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Macroeconomic Policies in a Global Context (Edexcel A Level Economics A)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Macroeconomic Policies in a Global Context

  • Due to globalisation, economies do not operate in isolation but are highly interdependent

  • This means that the effectiveness of any of the macroeconomic policies and direct controls used by a government is dependent on the global environment

    • The extent to which it is dependent is influenced by the size and development of the economy

  • Different approaches are used by different governments to attempt to solve the same problem

    • E.g. After the Global Financial Crisis of 2008, the UK Conservative led government initially used a Keynesian approach to bailing out the banks and then quickly followed this with a contractionary demand-side policy of austerity. The Democratic led USA Government also used a Keynesian approach to rescuing financial institutions and then followed it up with further expansionary fiscal and monetary policy

The Use of Policy Measures To:

Aim

Explanation

Reduce fiscal deficits and national debts

  • Debt is not necessarily bad as it can be used to leverage growth - but unsustainable debt is bad

    • One study found that once debt exceeds 90% of the annual GDP, it becomes unsustainable very quickly

  • With the recent willingness of Central Banks to print new money to facilitate quantitative easing, questions have been raised about the need to borrow to finance capital expenditure - why not print it?

  • The use of austerity to reduce deficits and debts has long term effects and creates hardship for many households. It also increases inequality as many government services are cut e.g. 800 libraries have closed in the UK since austerity was implemented in 2010

Reduce poverty and inequality

  • Countries have different approaches

  • Some have a progressive tax system which helps to redistribute income based on financial need (means tested)

  • Others have a progressive tax system plus free education and healthcare for all

  • The measures taken to reduce poverty and inequality are very much influenced by political ideology and normative economics e.g. there is a strong bias against free healthcare in the USA as many people believe that equates to socialism

    • Meanwhile data shows that the healthcare system in the USA is one of the most inefficient in the top 50 wealthiest countries in the world

Changes in interest rates and the supply of money

  • Central Banks can change interest rates and the supply of money based on the internal needs of their economies - and they often do

  • However, sometimes they have to react to global dynamics that present problems e.g. the exchange rate may depreciate as other countries raise interest rates. They may wish to keep interest rates lower but to stabilise the currency they have to respond by raising interest rates

  • There is also some debate about the extent to which the money supply can be controlled

  • Different views exist on the role that an increase in the money supply plays in creating inflation 

    • Milton Friedman (a Monetarist) held the view that "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output"

    • This opposes the Keynesian view that inflation is the result of a change in output

    • The global money supply has increased enormously since 2010 as a result of quantitative easing e.g. between March 2020 and the end of 2021 the USA had increased the money supply by $6.3 trillion

      • In early 2022 inflation began to spike globally confirming the fears of many monetarists

Increase international competitiveness

  • These typically include protectionism, currency depreciation and the use of supply side policies

  • The effectiveness of these policies depends on the response of trading partners

  • Policies to improve international competitiveness can result in creating internal domestic conflicts which are difficult to resolve e.g. by protecting the steel manufacturing industry in the UK, the cost of steel as an input for broader industry increases

    • Employment gained in steel manufacturing is very likely surpassed by employment lost in steel related industries as a result of the increased costs of production

Use of Policies in Responding to External Shocks

  • The following recent external shocks to the global economy have forced governments to respond with a range of policies in order to steer their economies through the crisis

  1. The Global Financial Crisis of 2008

  2. The Arab Spring which started in 2011: This was a further development of the Iraq War and the long running war on terror. It continued to develop into a major conflict centered in Syria, raising geopolitical tensions. Many Western economies benefitted through an increase in gross domestic product as governments increased spending on military hardware

  3. The Asian Tsunami of 2011 had major impacts on the supply chains of many automotive and electronic industries

  4. The Global Trade War that developed under President Trump and continued from 2016 to 2020

  5. The Global Pandemic, Covid19, which started in January of 2020

  6. The Russian War on the Ukraine which started in February 2022. The Ukraine is one of the world's largest producers of grain and Russia is one of the world's largest exporters of natural gas

Measures to Control Global Companies

  • The ability of governments to control global companies is dependent on a range of factors including

    • The power of the government in relation to the power of Transnational Corporations

    • The absence of corruption e.g. Singapore is ruthless in stamping out corruption but Romania and Democratic Republic of Congo are well known for their high levels of corruption. The latter allow Transnational Corporations to influence legislation and to decide how the factors of productions are used/exploited

    • The state of development of the legal, financial, media and political institutions e.g. many of these institutions remain undeveloped in Cambodia and Transnational Corporations are stripping the country of its resources

    • The state of development of the economy as a whole (developing or developed)

  •  Transnational Corporations are well known for using their power, wealth and access to the world's best lawyers to secure (and protect) favorable trading conditions that will maximise their profits

    • They often engage in monopoly and monopsony behaviour

Reducing the use of transfer pricing

  • A corporation will set up multiple sub-corporations which it owns

  • The corporation then extracts resources from a country and sells it to their own sub-corporation at a low price

  • This results in low taxes or low revenue share in the resource rich country e.g. Chinese and Singaporean firms working in DRC have an arrangement to pay the government 40% of the revenue received for the sale of cobalt

    • If they sell it to their own sub-corporation at a low price, the government receives less revenue

    • It is hard for less developed countries to challenge this kind of power and the World Bank is now helping governments to negotiate deals that bring transparency

Other measures to reduce transnational abuse of power

  • Setting more rigorous labour protection laws as well as ensuring that transnationals are using local labour and not labour from their own country

  • Establishing more rigorous laws around technology transfer between local and transnational firms

  • Establishing limitations or targets on the level of exports by the transnational firms

Problems Facing Policymakers

Problems Facing Policymakers When Applying Policies

Problem

Explanation

Inaccurate information

  • Data often lags reality as underlying economic conditions can change quickly

  • Data on unemployment, inflation, GDP growth etc. is useful for identifying trends, but the reason for the trend may not always be clear and policy decisions may be based on incorrect assumptions

Risks and uncertainties

  • Identifying risks and establishing the uncertainties contained within any policy decision can be a very difficult task indeed

  • The risks may be greater than expected

  • The uncertainties may not even be identifiable when the policy is instituted e.g. the impact of the Brexit vote contained many foreseen outcomes (e.g. loss of free movement), but there were also many uncertainties which were not recognised e.g. the need for many small UK firms to relocate operations to Europe in order to avoid excessive export costs

Inability to control external shocks

  • As mentioned above, external shocks have a ripple effect on economies around the world and globalisation makes it very difficult to protect against them

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Jenna Quinn

    Author: Jenna Quinn

    Expertise: Head of New Subjects

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.