Macro - Yr 2

• Resource Crowding Out - When government spending causes a shortage of resources in the private sector
• Hyman Minsky Hypothesis - Over periods of economic prosperity, financial institutions invest in riskier assets. Argues that the financial system is inherently unstable
• Prebish-Singer Hypothesis - Countries who are primary product dependent will have worsening terms of trade (value of imports rise whilst the value of exports fall). The only way to fix is to invest in capital
• Trade Diversion - International trade reduces domestic production which means consumers buy from foreign producers instead of local ones. Countries may add a tariff
• Trade Creation - Increase in international trade results in more efficient allocation of resources as countries specialise in what they do best
• Free Trade Agreement - A region whose member countries have lower or no tariffs. E.g - North America Free Trade Agreement
• Customs Union - Standard Tariffs for non-members
• Common/Single Markets - A group of countries that have agreed to remove barriers to trade and to allow free movement of labour. E.g - the EU
• Economic Union - The countries economies become integrated
• Monetary Union - A union of countries that share a common currency and a common monetary policy.
• Money Market - Short term, highly liquid debt securities. E.g - treasury bills and certificates of deposit
• Capital Market - Long term debt and equity securities. E.g - Corporate bonds and government bonds.
• Foreign Exchange Market (FOREX) - A place where currencies are brought and sold; facilitates international trade and investment
• Characteristics of Money - Durable, portable, divisible and not be able to be counterfeited
• Stocks - Represent Ownership in a company and pay dividends to shareholders
• Bonds - A debt instrument that pays interest to the bondholder
• Derivatives - Instruments whose value is based on the value of and underlying asset, such as options or futures
• Narrow Money, M1 - Most liquid components of money supply, including cash and bank deposits
• Broad Money, M2, M3 ... - Incorporates the liquid and liquid assets
• Yield = Coupon / Market Price x 100
• Financial Policy Committee (FPC) - Sets policy tools, Identifies systemic risk and takes part in stress testing. Macro prudential regulation
• Prudential Regulation Authority (PRA) - Micro prudential regulation, supervision and setting/enforcing standards for financial institutions
• Financial Conduct Authority (FCA) - Regulation , consumer protection, and market supervision
• Glass–Steagall Act of 1933 = prohibited commercial banks also being investment banks
• Basel Accords = International banking regulation framework that sets minimum capital requirements for banks based on their level of risk-taking.
• Financial Services Act, 2012 - Provides new regulatory framework for financial institutions in the UK
• Moral Hazard - One party will act irrationally due to the effects being burdened by third parties
• Absolute Advantage - Coined by Adam Smith - The ability of a country to produce a good or service at a lower cost than another country with the same resources
• Comparative Advantage - Developed by David Ricardo - When one country can produce a good/service at a lower opportunity cost than another country with the same resources
• Gravity Theory of Trade - Countries tend to trade with other nations close to them
• Current Account = A country's trade in goods and services as well as its primary and secondary income flows
• Financial Account = Foreign direct investment, net portfolio investment, bank flows and foreign exchange reserves
• Oliver Blanchard - Debt is not a big issue if your GDP is rising significantly as well
• J-Curve Effect and the Marshall-Learner Condition - If the PED for imports and exports is greater than or equal to 1, then a depreciation of the currency will lead to an improvement in the current account

  
• Floating Exchange Rate - Advantages - Independent monetary policy, shock absorption, currency reserves and automatic correction of trade imbalances
• Floating Exchange Rate - Disadvantages - Exchange rate volatility (uncertainty), loss of exchange rate as a policy tool, risk for businesses and investors
• Fixed Exchange Rate - Advantages - Price stability, foreign direct investment (economy is more attractive), reduced risk
• Fixed Exchange Rate - Disadvantages - Lack of flexibility, dependence on reserves, balance of payments issues
• Terms of Trade = Average export price index / Average import price index x100
• Gini Coefficient - 1 = Perfect inequality, 0 = perfect equality. For the UK this is around 0.35