4.2.6 The international economy Flashcards
1
Q
What is globalisation?
A
The ever increasing integration of the world’s local, regional and national economies into a single, international market
2
Q
What are the characteristics of globalisation?
A
- Free trade of goods and services
- Free movement of capital and labour
- Free interchange of technology and intellectual capital
- Interdependence between countries
- FDI and more migration
3
Q
What is interdependence?
A
Where the performance of a country depends on the performance of other countries, seen in 2008-9 when the effects of the GFC spread across the globe
4
Q
What are the causes of globalisation?
A
- Trade in goods: developing countries have acquired the capital and information to manufacture goods, from efficient transport and MNCs moving their production abroad
- Trade in services: such as the trade of tourism
- Trade liberalisation: growing strength and influence of organisations such as the WTO, which advocates free trade, has contributed to declining trade barriers
- Multinational corporations: the spread of technological knowledge and economies of scale has resulted in lower costs of production
- International financial flows: such as flow of capital and FDI enabling countries such as China to finance their growth, facilitated by the removal of capital controls
- Communication: improvements in IT have resulted in easier and cheaper communication, leading to the world being more interconnected as transport links and transfer of information has improved and become easier
- Containerisation: resulting in it becoming cheaper to ship goods across the world, causing prices to fall, making the market more competitive
5
Q
How has containerisation contributed to globalisation?
A
- It means that goods are distributed in standard sized containers, so it is easier to load and cheaper to distribute using rail and sea transport, helping to meet world demand
- Cargo can be moved much faster, so economies of scale can be exploited and less labour is required
- It is mainly MNCs which have been able to exploit this, and could result in some structural unemployment
6
Q
What are the benefits of globalisation on developed countries?
A
- Increased choice for consumers: higher consumer surplus and high consumer welfare
- Decreased inflation from higher supply, increased competition and price level drops
- Export-led businesses profit off of higher demand
- Economies of scale and access to cheaper labour
- Resource mobility leading to more efficient allocation of resources and higher productivity
- Increased FDI
- Higher political stability as countries are able to maintain relations with other countries as they rely on them
7
Q
What are the costs of globalisation on developed countries?
A
- Possible structural unemployment from occupational immobility
- Industrial sectors without a comparative advantage lose out
- Labour migration resulting in pressure on services and infrastructure
- Environmental impacts such as increased pollution
- More inequality
- Political sovereignty
8
Q
What are the benefits of globalisation on developing countries (LEDCs)?
A
- Economic growth resulting from easier trade and increased production, causing the rise of emerging markets, increasing choice for consumers
- Greater employment opportunities enabled by MNCs (but could be exploitative)
- Economies of scale for existing firms
- Capital inflows, meaning more FDI
9
Q
What are the costs of globalisation on developing countries (LEDCs)?
A
- Brain drain, as skilled workers can leave the country in search of better living standards and a higher income
- Resource depletion
- Cheap labour exploitation
10
Q
What are multinational corporations (MNCs)?
A
Organisations which own or control the production of goods and services in multiple countries
11
Q
What is the role of MNCs in globalisation?
A
- They have used marketing to become global, and by growing, have been able to take advantage of economies of scale
- The spread of technological knowledge and economies of scale has resulted in lower costs of production
12
Q
What are the advantages to the receiving country of FDI?
A
- Employment opportunities
- Boosted AD in the SR
- Potential LRAS boost in the LR, from more skilled labour and better infrastructure
- Increased tax revenue, from direct taxes such as corporation and income tax
13
Q
What are the disadvantages to the receiving country of FDI?
A
- Possible exploitation of labour and local resources, as the country may over offer for the FDI, such as lower taxation
- Profits may be sent back to country where the headquarters are located
- Company may use their own workers
14
Q
What are the advantages of FDI for MNCs?
A
- Cheaper costs of production: cheaper labour, lower taxes (form of tax avoidance), able to avoid tariffs and quotas
- Can take advantage of weaker legislation, such as less environmental laws in the country enabling the MNC to use more resource
15
Q
What are the disadvantages of FDI for MNCs?
A
- Exchange rate risks meaning that costs could increase
- Possible diseconomies of scale, such as communication and coordination problems
- Possible hostility from the government of the country, for reasons such as exploitation
16
Q
What does the effect of FDI depend on?
A
The receiving country’s government’s approval
17
Q
What is comparative advantage?
A
- The ability of a country to produce at a lower opportunity cost than another country
- They have to give up producing less of another good than another country, using the same resources
18
Q
What is absolute advantage?
A
The ability of a country to produce at a lower unit cost than another country
19
Q
What is the difference between comparative and absolute advantage?
A
If a country has the comparative advantage, it means that they can produce that product at a lower opportunity cost than another country, whereas if a country has the absolute advantage, it can produce the product at a lower unit cost than another country
20
Q
What can countries do where they have comparative advantage?
A
Specialise, increasing economic welfare and total output
21
Q
What are the benefits of specialisation?
A
- Exploitation of economies of scale, lowering costs of production
- Increasing total output as all countries specialise in what they are efficient at producing
22
Q
What are the costs of international trade?
A
- Job losses, as countries with lower labour costs have entered the market
- Environmental damage due to increase in manufacturing
- Dependency on other countries for necessities
23
Q
What are the reasons for changes in the pattern of trade between the UK and the rest of the world?
A
- Changing comparative advantages, as developing countries gain advantage in production of manufactured goods due to their lower labour costs, shifting production abroad and away from developed countries
- Impact of emerging economies - more countries participating in world trade since collapse of communism
- Exchange rate changes, such as China keeping their currency’s value low to make exports relatively cheap (export-led growth)
- Protectionism/ Free Trade areas: policies of developed countries have limited the ability of developing countries to export primary commodities
24
Q
What are the benefits of international trade?
A
- Increase in total world output, leading to higher economic growth and living standards
- Access to resources/ finished goods that the country can’t produce
- More choice, meeting demand closely (solving economic problem)
- Increase in economic efficiency by establishing a competitive market, lowering costs of production and increasing output
25
What is protectionism?
The act of guarding a country's industries from foreign competition.
26
What are examples of protectionist policies?
Tariffs, quotas and export subsidies to encourage production and lower costs.
27
What are the causes of countries adopting protectionist policies?
- Protection of domestic jobs
- To improve the current account on the balance of payments
- New industries might need short term protection until they develop
- Tariffs can generate tax revenue
- Can be used to correct market failure, such as protecting society from demerit goods
28
How will protectionism protect domestic jobs?
- Foreign exporters pay tariffs, likely increasing the price of imports
- Imports become less competitive, increasing the demand for domestic goods
- As labour is in derived demand, domestic unemployment decreases
- Structural unemployment is prevented
29
How does protectionism improve the current account on the balance of payments?
Imports are made less competitive, decreasing the demand for imports, reducing the trade deficit.
30
How does protectionism support new industries?
By protecting new industries against larger businesses, they can gain economies of scale.
31
What are tariffs?
Taxes on imports to a country.
32
What are the impacts of tariffs?
- Quantity demanded of domestic goods increases
- Domestic producers gain some of consumer surplus
- Quantity demanded of imports decreases
- Government gains tax revenue
- Dead weight loss to society
- Can lead to retaliation, so exports might decrease
33
What is a quota?
A limitation on the quantity of a foreign produced good that is sold on the domestic market, by setting a physical limit on a specific good imported in a set amount of time.
34
What is the impact of a quota?
It leads to a rise in the price of the good for domestic consumers, so they become worse off.
35
What are export subsidies?
A form of government intervention to encourage goods to be exported rather than sold on the domestic market, by using direct payments, tax relief, or providing cheap access to credit.
36
What is an embargo?
A complete ban on trade with a particular country, usually politically motivated.
37
What is the impact of excessive administrative burdens, also known as 'red tape', on trade?
- Increases the cost of trading, so discourages imports
- Makes it difficult to trade with other countries, and is particularly harmful for developing countries which are unable to access these markets
38
What are potential negative consequences of countries adopting protectionist policies?
- Decreased global trade and output due to extra costs
- Risk of retaliation from other countries (depending on their size), worsening international relations
- Cost-push inflation
- Less FDI
- Market distortion leading to allocative inefficiency
- Prevents industries from competing in a competitive market, leading to productive inefficiency
- Consumers face higher prices and less variety, so consumer welfare is lost
39
What are potential positive consequences of countries adopting protectionist policies?
- Reduced trade deficit
- Increase in domestic employment
- Prevention of structural unemployment
- Increased tax revenue from tariffs
40
What is a customs union?
A collection of countries that has free trade between members and have established a common trade policy with the rest of the world, such as using a common external tariff.
41
What is an example of a customs union?
The European Union
42
What do common markets establish?
Free trade in goods and services, a common external tariff and allow free movement of capital and labour across borders.
43
What are the features of a customs union?
- Free trade between members
- Common trade policy with the rest of the world
- Safety measures for imported goods, such as food, are common across all members
- Common customs rules and procedures
- A structure for the combined administration of the members
44
What is the benefit of a common trade policy in a customs union?
Helps to create and guide trading relationships with countries and blocs outside the customs union.
45
What are the main characteristics of the Single European Market (SEM)?
- Free movement of goods, services, capital and labour between nations
- Administrative provisions, laws and regulators are approximated between members, meaning some laws are better suited to some countries, and not so much for others
- Common competition policy
- Common external tariffs
46
What were the consequences for the UK of its membership of the EU?
- Trade creation and trade diversion
- Reduced transaction costs, due to no barriers to trade or border controls
- Economies of scale
- Enhanced competition
- Migration, increasing the supply of labour, which could help fill labour shortages, but might mean some countries lose their best workers
47
What is the role of the World Trade Organisation (WTO)?
- Promotes world trade through reducing trade barriers and policing existing agreements
- Settles trade disputes by acting as the judge
- Organises trade negotiations
- Covers the trade in services and intellectual property rights
48
What are possible conflicts between regional trade agreements and the WTO?
- Trading blocs might distort world trade or adversely affect those who do not belong to them
- Conflicts between blocs could lead to a rise in protectionism
- Some countries might argue that the WTO is too powerful or ignores the problems of developing countries
- Setting up a customs union or a free trade area could be seen to violate the WTO's principle of having all trading partners treated equally
49
How might trading blocs distort world trade or adversely affect those who do not belong to them?
There could be an inefficient allocation of resources as a result of policies such at the EU CAP.
50
How could conflicts between blocs leading to a rise in protectionism be a conflict between regional trade agreements and the WTO?
A common external tariff contradicts the WTO's principles, since although there is free trade between members, protectionist barriers are imposed on those who are not members.
51
Why might some countries argue that the WTO is too powerful or ignores the problems of developing countries?
Developed countries do not trade completely freely with developing countries, limiting their ability to grow.
52
What accounts make up the balance of payments?
The current account, the capital account and the financial account.
53
What does the current account consist of?
The balance of trade in goods, the balance of trade in services, primary income flows and secondary income flows
54
Is the current account in surplus or deficit in the UK?
Deficit in the UK
55
What components of the current account are in deficit in the UK?
The balance of trade in goods and secondary income flows
56
What components of the current account are in surplus in the UK?
The balance of trade in services and primary income flows
57
What components of the current account represent the trade balance?
The balance of trade in goods and the balance of trade in services
58
What are examples of primary income flows?
Net income flows from UK overseas assets, such as dividends, interest and profits
59
What are examples of secondary income flows?
Net current transfers, such as aid, EU grants, remittances, gifts
60
What does the financial account consist of?
Other capital flows (‘hot money’), net portfolio investment, net direct investment (FDI), drawing on reserves, and financial derivatives + employee stock options
61
What does the current account measure?
All currency flows into and out of a country to pay for trade, together with primary and secondary income flows
62
What does the financial account record?
Flows of capital into and out of the economy
63
What does a deficit in the financial account mean?
The country acquires capital assets located in other countries that are greater in value than the country’s own assets bought by overseas companies
64
What is long term capital?
Investing in FDI e.g. factories/offices
65
What are portfolio capital flows?
Purchase of bonds/shares etc. rather than physical/productive assets like FDI
66
What causes short term speculative flows (‘hot money’)?
Expected exchange rate or interest rate changes
67
Where does investment go in the balance of payments?
The financial account
68
Where does income from investment go in the balance of payments?
The current account
69
What does a surplus in the financial account mean?
Money flowing into the country
70
What is the effect of a balanced current account on the AD curve?
AD is stable/unchanged
71
What is the effect of a deficit on the current account on the AD curve?
AD shifts left
72
What is the effect of a surplus on the current account on the AD curve?
AD shifts right
73
What does a current account deficit imply for the financial account?
There is a financial account deficit
74
What does a current account deficit being seen as a weakness depend on?
- The size or percentage of the GDP
- How the deficit is financed
75
What are the benefits of a current account deficit?
- More imports means consuming outside the PPF, increasing living standards
- Could be deflationary
- Could be from importing capital goods, boosting LRAS
76
What are the long run issues with a current account deficit?
- If imports are persistently greater than exports, AD decreases, resulting in lower growth and increased unemployment
- It puts pressure on the currency to depreciate, resulting in import inflation
- If it is being financed by ‘hot money’ then it could result in ‘disaster’, or foreign currency reserves, which could run out
77
What different ways can a current account deficit be financed, and how will they perform in the long run?
- FDI - stable in long run
- ‘Hot money’ - ‘disaster’
- Foreign currency reserves - fine but could run out
- Selling bonds/shares to foreign investors - depends on how long country can keep borrowing
78
What are the demand-side determinants of the current account?
- The economic cycle of the UK and foreign countries
- The value of the currency
- Protectionism
79
What are the supply-side determinants of the current account?
- Training
- Changes in productivity
- Innovation
- Current account changes
80
What are the benefits of the exchange rate falling as a result of a current account deficit?
- It could solve the current account deficit
- It makes foreign investment into the UK attractive, which could lead to a surplus on the financial account
81
What is the exchange rate of a currency?
The weight of one currency relative to another.
82
What determines the value of the exchange rate in freely floating systems?
The force of supply and demand.
83
What is the demand for a currency equal to?
Exports and capital inflows.
84
What is the supply for a currency equal to?
Imports and capital outflows.
85
What is the effect of a decrease in interest rate to the exchange rate?
A fall in interest rates, relative to other countries, makes it less attractive to invest funds into the country as the rate of return on investment is lower, decreasing the demand for the currency, increasing hot money outflows, causing a depreciation.
86
What factors impact the exchange rate?
- Interest rates within country (positive correlation)
- Interest rates abroad (negative correlation)
- Political/economic stability/instability (e.g. Brexit), speculation
- Government intervention
- Inflation
87
What are the benefits of a weaker, depreciating pound?
- Increase in exports as they become more price competitive - foreign consumers will be able to buy more pounds with their currency, and there should be growth in export industries in UK
- Improvement on trade deficit - UK firms competing with foreign firms will benefit as consumers buy domestic goods over importing (imports more expensive)
- More FDI coming into UK
- More AD, more growth, increased employment
88
What are the negatives of a weaker, depreciating pound?
- Cost-push inflation from importing raw materials such as oil, increasing costs of production
- Potential demand-pull inflation due to increase in AD, particularly if there is not much spare capacity
89
What does the impact of a change in the value of a currency depend on?
The size of the change and the currency it is moving against.
90
What is a fixed exchange rate system?
An exchange rate value determined by the government compared to other countries.
91
How can an exchange rate system be fixed?
The government influences the supply and demand of the currency to artificially change the exchange rate in FOREX markets.
92
What is devaluation in a fixed exchange rate system?
Where the government actively devalues the currency
93
What is revaluation in a fixed exchange rate system?
Where the government actively boosts the currency
94
How can a fixed exchange rate system be influenced?
The central bank changes the base rate, or buys or sells the domestic currency or uses foreign currency reserves to influence supply of currency to change the price.
95
What is the effect of an increase in interest rate to the exchange rate?
An increase in interest rates, relative to other countries, makes it more attractive to invest funds into the country as the rate of return on investment is higher, increasing hot money inflows, increasing the demand for the currency, causing an appreciation.
96
What is the effect of the central bank increasing the supply of a currency?
Supply can be increased by selling the currency so more is on the market, resulting in a depreciation, making exports more competitive.
97
What is a managed exchange rate system?
It combines the characteristics of fixed and floating exchange rate systems, as the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate.
98
What are examples of managed exchange rate systems?
The Japanese yen and the Indian rupee.
99
Why does the Bank of England carry out foreign money transactions?
To manage the UK's gold and foreign currency reserves, as well as managing the MPC's pool of foreign currency reserves.
100
What are foreign currency transactions?
Buying and selling foreign currency to manipulate the domestic currency.
101
What are the advantages of fixed exchange rate systems?
- Can achieve certainty and stability in FOREX markets for business, removing risk of harsh fluctuations in the exchange rate (also achieved through forward guidance in floating)
- Imposes an anti-inflationary (demand-pull) discipline on a country's domestic economic management
102
What are the disadvantages of fixed exchange rate systems?
- The government and central bank don't necessarily know better than the market where the currency should be, so could lead to government failure
- The balance of payments does not automatically adjust to economic shocks
- It can be costly and difficult for the government to hold large reserves of foreign currencies
103
What are the advantages of floating exchange rate systems?
- Exchange rate automatically adjusts to economic shocks
- Gives the monetary policy more freedom to focus on other macroeconomic objectives
104
What are the disadvantages of floating exchange rate systems?
- Fluctuations in the price of the exchange rate can be unpredictable, which can make investment planning difficult
- Can affect the exports and imports of a country, which could cause a lot of unemployment if a particular industry is affected
- Can make the exchange rate vulnerable to speculative shocks
105
What is a currency/monetary union?
Where members share the same currency.
106
What is an example of a currency/monetary union?
The Eurozone
107
What do members of a monetary union have the same, other than currency?
Interest rate
108
What are the five convergence criteria countries have to meet in order to join the Euro?
1. Inflation below 1.5% of the 3 lowest inflation countries
2. Budget deficit below 3% of GDP
3. Average government bond yield below 2% of the yield of the 3 lowest yield countries
4. Gross National Debt below 60% of GDP
5. Stable national currency relative to other EU currencies for 2 years prior to entry
109
When does an optimal currency zone occur?
- Countries have achieved real convergence
- They respond similarly to external economic shocks or government policy changes
- There is flexibility in product markets and labour markets to deal with shocks, through geographical and occupational mobility of labour, and wage and price flexibility in factor markets
- Fiscal transfers could be used to even out some regional economic imbalances
110
What are the advantages for a country joining a currency union?
- More currency stability, and less prone to speculative shocks, so gives future markets more certainty, so there is more investment and growth potential
- Fewer admin fees and less red tape when travelling abroad or exchanging currency, which can lead to more tourism
- Small firms benefit from the time and money saved using a common currency
- Increased level of integration increases the ease of trade and competition, increasing efficiency and productivity
111
What are the disadvantages for a country joining a currency union?
- A one size fits all monetary policy might not be effective due to differences in economic performance
- Member nations lose sovereignty, meaning strong economy countries have to cooperate with weaker economy countries, and they cannot adapt their policies to meet each individual requirement
- The exchange rate is not flexible to meet each country's need, such as if they need a boost in exports
- Problems can occur if economies are differing in terms of their economic cycles, as an economy in a recession will need to lower interest rates, but an economy in a boom will need higher interest rates
112
What is economic growth?
The changes in physical quantity of goods and services that are produced/ a country has the potential to produce
113
What is economic development?
The changes in the physical quantity and quality of goods and services that are produced/ a country has the potential to produce
114
What is the difference between economic growth and economic development?
Economic growth refers to the quantity of goods and services that are produced/ a country has the potential to produce, whereas economic development refers to the quantity and quality of goods and services
115
What are the aims of economic development?
- To raise living standards
- To improve equality and the distribution of income, so that absolute and relative poverty is decreased
- To increase sustainability
- To expand political and social choices
116
What does total economic welfare come from?
- Purchasing goods and services
- State provision (healthcare, education)
- Quality of life factors
117
What are the 2 methods of measuring development?
- GDP per capita (at PPP)
- HDI - Human Development Index
118
How is GDP per capita a method of measuring economic development?
- A higher GDP per capita shows an increase in national income, showing an increase in average income, meaning there is more spending on goods and services, leading to higher living standards
- A higher average income shows a decrease in relative or absolute poverty
119
What are the issues with measuring economic development using the GDP per capita?
- It doesn’t prove quality of life
- More growth does not necessarily equal more development
- It doesn’t account for inequality, such as Qatar having a high GDP/capita but also high poverty
- It doesn’t take into account the cost of living, unless using PPP (e.g. Norway)
- It doesn’t consider the quality of goods and services provided
- It doesn’t consider what the GDP is being spent on, as it could be spent inefficiently, such as military over health
- It doesn’t consider externalities, such as costs to the environment
120
How does the HDI measure economic development?
- Measures life expectancy at birth
- Measures mean/expected years of schooling (for over 25s)
- Measures GNI per capita (PPP $)
121
What are the issues of measuring economic development with the HDI?
- Quality of education/life in general not accounted for
- Skewed answers
- Income inequality (and other GNI issues)
- Misses key quality of life factors
122
What are the barriers to growth and development?
- Lack of physical capital investment
- Corruption
- Institutional factors (laws, constitutions, financial system, property rights)
- Lack of infrastructure
- Poor human capital
- Primary product dependency
- Rapid population growth
- External debt
- Disease
123
How is a lack of physical capital investment a barrier to growth and development?
- Harod-Domar model (circle of: increased investment -> higher capital stock -> higher economic growth -> increased savings)
- Encourages ‘capital flight’, money going overseas
- Developing countries tend to have poorer banking infrastructure: not many banks, lack of finance, very high interest rates - lower savings in banks - less money for investment - lack of capital investment
124
What is corruption?
Dishonest or fraudulent conduct by those in power
125
How is corruption a barrier to growth and development?
- Political corruption means money is spent on unnecessary goods and services for personal gain rather than health/education for the welfare of society
- Higher costs could be faced by businesses in the form of ‘red tape’
- Less FDI
126
How are institutional factors a barrier to growth and development?
- Law, such as well policed contract law, is critical for businesses and consumers to do business with each other
- Financial system, as poorer banking infrastructure lowers savings in banks, so there is less money for investment
- Tradeable property rights are critical for economic development
127
How is a lack of infrastructure a barrier to growth and development?
- Examples: transport (roads/rail/ports), hospitals/schools (buildings), water network/ gas/electricity, communication (broadband)
- Can restrict trade due to high costs, difficulties in getting raw materials, difficulties in exporting, so less exports, decreasing AD
- Lack of FDI
128
How is poor human capital (collective knowledge/skills/experience from education) a barrier to growth and development?
- Developing countries tend to have a low stock of human capital
- Even if you spend on education, educated people move country to be paid more (‘brain drain’)
- People in developing countries pressured to go to work much earlier in life
- Lower human capital - less skilled population - little increase in productive capacity over time, higher costs (so higher prices), lower productivity - less innovation
129
How is primary product dependency a barrier to growth and development?
- GDP reliant and lack of diversity of products
- Low value added
- Natural disasters can result in less product (e.g. tea leaves)
130
How is rapid population growth a barrier to growth and development?
- Leads to resource depletion and unemployment
- Pressure on healthcare/education increases inequality
- e.g. Niger
131
How is external debt a barrier to growth and development?
Paying high interest loans creates an opportunity cost, meaning there is less government expenditure on education/healthcare
132
How is disease a barrier to growth and development?
- Wipes out factors of production, decreasing productivity
- Higher percent of government income spent on healthcare rather than education
- e.g. Ebola crisis in Uganda
133
What free market policies might be adopted to promote economic growth and development?
- Trade liberalisation
- Promotion of FDI
- Removal of government subsidies
- Microfinance schemes
- Privatisation
134
What interventionist policies might be adopted to promote economic growth and development?
- Development of human capital
- Protectionism
- Infrastructure development
- Buffer stock schemes
135
How might trade liberalisation lead to the promotion of economic growth and development?
World GDP can be increased using free trade, since output increases when countries specialise, so living standards might increase and there could be more economic growth.
136
How might the promotion of FDI lead to the promotion of economic growth and development?
- FDI is the flow of capital from one country to another, in order to gain a lasting interest in an enterprise in the foreign country
- It can help create employment, encourage the innovation of technology and help promote long term sustainable growth
- It provides LEDCs with funds to invest and develop
137
How might the removal of government subsidies lead to the promotion of economic growth and development?
They can distort price signals by distorting the free market mechanism, which a free market economist would argue could lead to government failure, due to an inefficient allocation of resources.
138
How might microfinance schemes lead to the promotion of economic growth and development?
- Microfinance involves borrowing small amounts of money from lenders to finance enterprises, increasing the incomes of those who borrow and can reduce their dependency on primary products
- The investment of the loan can lead to a multiplier effect
- Can help businesses to be set up, increasing employment, output and growth
- Can be spent on immediate consumption, increasing living standards
139
How might privatisation lead to the promotion of economic growth and development?
The firm now has profit incentive, increasing allocative efficiency and might mean goods and services are of a higher quality.
140
How might the development of human capital lead to the promotion of economic growth and development?
- The skills base in the economy would improve, improving productivity and allowing more advanced technology to be used, as workers will have the necessary skills
- Country can move their production up the supply chain from primary products, to manufactured goods and to services, which can earn them more
141
How might protectionism lead to the promotion of economic growth and development?
- Can help reduce a trade deficit, as there will be less importation due to tariffs and quotas on imports
- Protects new industries, increasing employment
142
How might infrastructure development lead to the promotion of economic growth and development?
- Increases access to high quality transport, energy, water and telecommunications, increasing living standards
- Increases labour mobility, increasing productivity
- Employment can be boosted from improved roads, railways and public transport
143
How might buffer stock schemes lead to the promotion of economic growth and development?
- In the agriculture market governments might intervene with a buffer stock system to reduce price volatility
- Governments buy up harvests during surpluses and then sell the goods onto the market when supplies are low
- Historically, these have been unsuccessful
- It helps incomes of farmers to remain stable, as fluctuations in the market are reduced and it increases consumer welfare by ensuring prices are not in excess
144
How might tourism development lead to the promotion of economic growth and development?
- It can create many jobs and help shift a developing country away from dependency on primary products
- Helps to diversify the economy and make it more attractive to FDI, as well as developing their infrastructure
- Revenue into country earned from hotels, restaurants etc.
145
How might primary industries development lead to the promotion of economic growth and development?
- Some developing countries have an abundance of raw materials, so governments might exploit this advantage and develop the industry so the country can have a comparative advantage in its production
- Primary industries, especially those allied to farming, form the livelihoods of the bulk of the population
- It is sometimes the only source of income for most families, so it is important that the industry is
supported
146
How might Fairtrade schemes lead to the promotion of economic growth and development?
- They ensure that farmers can receive a fair price for their goods, as supermarkets buy a guaranteed quantity at a price above the market equilibrium
- Helps farmers as they have a guaranteed income and certainty about their sales, so can plan for the future
- They can help support community development and social projects, as well as ensuring working conditions meet a minimum standard
- Encourages sustainable production, promotes environmental protection, and stops the use of child labour
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What is the role of aid in promoting economic growth and development?
- Consumers in LEDCs have a higher propensity to consume than save, due to their limited incomes, so capital inflows, including those in the form of aid, can help fill this savings gap
- It provides temporary assistance to a country, such as humanitarian aid offered to countries after conflicts or natural disasters
- It could be a grant for a project that a country might not have the funds for
- It could be used to reduce human capital inadequacies or to pay off debt
- It can improve infrastructure, which can help make the country more productive
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What are the benefits of aid to promote economic growth and development limited by?
Corrupt leaders, the size of the aid payment and the potential for the receipt country to become dependent on aid.
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How might debt relief lead to the promotion of economic growth and development?
- Debt relief is the partial or total forgiveness of debt
- In developing countries, debt is considered to be a main cause of poverty, as it causes human suffering and prevents development
- With high levels of debt, financial resources are diverted from infrastructure, education and healthcare
- A country’s ability to pay debt is most important, as, if a country defaults on its debt, it can make it hard to borrow more money in the future
- It can allow a country to import more and increase the population’s standard of living
- It improves government finances, so public services could be funded instead
