14 - The International Economy Flashcards
What is International Trade?
The exchange of goods and services along international borders, allowing for greater competition, and more competitive pricing in the market.
What are the benefits of international trade?
Access to new markets, more consumer choice, more competition, elastic supply, specialisation, economies of scale.
What are the disadvantages of International trade?
Domestic unemployment, less domestic demand, leakage from circular flow, loss of industry, domestic suppliers lose market share.
What are the barriers to trade employed by countries?
Tariffs, Quotas, subsidies, embargoes.
What are the main reasons for trade barriers?
Response to allegations of export dumping, response to a persistently large trade deficit, providing employment position in key industries, protect fledgling sectors, raise tax revenues, response to impact of an economic downturn.
What are the characteristics of a free trade area?
No tariffs between members, no external tariff, negotiate own trade deals.
What are the characteristics of a customs union?
No tariffs, no border checks, common external tariff, trade deals for whole customs union.
What are the characteristics of a single market?
No tariffs, no border checks, freedom of movement of goods and people, common rules and regulations.
What is the impact of a free trade diagram on the domestic market?
In equilibrium at PE, QE. World suppliers enter market because of free trade policy.
What happens to domestic demand, and domestic supply on a free trade diagram?
Increase in Dom demand, decreased market price from PE to P1. Decreased domestic supply. Excess demand from Q2-Q1.
What are the evaluations of international trade?
Benefits of trade depend on specialisation and exchange, short run may see domestic unemployment, long run may see better allocation of resources, depends on trade deal, and trade balance.
What are the benefits of providing state aid for industries?
Can secure investment and company operations, helps struggling industries.
What are the costs of providing state aid for industries?
Can give some industries unfair advantages.
What are the economic consequences of a tariff war between the US and China?
Could cause a decline in real exports, and GDP. Weaker demand for other exports, US imports from China fell significantly, some tariffs have been passed onto consumers.
What is Globalisation?
The process of increasing integration of the world’s economies.
What are the causes of globalisation?
Improvements in information technology, developments in transport, service industry growth has made it easy to transport around the world.
What are the characteristics of globalisation?
Growth of international trade, reduction of trade barriers - trade liberalisation. Greater international mobility of capital and labour. Increase in the power of TNC’s. Decrease in governmental power.
What are less developed economies?
Countries considered behind others in terms of their economy, human capital and infrastructure.
What are the consequences of globalisation in less developed economies?
Has caused low paid workers in sweatshops, farmers in developing countries could be forced to grow GM crops, growing dominance of US corporate culture.
What are more developed countries?
Countries with a high degree of economic development, high average income per head, high standards of living.
What are the consequences of globalisation for more developed economies?
MNC’s could reduce wages and living standards in developed economies. New jobs could be highly skewed or low paid, unskilled. Spread of technology makes more people better off.
What is the dependency theory of trade?
Developing economies possess little capital because the system of world trade has been organised by developed economies to their own advantage, so the terms of trade are moved in favour of industrialised countries.
What do developing economies have to do in order to develop?
Export more to buy the same quantity of capital goods for energy vital for development. The movement of the terms of trade in favour of developed economies has raised levels of income.
How has globalisation in the service sector changed?
After call centre employment rose, locating in high unemployment regions in the UK, they then moved to Asia and Eastern Europe.
What has happened to the ‘Death of distance’?
Distance is less of a barrier for businesses and consumers, due to globalisation.
Which factors encourage the location of call centres?
Low wages in developing economies, reliable and cheap telecommunications, 24 hour shift employment, workers are fluent in English.
What does globalisation involve?
Moving capital to lower cost labour - more than it allows migration to more developed countries.
What has globalisation reduced?
The power of national governments in smaller countries, to control multinational firms operating within their boundaries. They have less freedom to introduce tariffs.
What does comparative advantage argue?
Argues that countries can benefit from trading with each other by focusing on making the things they’re best at making, buying the things they’re not good at.
What are the advantages of comparative advantage?
Can justify globalisation, as countries can have higher material outcomes. Productivity gains by specialising their economies, increases efficiency of production by focusing on these tasks.
What are the disadvantages of comparative advantage?
Developing countries may be kept at a relative disadvantage, may promote unfair of poor working conditions, can lead to resource depletion, risk of over-specialisation.
What is an example of comparative advantage?
High powered executives may consider hiring an assistant to answer their emails. Even if they could do this faster themselves, it’s more productive for them to spend time of managerial work, than secretarial work.
How is comparative advantage measured in opportunity cost?
What a country gives up when it increases the output of a country by 1 unit.
What happens when a country possesses an absolute advantage in both products it produces?
Its’ comparative advantage lies in producing the good where its’ absolute advantage is greater.
What happens when a country has an absolute disadvantage in both goods it produces?
It possesses a comparative advantage in the product which it has less of an absolute disadvantage in.
What happens when one country has an absolute advantage in goods?
Complete specialisation with comparative advantage doesn’t result in a net output gain. The output of one good rises, output of the other good falls.
When does a country have an absolute advantage?
If it can produce more of a good with a given amount of resources than another country.
What is production without specialisation?
If countries devote half their total resources to each activity.
What other factors matter to translate into trade gains?
Administration and transport costs, suitable demand conditions.
What are the assumptions which underpin comparative advantage?
Perfect occupational mobility - resources used in one industry can be switched into another without loss of efficiency, constant returns to scale - doubling the inputs in each country leads to a doubling of total output.
What are the inputs of a comparative advantage diagram?
Germany’s PPF has a smaller slope, meaning Germany has a lower opportunity cost than the UK when producing cars. The UK has a steeper slope, meaning it has a lower opportunity cost.
What are the impacts of an absolute advantage diagram?
Spain has absolute advantage over Belgium, so can produce more of both items with the same resources, Belgium has comparative advantage in Bakery items.
What is Protectionism?
The act of imposing trade barriers to protect the income of domestic producers.
What are the benefits of protectionism?
Job creation and protection, protect industries such as infant industries, allowing domestic start up firms to survive or develop comparative advantage. Diversify the economy - structural change. Source of government revenue.
What are the disadvantages of protectionism?
Trade War - Response of other countries to our actions. Inefficient allocation of resources - countries should specialise and produce what they’re good at.
What is the impact of protectionism on infant industries?
Increasing returns to scale - the more a country specialises in a particular industry, it becomes more productively efficient. Good for infant industries to develop and achieve full economies of scale.
What is the impact of protectionism of agricultural efficiency?
Monoculture erodes efficiency, destroys comparative advantage which existed before specialisation took place.
What does strategic trade theory argue?
That comparative and competitive advantage aren’t natural. and governments try to create comparative advantage by nurturing strategically selected industries.
What does strategic trade theory justify?
Protecting industries while competitive advantage is built, arguing that protectionism can prevent exploitation by a foreign monopoly.
How do governments in developed economies use strategic policy to help declining industrues?
Trade adjustment assistance, other aid to workers and firms in these industries. Subsidies on exports or taxes on imports and investment, to protect industries from foreign competition.
What is the impact of protectionism on employment?
Trade unions argue that import controls are necessary to prevent multinational firms shifting capital to low wage developing economies, exporting output back to countries where capital was moved.
What are the advantages of globalisation?
Promotes free trade, technological change, economies of scale, economic growth increases.
What are the disadvantages of globalisation?
Pollution, as a negative externality, loss of local jobs, profits can leak out of economy, countries can become dependent on FDI.
What are patterns of trade?
The changes in a country’s imports and exports throughout periods of time.
Which factors change the patterns of trade?
Absolute and comparative advantage, protectionism, trading blocs, trade creation, exchange rates, government intervention, globalisation, external shocks, economic development, exploitation of resources.
How does comparative advantage affect the patterns of trade?
A country able to produce a good at a lower opportunity cost.
How do the exchange rate and supply chains affect the pattern of trade?
Changes in the exchange rate make it cheaper to import from another country, growth of global supply chains.
How do trading blocs and technological advancements affect the patterns of trade?
Allowing countries to freely trade with one another contributes to trade creation. Better quality goods to export and import.
How does productivity of workers affect patterns of trade?
Employees able to produce high quality goods for countries to export and import.
What are the top 5 global trade blocs?
EU, NAFTA, ASEAN, MERCOSUR, BRICS.
What is a tariff?
A tax on imports designed to raise the price of them - making domestically produced goods more price competitive.
What is an example of a targeted tariff?
EU - 25% tariffs on US goods such as orange juice, bourbon, and Harley Davidsons.
Which countries have the highest number of harmful tariffs in force?
USA, India, Russia, Japan, UK, Pakistan, China, Australia, Indonesia, Vietnam.
Who are the winners of tariffs?
Government - Tariffs increase price from P1 to P2. Domestic producers - Inefficient domestic producers benefit from a gain to producer surplus.
Who are the losers of tariffs?
Consumers - As prices rise, reduction in consumer surplus is greater than the increase in producer surplus. Importers - Quantity of imports gone from Q1 to Q2.
What are the advantages of tariffs?
Protects domestic firms, due to increase in producer surplus, increase in revenue and sales market share. Stops dumping of cheap imports, tax revenue for government.
What are the disadvantages of tariffs?
Higher prices, less choice for consumers, loss of imports, risk of trade war.
How much did the UK export to the EU in 2020?
£251 Billion, 48.4% of total UK exports.
How much did the UK import from the EU in 2020?
£301 Billion, 50.4% of total imports.
What was the size of the UK’s trade deficit with the EU in 2020?
£49.4 Billion.
What % of UK exports went to the EU in 2002 compared to 2020?
55% in 2002, 42% in 2020.
What % of UK imports were from the EU in 2002, compared to now?
58% in 2002, 50% now.
Since when has the UK had a trade deficit with the EU?
Since 1999.
Who are the UK’s top trading export partners?
USA, Germany, Netherlands, Ireland, France.
Who are the UK’s top trading import partners?
USA, Germany, China, Netherlands, France.
What are the examples of degrees of international economic intergration?
Preference areas, Free trade areas, customs unions, common external tariffs, common markets, economic unions, political unions.
What are preference areas?
Countries agree to levy reduced tariffs on certain trade, such as the EU’s association agreements.
What are free trade areas?
Member countries abolish tariffs on mutual trade, each partner determines its’ own tariffs on trade with non member countries. Traders try to import goods into the partner with the lowest external tariff.
What are Customs unions?
Two main features of a customs union are abolishing tariffs, and a common external tariff.
What is a common market?
Customs unions with additional provisions to encourage trade and integration through mobility of factors of production.
What do economic unions do?
Add further harmonisation in the areas of general, economic, legal, and social policies, and development of union wide policies.
What do political unions do?
The ultimate form of economic integration, involving submersion of separate nation institutions.
What is the difference between a free trade area and a customs union?
Members of a free trade area are free to set their own tariffs against non-members, but custom union members can’t.
What are the advantages of the Euro?
Costs decrease in transaction with countries of the Eurozone, reduction in exchange rates, increased competition, greater price transparency, ECB maintains control of interest rates.
What are the disadvantages of the euro?
No control over interest rates and cost of borrowing, more emphasis placed on fiscal policy, introductory costs, divergences in trade area.
What are the benefits of trading in the EU?
Greater competition, removal of trade barriers, reduction of business costs, greater business efficiency, reduces anti-competitive practices.
What are the disadvantages of EU membership?
Cost - UK membership cost £15 Billion gross. Inefficient policies - 40% of EU spending goes on common agricultural policy. Net migration - Free movement of labour, causing overcrowding.
What is the role of the World trade organisation?
Organise talks among member states to reduce import controls, came about because of the blame of protectionist policies before WWII.
What has the WTO been successful at?
In reducing import controls on manufactured goods.
What have the WTO been less successful at?
Securing agreement to reduce tariffs and quotas on trade in services and agricultural goods.
What is a quota?
Physical limit on the amount of imports that can be brought into a particular country.
What are the impacts of imposing quotas?
Leads to a fall in imports, domestic suppliers gain more revenue. Price rises to P2, domestic suppliers, supply more Q3 to Q4. Consumers pay a higher price.
Why are governments not impacted directly from Quotas?
There is no tax income.
What are the impacts on consumer surplus?
Net welfare loss to society, increase in producer surplus, decline in consumer surplus.
What happens to world exporters?
They make less revenue - unless demand is very inelastic, meaning increase in price is greater than fall in quantity.
What is the Balance of Payments?
A record of all the currency flows into and out of a country in a time period.
What are the different parts of the BOP?
Current account, capital account, financial account.
What are the different parts of the current account?
Trade in goods, trade in services, investment income, transfers.
What are the different parts of the financial account?
Transactions in financial assets, investment flows, government transactions such as portfolio investments.
What is the Capital account?
Transfer of assets by individuals.
What is the current account deficit offset by?
The financial account surplus.
What is the comparative advantage in the short run?
Run a current account deficit to achieve comparative advantage in the long run.
What is the comparative advantage in the long run?
Achieve a current account surplus, or reduction, due to higher rates of investment, as a % of GDP and productivity rates.
What does a trade surplus lead to?
An increase in AD - injection of money.
What does a trade deficit lead to?
A decrease in AD - leakage of money.
What is a trade imbalance?
A situation where the trade balance of an economy is in deficit or surplus.
What are the causes of a trade imbalance?
Productivity, exchange rates, commodity prices, industrial sector, protectionism, lower comparative advantage.
What is a cyclical deficit?
Occurs during a recovery or boom in the economic cycle due to a rise in demand for imports.
What does a long term structural deficit show?
A country is living beyond its’ means, weakening domestic economy, lack of international competitiveness.
What does a long term structural deficit threaten?
Employment, incomes, living standards.
What are the causes of a structural current account deficit?
Under investment, relatively low productivity, high inflation persistently, Inadequate R and D, emergence of lower cost competition.
What are the causes of cyclical current account deficits?
Over-valued exchange rates, boom in domestic demand, recession in key export markets, slump in global prices of exports, increased demand for imported technology.
What are the advantages of a trade surplus?
An increase in economic growth, increase in demand, multiplier effect - exports increase, increase in investment leads to an increase in incomes. Increase in confidence and investment.
What are the disadvantages of a trade surplus?
Exchange rate appreciates - exports become expensive, imports become cheaper. Inflationary pressure - demand pull inflation, income inequality.
What are the advantages of a trade deficit?
Domestic scarcity of the good or service produced, availability and choice, more efficient allocation of resources.
What are the disadvantages of a trade deficit?
Deficit must be financed - leakage of profits to foreigners - surplus in the financial account. Loss of domestic jobs, loss of confidence and investment, negative multiplier effect.
What is the Balance of trade in goods?
The part of the current account measuring payments for imports and exports of goods.
What is the balance of trade in services?
Part of the current account, the difference between the payments for the exports of services and the payments for the imports of services.
What are primary income flows?
Net income flows made up mostly of investment income generated from profits, dividends and interest payments.
What are secondary income flows?
Current transfers of income arising from such items as gifts between residents of different countries, donations to charities abroad, and overseas aid.
How can you correct a current account deficit?
Inflation, supply side policy, fiscal policy, monetary policy, depreciation.
How does inflation correct a current account deficit?
Reducing it makes exports cheaper.
How does supply side policy correct a current account deficit?
Training to improve skills, reduces unit labour costs, increases productivity and competitiveness.
How can fiscal policy correct a current account deficit?
Reducing corporation tax to reinvest profits.
How can monetary policy correct a current account deficit?
Interest rates fall, loans and prices are cheaper.
How does depreciation correct a current account deficit?
Makes X cheaper, M more expensive - Marshall Lerner condition.
What is the Marshall Lerner condition?
States that for a currency devaluation to have a positive impact on trade balance, the sum of price elasticity of exports and imports must be greater than 1.
What happens when PED<1?
Devaluation worsens current account.
What happens when PED>1?
Devaluation improves current account.
What happens if goods exported are elastic?
QD increases, export revenue increases.
What happens if goods imported are elastic?
Total import expenditure decreases.
What happens in there’s a price fall in the Marshall Lerner condition?
% increase in QED - % loss in price - total revenue increases.
What is the counterpoint to exchange rate appreciation?
Means imports become cheaper - use monetary policy.
What should a government do if there’s too much demand for imports?
Use fiscal policy.
What happens if there’s scarcity in a current account deficit?
Structural problem of decline in manufacturing - long run issue.
How can a government use supply side policies to correct a current account deficit?
Restructure the economy, invest in new technology, apprenticeships, subsidies and grants to encourage business start-ups.
Which expenditure switching policies correct a deficit?
Involves changing the goods that people buy, devaluation of currency makes domestic goods relatively cheaper, imports more expensive. Consumers switch from buying imports to domestic goods.
What are expenditure reducing policies to correct a deficit?
Policies to reduce overall spending on imports, can involve tight fiscal or monetary policy.
What does devaluation cause?
The risk of cost push inflation, eroding competitive boosts, and a fall in real incomes. Tariffs cause a risk of retaliation from other countries.
What is foreign direct investment?
Investment in capital assets in a foreign country by a business with headquarters in another country, and sometimes establish subsidies.
What is portfolio investment?
The investment of one country’s securities by the residents or financial institutions of another country.
What are hot money flows?
Flows of money across international borders, moving to find the greatest short term return - usually very easy to move.
What do Hot money flows cause?
Instability of currencies, exchange rates, balance of payments, and domestic economies.
How did hot money flows occur in 2008/09?
Owners of hot money shifted their funds out of the pound on a massive scale. After this, hot money flowed into the pound, until 2015.
What is an example of speculative capital flows between currencies destabilising the international monetary system?
The credit crunch.
What does an increase in exports cause?
A shift in the AD/AS curve to the right, depending on the shape and slope of the SRAS curve around the initial point of equilibrium.
What happens during deficient Aggregate Demand?
Any event that increases aggregate demand increases the level of real output in the economy, causing demand deficient employment to fall.
Why must the BOP balance for the whole world?
All countries can’t run surpluses simultaneously. Deficit countries may be forced to impose import controls from which all countries eventually suffer.
Which factors influence a country’s current account balance?
Productivity, Inflation, Exchange rate.
How does productivity influence a country’s current account balance?
Improving labour productivity is critical to the success of supply side policies intended to improve the price competitiveness and quality competitiveness of a country’s exports in their national markets.
How does inflation influence a country’s current account balance?
The rate of inflation relative to those of its’ trade competitors. If inflation is higher than the rates of its’ competitors, the country’s exports lose their price competitiveness.
How does the Exchange Rate influence a country’s current account balance?
A rising exchange rate increases the foreign currency prices of the country’s exports, reducing their competitiveness. Imports become more price competitive. Price elasticity of demand for exports and imports are relevant to the analysis of the effects of a change in a country’s imports.
What happens when the demand for exports and demand for imports are both price elastic?
A fall in the exchange rate is likely to reduce a current account deficit.
What does devaluation of currency cause?
The price of imports rises from P1 to P2, overseas price of UK exports falls from P3 to P4.
What can supply side policies do, which promote greater investment in R and D?
Improve quality competitiveness.
What do Supply side policies, with an outward shift of LRAS, cause?
They provide the economy with increased capacity, enabling a reallocation of resources towards exporting.
What does successful supply side policy cause?
Improves exports, leads to import substitution, by increasing labour productivity.
What is the problem with export led growth?
Has been more narrowly focused on how best to improve competitiveness of UK exports, and achieve sustained economic growth.
How has export led growth been used?
With regard to growth strategies in the developing world.
What is consumption led growth?
Economic growth being fuelled by rising consumption.
Where is a lot of consumer spending focused?
On goods and services produced in other countries, ‘sucking’ imports into the economy.
Why is Consumption led growth unsustainable?
A rapid growth of consumption fuelled by increased household debt leads to speculative bubbles.
What is investment led growth associated with?
Increased productivity, modernisation and engagement of the economy’s productive capacity.
How can the government correct a BOP surplus?
Reflation, removing import controls, revaluation.
How does reflation correct a BOP surplus?
Reflating demand, via expansionary monetary policy or fiscal policy, increases a country’s demand for imports.
How does removing import controls correct a BOP surplus?
Trade can be liberated by removing import controls.
How does Revaluation correct a BOP surplus?
For a revaluation to reduce a current account surplus, the Marshall - Lerner condition must be met.
What does a BOP deficit mean in the short run?
A deficit allows a country’s residents to enjoy living standards boosted by imports, would be higher than possible from consumption of output alone.
Why can deficit countries not reduce deficits?
They can’t change it unless countries with large surpluses take action.
What is a negative of a BOP surplus?
Can be inflationary.
What can competitive devaluation lead to?
Retaliatory devaluation, and an exchange rate war.
Why is it hard for the dollar to devalue?
Because many countries peg their currency against the dollar, so other countries would fall similarly.
What are the benefits of a BOP surplus?
Makes exports cheaper, helps achieve a current account surplus.
What is Economic Development?
The process of improving standards of living both in material and psychological aspects.
What are the objectives of economic development?
To increase the availability and widen the distribution of basic life sustaining goods. Raise standards of living, expand the range of economic and social choice.
What are the aspects of economic development?
Quality of life measure, GDP per capita, dependent on government intervention, focus on equality.
What are the characteristics of developing economies?
Low standards of living, low levels of productivity, high rates of population growth, high and rising levels of unemployment, reliance on primary sector.
Which countries have the highest HDI?
Norway, Austria, Iceland, Canada, Ireland.
Which countries have the lowest HDI?
Burundi, Chad, DRC, Burkina Faso, Mali.
What are the examples of projects which help economic development?
Hospitals, work experience, average incomes, local GP, prison service, right to vote, pensions, child protection.
What is HDI?
Reflects the distribution of economic development, and resulting deprivation.
What does HDI measure?
Health - Life expectancy at birth. Wealth - GNI per capita. Education - Mean years and expected years of schooling.
What is the analysis of HDI?
A qualitative measure, looking at quality of life. A broader measure, not just income. Looks at access to education, healthcare, longevity, GDP per capita. Doesn’t reflect inequality.
What is the trickle down effect?
Spending by the wealthy creates employment opportunities for others.
What are the constraints on Economic development?
Low living standards, low productivity of factors of production, high population growth, high levels of unemployment, a narrowly focused economy. Conflict, Geography.
What is the resource curse?
The paradox that countries with an abundance of natural resources, tend to have less economic growth, less democracy, worse development outcomes.
What are the impacts of the resource curse on currency?
Causes a large appreciation of the currency, imports become cheaper, destroying domestic firms, exports become expensive. Governments gain large revenues from the sale of the revenue.
What are the reasons for the resource curse?
Civil war - In control of ownership. Limits investment in diversified industries, income elasticity of demand, monopoly ownership.
How does a civil war cause a resource curse?
These countries can be more vulnerable to civil conflict with competing interests, fighting for control of natural wealth, leading to wasted resources and lost human capital.
How do limits in investment in diversified industries cause a resource curse?
A country specialises in the production of the resource they have, so there is less incentive to diversify into different industries such as the service sector.
How does income elasticity of demand cause a resource curse?
Primary products have a lower income elasticity of demand than services and manufactured goods, causing declining terms of trade.
How does monopoly ownership cause a resource curse?
Global multinationals such as BP and Shell cause profits to flow back to the country of the MNC, not the economy in which resources are found.
What is an evaluation of the resource curse?
Countries with abundant resources have lower rates of economic growth. Countries with good institutions have no trade off. Resources aren’t necessarily an impediment to growth.
What is an example of the resource curse?
Botswana is dependent on the diamond industry - 40% of GDP, one of the highest rates of economic growth in the world between 1965 - 2002.
What is FDI?
Involves a multi-national corporation building a manufacturing plant, or other physical investment in a foreign economy.
What are the advantages of FDI?
Helps to plug the savings gap, imports foreign exchange into the economy. Jobs created directly and indirectly, creating a regional multiplier effect, introduce new technology. Generates tax revenue for government.
What are the disadvantages of FDI?
Investing in urban areas, widens the gap between urban and rural incomes - creating regional inequality. Exploitation of the workforce - Low wages, unsafe working conditions. Exploiting local environments. Profits leave the LEDC.
What is the Harrod - Domar growth model?
Stresses the importance of savings and investment as key determinants of growth.
What does the economic growth rate depend on?
Level of national savings, productivity of capital investment, savings ratio/capital output ratio.
What does the success of FDI depend on?
Amount of annual increase in FDI, as a % of GDP. Complimentary investment - roads. Government spending tax revenue - provision of public and merit goods. Size of the local multiplier. Type of jobs created.
What are the policies to promote economic development?
Tourism, overseas development assistance, international trade, government transparency, import substitution, industrialisation, FDI.
What are Remittances?
Cross border transfers of money from workers back to their country of origin.
What is Globalisation?
Economic integration of national economies through international trade.
What are the characteristics of globalisation?
Trade Blocs, increase of FDI by MNC’s, internationalisation of products and services, structural change - outsourcing of production.
What are the advantages of globalisation?
Promotes free trade, technological change, economies of scale, economic growth increases.
What are the disadvantages of globalisation?
Pollution, loss of local jobs, profits can leak out of economy, countries become dependent on FDI, landlocked countries lose out, migration causes economic and social pressure.
Which other policies help economic development?
Improved macroeconomic conditions, free market supply side policies, interventionist supply side policies, export oriented development, diversification.
How does Macroeconomic Stability help economic development?
A commitment to low inflation, foreign investors have more confidence to invest, effective monetary policy such as central bank independence. No large budget deficits.
How does less restrictive regulation create economic development?
Creates a climate which is conducive to business, tackling corruption, which is a large barrier to domestic and inward investment.
How does privatisation and deregulation create economic development?
Moving from a communist country to a mixed economy helped china, privatisation gives firms a profit incentive to make firms more efficient. Opening markets to internal and international competition.
How does investment in public services create economic development?
The free market doesn’t provide sufficient levels of education - market failure. Providing basic levels of education and training can increase earning potential.
How does diversification away from agriculture cause economic development?
Volatile prices of primary products limits economic development, as well as low income elasticity of demand. Government encouragement of industries such as manufacturing, countries with little infrastructure don’t always make effective use of capital investment.
What is the IMF?
International Monetary Fund.
What can the IMF do?
Give loans to countries to address a fiscal problem, but sometimes insist on free market reforms, which limit spending on the poor.
What are the reasons to diversify the economy?
One incident can ruin perceptions of a country / economy. Comparative advantage can give better technology and productivity, which can spur growth. Tourism also has high environmental costs.
What are the reasons not to diversify the economy?
Government intervention could be infficient and waste money, an economy may not have sufficient infrastructure to develop manufacturing. There are many advantages of tourism.
Which factors affect growth in developing countries?
Levels of infrastructure, levels of corruption, educational standards, labour mobility, levels of inward investment, flow of foreign aid and investment, levels of savings and investment.
How does an increase in GDP not always mean an increase in living standards?
Corruption, environmental problems, military spending.
How does corruption mean GDP doesn’t always ensure higher living standards?
Benefits of growth may go into politicians’ bank accounts.
How do environmental problems mean GDP doesn’t always lead to higher living standards?
Can lead tohealth problems - lower living standards for individuals.
How does military spending mean GDP doesn’t always increase living standards?
If higher military spending is at the expense of healthcare and education, it can lead to lower living standards.
