Macroeconomics

• Absolute Advantage: exists when a country is able to produce a good more cheaply in absolute terms than another country.
• Globalisation: the ever-increasing integration of the world’s economies into a single market.
• MNCs: a company with significant product operations in at least two countries.
• characteristics of globalisation

  • Free trade of goods and services
  • Free movement of labour
  • Free movement of capital
  • Free exchange of technology and ideas
• causes of globalisation

  • Trade in goods​
  • Trade in services​
  • Trade liberalisation​
  • Multinational companies
  • Foreign ownership of firms
  • International finance flows​
• effects of globalisation on consumers

  pros:

  • Consumer choice
  • Lower prices (location, wages, EofS, technology)
  • Better quality/designs

  cons:

  • Homogenised goods e.g. ‘International food’
  • Commodity prices soared
  • Certain products – D not perfectly elastic in LR – price rise•Local industries shrink e.g. Blackpool and Southend
• effects of globalisation on producers:

  pros:

  • increased specialisation and trade
  • lower risk: raw material + larger market
  • Lower costs
  • Greater profits
  • Regulation and tax avoidance
• cons for effects on producers

  • Increased dependency
  • Trade sanctions e.g. Russia
  • TNC’s footloose (capitalism)
  • Tax Avoidance: TP, Inflated patent costs, transfer production
  • Retaliation – Trade barriers, Protectionism, immigration bans, trade bans
• The Role of Financial Markets

  • To facilitate savings: Offering a secure place to store money and earn interest for businesses and households
  • To lend to businesses and individuals: Financial markets provide an intermediary between savers and borrowers
  • To facilitate the exchange of goods, services & labour: through money, currency and credit markets
  • To provide forward markets in currencies and commodities: allowing agents to insure against price volatility
  • To provide a market for equities: Allowing businesses to raise financial capital to fund their capital investment and expansion
• Role of Central Banks

  • Control Money Supply
  • Regulation of Financial Markets
  • Lender of Last Resort
  • Manage exchange rate
  • Insider trading
  • Market Rigging
• Remit of Monetary Policy Committee

  • Low, stable inflation [CPI = 2%]
  • Strong growth & employment
• Powers of Monetary Policy Committee

  • Base Rate
  • QE
  • Reserve ratios
• Remit of Financial Policy Committee

  • Macro-prudence: Identify, monitor, address systemic risk in financial & housing markets
• Powers of Financial Policy Committee

  • Loan-to-value limits
  • Debt-to-income limits
• Remit of Prudential Regulation Authority

  • Micro-prudence: Identify, monitor, address specific risk within financial institutions
• Powers of Prudential Regulation Authority

  • Senior Managers Regime
  • Deferred bonuses
  • £85,000 Deposit Protection Scheme
  • "Ring-fence" retail/ investment
• Remit of Financial Conduct Authority

  • Consumer protection and competition in financial markets
• Powers of Financial Conduct Authority

  • Fines for misconduct
  • Prohibit individuals from trading
  • Bring criminal prosecutions [insider trading]
• Interest rates


  The opportunity cost of holding money
• Money Supply


  Perfectly inelastic (Controlled by Central Banks/ created by commercial banks)
• Money Demand


  Downward sloping (as interest rates decrease, the demand for loans increase)
• Short-term


  • Cash
  • Depreciates with inflation
• Long-term


  • Bonds
  • Appreciates with interest
• Loose Monetary Policy


  Increases money supply, decreases interest rates
• Currency/ Commodity Markets (Spot)


  • Spot Price
  • Strike Price
  • Current Price
  • Future price
  • Currency
  • Commodities
  • Demanded for trade
  • Demanded for production
  • Speculation
• Currency/ Commodity Markets (Forwards)


  • Forwards Market: Allows for "hedging" by locking in future price
  • Form of self-insurance
  • Reduces market volatility
  • Buffer stock schemes
  • Spot Price
  • Strike Price
  • Current Price
  • Future price
  • Long
  • Short
  • Expecting prices to rise
  • Expecting prices to fall
  • Bullish
  • Bearish
• Stock/ Bond/ Equity Markets

  • Firms
  • Governments
  • Stocks
  • Bonds
  • Raise financial capital (P1 x Q1)
  • Primary
  • Secondary
  • Revenue generating
  • Speculative
  • Efficient Market Hypothesis: Financial markets will price assets correctly based on all available information
  • Profit by being: First, original, lucky, an insider...
• Moral Hazard


  When the costs of risky behaviour are not borne fully by the risk-taker
• "Privatise the gains, socialise the costs"
• Should a bank be "too big to fail?"
• Financial Market Failure


  • Externalities
  • Bailouts
  • 2008 Bank Bailout
  • Moral Hazard
  • Banker bonuses
  • Information Gaps
  • Speculation & Bubbles
  • Housing Bubble
  • Insider trading
  • Misselling
  • PPI Scandal
  • Monopoly Power/ Collusion
  • Market Rigging
  • Forex Collusion
  • LIBOR Scandal
• Globalisation


  The ever-increasing integration of the world's economies into a single market
• Synoptic Links


  • Savings
  • Lending
  • Exchange
  • Forward
  • Equities
• MNCs


  A company with significant product operations in at least two countries
• Frances Cairncross, The Economist: 'Globalisation is the "death of distance"'
• Forward markets in currencies

  • Firms buy their currency in advance/ "lock in a price"
  • Firms agree a fixed price for purchase of foreign currency in the future
  • Enables firms to reduce risk/uncertainty
  • Firms can be certain about the cost of their imports in pounds
• Niall Ferguson, Historian: 'The international integration of markets for goods, labour and capital'
• Martin Wolf, FT: 'Globalisation is the integration of economies through markets across frontiers'
• Historical periods of globalisation

  • 16th Century - The Silk Road
  • 19th Century - The British Empire
  • 19th Century - The Suez Canal
  • 20th Century - Mass Production
  • 21st Century - "Globalisation on Steroids"
  • 21st Century - Multinational Companies
• Characteristics of globalisation


  • Free trade of goods and services
  • Free movement of labour
  • Free movement of capital
  • Free exchange of technology and ideas