of relative poverty (though they will likely qualify for some 'tax credits')
        
        Absolute poverty is more useful when considering developing countries
        
        Relative poverty is more useful when considering developed countries
      - Measure of absolute poverty and relative poverty
        
        The world bank classifies absolute poverty if an individual's income falls below $1.90 per day
        
        Relative poverty applies to those whose income falls below a set percentage of that country's per capita income
        
        In the EU, relative poverty is where income falls below 60% of the per capita income of an individual country
        
        A person's income can rise over time, but they can still fall into relative poverty if the average income for their country rises faster
    - - Causes of Poverty
  - - - Wealth inequality - covers how there are differences in the value of the stock of assets held by individuals and households
        
        Income inequality - exists in most economies, as the distribution of income is uneven
    - - The Lorenz curve
        
        looks at the population and how income s shared out by percentage of the population, e.g. what percentage of income is earned by the poorest 20% of the population
        
        The 45 Degree line indicates perfect inequality of income
        
        The concave curve represents the Lorenz curve
        
        The more concave the curve is, the greater the level of income the inequality
        
        The Gini Coefficient
        
        uses information from the Lorenz curve to express inequality as a number
        
        Calculated = Area A/Area A+B
        
        Greater income inequality means Area A becomes bigger than Area A + B
        
        Gini Coefficient = 0 means perfect equality of income
        
        Gini Coefficient = 1 means perfect inequality of income
        
        Gini Coefficient can be measured based on gross income and net income (with an adjustment for welfare benefits)
        
        Gini Coefficient for household income (income less taxes plus benefits) is smaller than for income before deductions and additions
      - Causes of income and wealth inequality
        
        Within Countries
        
        Differences in skill and education
        
        Generosity of the welfare system
        
        Inheritance laws
        
        How progressive taxation system is
        
        Wage rates (and the strength of trade unions)
        
        Access to the property market
        
        Between Countries
        
        Natural resources
        
        Political stability
        
        How open the economy is to foreign trade
        
        Interference from outside countries
        
        Macroeconomics policies
        
        Investment in education and training
        
        Impact of economic change and development on inequality
        
        Developing economies may initially have reasonably low income inequality
        
        During development, income inequality increases
        
        Whether continued growth leads to reductions in inequality depends on the views of the population in the economy
        
        In recessions, income inequality may increase again (as unemployment significantly increases ineequality)
        
        Significance of capitalism for inequality
        
        Capitalist economies are generally mroe unequal than non-capitalist economies
        
        Owners of the production resources generally see their incomes rising faster than those who do not own significant amounts of resources
        
        Returns on wealth are often greater than returns on incomes. meaning wealth inequality increases
        
        Wealth inequality can lead to further income inequality, as wealth generates higher incomes
- - - - The build-up of capital stock will be slow - holding back development and growth of GDP