Globalisation Test Reviewer:
What is the difference between microeconomics and macroeconomics?
Microeconomics is the study of decisions made by people and businesses regarding the
allocation of resources and prices of goods and services. It also takes into account taxes and
regulations created by governments.
Microeconomics - tries to explain what happens when there are changes in certain conditions.
Example of micro- examines how a company could maximise its production and capacity so that
it could lower prices and better compete in its industry. Can be gleaned from the financial
statements
Macroeconomics studies the behaviour of a country and how its policies affect the economy as a
whole. Analyses entire industries and economies, rather than individual or specific companies
(top-down approach)
What are the differences between monetary policy and fiscal policy
Monetary policy addresses interest rates and the supply of money in circulation, and it generally
is managed by a central bank.
Fiscal Policy addresses taxation and government spending, and it generally is determined by
legislation.
Both monetary policy and fiscal policy together have a great influence over a nation’s economy.
Factors effecting economic growth in mature countries
A mature economy is the economy of a nation with a stable population and slowing economic
growth. A population has stabilised or is in decline when the birth rate is equal to or less than the
mortality rate.
1. Human Resource - Refers to one of the most important determinant of economic growth of a
country. The quality and quantity of available human resource can directly affect the growth
of an economy. The quality of human resource is dependent on its skills, creative abilities,
training, and education. If the human resource of a country is well skilled and trained then
the output would also be of high quality. On the other hand, a shortage of skilled labor
hampers the growth of an economy, whereas surplus of labor is of lesser significance to
economic growth. Therefore, the human resources of a country should be adequate in
number with required skills and abilities, so that economic growth can be achieved.
2. Natural Resources - Affect the economic growth of a country to a large extent. Natural
resources involve resources that are produced by nature either on the land or beneath the
land. The resources on land include plants, water resources and landscape. The resources
beneath the land or underground resources include oil, natural gas, metals, non-metals, and
minerals. The natural resources of a country depend on the climatic and environmental
conditions. Countries having plenty of natural resources enjoy good growth than countries
with small amount of natural resources. The efficient utilization or exploitation of natural
resources depends on the skills and abilities of human resource, technology used and
availability of funds. A country having skilled and educated workforce with rich natural
resources takes the economy on the growth path.
3. Capital Formation - Involves land, building, machinery, power, transportation, and medium
of communication. Producing and acquiring all these manmade products is termed as capital
formation. Capital formation increases the availability of capital per worker, which further
increases capital/labor ratio. Consequently, the productivity of labor increases, which
ultimately results in the increase in output and growth of the economy.
4. Technological Development -Refers to one of the important factors that affect the growth of
an economy. Technology involves application of scientific methods and production
techniques. In other words, technology can be defined as nature and type of technical
instruments used by a certain amount of labor. Technological development helps in
increasing productivity with the limited amount of resources. Countries that have worked in
the field of technological development grow rapidly as compared to countries that have less
focus on technological development. The selection of right technology also plays an role for
the growth of an economy. On the contrary, an inappropriate technology- results in high cost
of production.
5. Social and Political Factors -Play a crucial role in economic growth of a country. Social
factors involve customs, traditions, values and beliefs, which contribute to the growth of an
economy to a considerable extent. For example, a society with conventional beliefs and
superstitions resists the adoption of modern ways of living. In such a case, achieving
becomes difficult. Apart from this, political factors, such as participation of government in
formulating and implementing various policies, have a major part in economic growth.
Present and future value (and calculations)
PV= FVn [1/(1+r)^n]
FV= PVn(1+r)^n
Opportunity cost
The loss of potential gain from other alternative when one alternative is chosen - opportunity
cost of something is what you sacrifice to get it.
Comparative advantage and absolute advantage
Comparative advantage - producing the good at a lower opportunity cost than another person or
nation
Absolute advantage - producing the good at a lower resource cost than another person or nation
Autarky- an economy system of self-sufficiency and limited trade. (When a country doesn’t
engage in international trade with any other country, they are in complete autarky.) (Closed
economy)
If someone has a lower opportunity cost than another person in producing a product, they have
the comparative advantage. Furthermore if both parties specialise in their comparative advantage
and then trade, they can get outcomes that are beyond each of their individual production
possibility frontiers.
If one person has a bigger absolute advantage than the other person, it would still make sense for
them to specialise because opportunity cost is more.
GDP equation
National income (GDP = Consumer spending + Investment + Government spending + (Exports -
Imports)
Define Diminishing return
The decrease in the marginal (incremental) output of a production process as the amount of a
single factor of production is incrementally increased, while the amounts of all other factors of
production stay constant
Define Nominal vs real
Nominal prices, (current dollar prices) measure the dollar value of a product at the time it was
produced. Real prices are adjusted for general price level changes over times, ex. inflation,
deflation. Real value is nominal value adjusted for inflation, and is obtained by removing the
effect of price level changed from the nominal value of time-series data, so as to obtain a truer
picture of economic trends
Understand Market failure
The economic situation defined by an inefficient distribution of goods and services in the free
market. A situation in which the allocation of goods and services in a free market leads to a net
loss of economic value
Understand Hegemonic power
Political, economic, or military predominance or control of one state over others. Leadership or
dominance of one group over another ex. China, Russia
Scope of classification of income Income per capita (LDC, Middle income country AND
number they respond to)
GATT AND WTO
The General Agreement on Tariffs and Trade covers international trade in goods. The workings
of the GATT agreement are the responsibility of the Council for Trade in Goods (Good Council)
which is made up of representatives from all WTO countries
- The World Trade Organisation is an intergovernmental organisation that is concerned with the
regulation of international trade between nations.
- WTO deals with the regulation of trade in goods, services and intellectual property between
participating countries by providing a framework for negotiating trade agreements and a
dispute resolution process aimed at enforcing participants’ adherence to WTO agreements,
which are signed by representative of member governments and ratified by their parliaments.
- WTO prohibits discrimination between trading partners, but provides exceptions for
environmental protection, national security, and other important goals.
- GATT - legal agreement between many countries, whose overall purpose was to promote
international trade by reducing or eliminating trade barriers such as tariffs or quotas
- Geneva Switzerland
- WTO - intergovernmental organisation that is concerned with the regulation of international
trade between nations
- Geneva Switzerland
- Purpose - reduction of tariffs and other barriers to trade
Dependency theory
1960- Prebisch found that increases in the wealth of the richer nations appeared to be at the
expense of the poorer ones.
- The notion that resources flow from poor and underdeveloped states to wealthy
states, enriching wealthy states at the expense of the underdeveloped states
- Approach to understanding economic underdevelopment
- Emphasises the punitive constraints imposed by global, political, and economic order
- Unequal relationship
- Developing country correlated with flow of fund with developed country
Bretton wood
- 730 Delegates from 44 nations in 1944
- Formed established the rules for commercial and financial relations among nations being
the first fully negotiated monetary order intended to govern monetary relations among
independent states
- The main feature: the obligation for each country to maintain external exchange rates within
1% by pegging the currencies to gold
- The IMF got the ability to bridge temporary imbalances of payments
Soft and Hard power
Hard power refers to tangible military and economic assets employed to compel, coerce,
influence, fend off, or defeat enemies and competitors.
Soft power comprises selective tools that reflect and project a country’s cultural values, beliefs,
and ideals. Through the use of movies, cultural exports and exchanges, information, and
diplomacy, a state can convince others that the ideas it sponsors are legitimate and should be
adopted.
Soft power can in many ways be more effective than hard power because it rests on persuasion
and mutual exchange.4 For example, Nobel Peace Prize recipient Barack Obama partly regained
some of the world’s support for the United States through a discourse emphasising multilateral
cooperation.
Realism, liberalism, structuralism, mercantilism and GINI index
Realism:
Realists believe that there is no centralized global authority that limits sovereign states and determines
their actions. For this reason, nation-states are the only legitimate actors in international affairs and
neither supranational nor domestic actors can restrict them.
Liberalism
A government should not try to control prices, rents, and/or wages but instead let open competition and
forces of demand and supply create an equilibrium between them that benefits the vast majority of
citizens. It differs from the doctrine of laissez faire in its acceptance of the government intervention to
control creation and spread of monopolies and in distribution of public good. Economic liberalism, in
general, favours redistribution of income through taxes and welfare payments.
Structuralism
Structuralism is a development theory which focuses on structural aspects which impede the economic
growth of developing countries. The unit of analysis is the transformation of a country’s economy from,
mainly, a subsistence agriculture to a modern, urbanised manufacturing and service economy. Policy
prescriptions resulting from structuralist thinking include major government intervention in the economy
to fuel the industrial sector, known as import substitution industrialization (ISI). This structural
transformation of the developing country is pursued in order to create an economy which in the end
enjoys self-sustaining growth. This can only be reached by ending the reliance of the underdeveloped
country on exports of primary goods (agricultural and mining products), and pursuing inward-oriented
development by shielding the domestic economy from that of the developed economies. Trade with
advanced economies is minimised through the erection of all kinds of trade barriers and an overvaluation
of the domestic exchange rate; in this way the production of domestic substitutes of formerly imported
industrial products is encouraged. The logic of the strategy rests on the infant industry argument, which
states that young industries initially do not have the economies of scale and experience to be able to
compete with foreign competitors and thus need to be protected until they are able to compete in the free
market.[9] The Prebisch–Singer hypothesis states that over time the terms of
trade for commodities deteriorate compared to those for manufactured goods, because the income
elasticity of demand of manufactured goods is greater than that of primary products. If true, this would
also support the ISI strategy.
Mercantilism
Also called “commercialism”, is a system in which a country attempts to amass wealth through trade with
other countries, exporting more than it imports and increasing stores of gold and precious metals.
GINI Index:
• The Gini index is a simple measure of the distribution of income across income percentiles in a
population.
• A higher Gini index indicates greater inequality, with high income individuals receiving much
larger percentages of the total income of the population.
• Global inequality as measured by the Gini index increased over the 19th and 20th centuries, but
has declined in more recent years.
• Because of data and other limitations, the Gini index may overstate income inequality and can
obscure important information about income distribution.
Capitalism:
- Economic system based on the private ownership of the means of production and their
operation for profit
Central capitalism:
- private property
- Capital accumulation
- Wage labour
- Voluntary exchange
Decision-making and investment are determined by every owner of wealth, property of
production ability in financial and capital markets