Unit 4: Developments in the Global Economy

Increase in trade as a proportion of GDP. globalisation

Increase in importance of transnational companies (TNCs) and foreign direct investment (FDI).

Increase in migration.

Factors contributing to increased globalisation in the last globalisation 50 years:; trade liberalisation; increased number and size of trading blocs; political change (breakdown of the Soviet system and opening up of China); reduced cost of transport and communications; increased significance of TNCs.

FDI by TNCs:; reasons for FDI; the impact of FDI on recipient countries.

Possible benefits of globalisation: globalisation; increased economic growth; increased tax revenue; economies of scale; lower prices and higher consumer surplus; more choice; higher living standards.

Possible costs of globalisation:; displaced workers; exploitation of workers; environmental impact of increased trade; loss of tax revenue from transfer pricing; increased income inequality within countries; the influence of TNCs on domestic economic policy.

Benefits and costs of specialisation and trade in the international comparative context. advantage

The theory of comparative advantage:; the distinction between absolute and comparative advantage; assumptions underlying the theory of comparative advantage; limitations of the theory of comparative advantage.

Factors influencing patterns of trade between countries and causes volume of world of changes in these patterns: trade; impact of emerging economies; changes in comparative advantage; growth in trading blocs and bilateral trading agreements; changes in relative exchange rates; changes in protectionism between countries.

Changes in trade flows between countries, and the reasons for these changes.

Understanding and calculation of the terms of trade.

Factors influencing a country's terms of trade, changes in:; relative inflation rates; relative productivity rates; relative labour costs; the exchange rate; the prices of imports and exports.

The impact of changes in a country's terms of trade on:; export revenues; living standards; balance of trade.

The role of the World Trade Organization (WTO) in trade liberalisation and liberalisation. trading blocs

Types of trading blocs:; free-trade areas; customs unions; common markets; economic and monetary unions.

Costs and benefits of membership of a trading bloc:; trade creation; trade diversion; costs and prices; economies of scale; transaction costs; movement of factors of production.

Possible conflicts between trading blocs and the WTO.

Reasons for restrictions on free trade: free trade; to protect infant and geriatric industries; to protect domestic industries and employment; to protect national security; to prevent dumping; to correct a deficit on the current account of the balance of payments; to raise revenue.

Types of restrictions on free trade:; tariffs; quotas; non-tariff barriers; subsidies to domestic producers.

Impact of protectionist policies on:; consumers; producers; governments; living standards; equality.

Components of the balance of payments: payments; the current account; the capital and financial accounts.

Causes of deficits and surpluses on the current account.

Measures to reduce a country's imbalance on the current account.

The significance of global trade imbalances.

The distinction between fixed, managed and floating exchange rates.

Government intervention in currency markets through:; foreign currency transactions; the use of interest rates; quantitative easing.

Factors influencing floating exchange rates:; relative interest rates; relative inflation rates (purchasing power parity theory); current account of the balance of payments; strength of the economy; capital flight; expectations and speculation; global factors, e.g. falls in commodity prices.

The distinction between revaluation and appreciation of a currency.

The distinction between devaluation and depreciation of a currency.

The impact of changes in exchange rates on:; the current account of the balance of payments (with reference to Marshall-Lerner condition and to the J-curve effect); the capital and financial accounts of the balance of payments; economic growth; employment and unemployment; rate of inflation; FDI flows.

Competitive depreciations/devaluations and their consequences.

Measures of international competitiveness: competitiveness; relative productivity rates; relative unit labour costs; relative export prices.

Factors influencing international competitiveness:; productivity; quality of human capital; exchange rate; wage and non-wage costs; regulations; quality of infrastructure; non-price factors.

Measures to increase international competitiveness:; policies to improve education and training; investment incentives; privatisation and deregulation; measures to reduce the exchange rate of the currency; trade liberalisation.

The significance of international competitiveness:; advantages for an economy of being internationally competitive; problems for an economy of being internationally uncompetitive.

The distinction between absolute and relative poverty.

Measures of absolute and relative poverty.

Causes of changes in absolute and relative poverty:; economic growth; education and training; welfare benefits; changes in tax structure; structural changes in the economy; aid; civil wars and conflict.

The distinction between wealth inequality and income inequality.

Measurements of inequality:; the Lorenz curve; the Gini coefficient.

Causes of inequality in income and wealth within countries and between countries.

The impact of inequality on:; enterprise; incentives; savings; education; migration; life expectancy.

The impact of economic change and development on inequality.

The significance of the free market economy (capitalism) for inequality.

4.3.5.1adistinction between capital expenditure, current expenditure and transfer payments

The distinction between capital expenditure, current expenditure and transfer payments.

4.3.5.1bReasons for the changing size and pattern of public expenditure in an international

Reasons for the changing size and pattern of public expenditure in an international context:; changing incomes; changing age distributions; changing expectations.

4.3.5.1csignificance of differing levels of public expenditure as a proportion of GDP on: •

The significance of differing levels of public expenditure as a proportion of GDP on:; productivity and growth; crowding out; levels of taxation.

4.3.5.2adistinction between, and examples of, direct and indirect taxes

The distinction between, and examples of, direct and indirect taxes.

4.3.5.2bdistinction between progressive, proportional and regressive taxes

The distinction between progressive, proportional and regressive taxes.

4.3.5.2ceconomic effects of changes in direct and indirect tax rates on: • incentives to work •

The economic effects of changes in direct and indirect tax rates on:; incentives to work; tax revenues: Laffer curve analysis; income distribution; real output and employment; the price level; the trade balance; FDI flows.

4.3.5.3adistinction between: borrowing and • fiscal deficits and fiscal surpluses public sector

The distinction between: borrowing and; fiscal deficits and fiscal surpluses public sector debt; automatic stabilisers and discretionary fiscal policy; a fiscal deficit and the national debt; structural and cyclical fiscal deficits.

4.3.5.3bFactors influencing the size of fiscal deficits and national debts

Factors influencing the size of fiscal deficits and national debts.

4.3.5.3csignificance of the size of fiscal deficits and national debts: • impact on interest

The significance of the size of fiscal deficits and national debts:; impact on interest rates; debt servicing; intergenerational equity.

4.3.5.4agovernments use fiscal policy, monetary policy, exchange- policies rate policy,

How governments use fiscal policy, monetary policy, exchange- policies rate policy, supply-side policies and direct controls to:; reduce fiscal deficits and national debts; control the rate of inflation; respond to external shocks in the global economy; reduce poverty and inequality.

4.3.5.4bUse of demand-side policies in response to the global financial crisis of 2008

Use of demand-side policies in response to the global financial crisis of 2008.

4.3.5.4cMeasures to control TNCs: • to reduce tax avoidance • the regulation of transfer

Measures to control TNCs:; to reduce tax avoidance; the regulation of transfer pricing; limits to government ability to control TNCs.

4.3.5.4dimpact of policy changes on: • local economies • national economies • the global economy

The impact of policy changes on:; local economies; national economies; the global economy.

4.3.5.4eProblems facing policymakers when applying policies: • inaccurate information • risks

Problems facing policymakers when applying policies:; inaccurate information; risks and uncertainties; inability to control external shocks.

The three components of the Human Development Index (HDI): economic education, health, income; how they are measured. development

Advantages and limitations of the HDI in comparing living standards between countries and over time.

Other measures of development:; the percentage of adult male labour in agriculture; access to clean water; energy consumption per capita; access to internet per thousand of population; access to mobile phones per thousand of population; access to doctors per thousand of population.

The impact of economic factors in different countries: growth and; volatility of commodity prices development; primary product dependency (the Prebisch-Singer hypothesis); savings gap (the Harrod-Domar model); foreign currency gap; capital flight; demographic factors (size and age distribution of population; migration); debt (household and overseas); access to credit and banking; infrastructure; education and skills.

The impact of non-economic factors in different countries:; corruption; poor governance; civil wars; migration; terrorism.

The impact of market-orientated strategies: promote growth; trade liberalisation and development; promotion of FDI; removal of government subsidies; privatisation; floating exchange rate systems; microfinance schemes.

The impact of interventionist strategies:; development of human capital; protectionism; managed exchange rates; infrastructure development; promoting joint ventures with TNCs; buffer stock schemes.

The impact of other strategies:; industrialisation (the Lewis structural dual-sector model); development of tourism; development of primary industries; debt relief; aid.

The role of international institutions:; the World Bank; the International Monetary Fund (IMF); non-government organisations (NGOs).