AL unit 11: International Economic Issues Flashcards
International aid
Refers to any form of assistance by one country to another. Usually given by economically developed to economically developing countries
Forms of international aid
Bilateral
Multilateral
Humanitarian assistance
Emergency or short term aid
Conditional or tied aid
Unconditional or untied aid
Charitable aid
Reasons for international aid
Helps countries fight diseases
Helps countries respond to disasters and humanitarian emergencies
Helps countries affected by a huge crisis
Helps countries improve health and education systems
Helps save lives of those in poverty
Helps countries improve infrastructure
Effects of international aid
Some aid has been used in unsuccessful investments
Aid money may be spent on defence rather than education or healthcare
Some aid has made the situation worse
Aid can be tied so receiving country is not free to decide how to spend
Can be corruption of receiving country so money is not spread
Interest rate of aid is usually at market rate
Lean repayments may be hard to finance
Importance of international aid
Helps receiving economies grow
Helps improve employment levels
Helps improve balance of payments position
Allows experts to provide technical advice and assistance
Can save lives of those living in poverty
Helps address health, education and infrastructure issues
Helps address humanitarian emergencies
Promotes international trade
Helps redistribute global wealth
Comparative advantage
Shows that all countries can benefit from free trade as long as there are differences in opportunity cost ratios. It will lead to an increase in world output leading to a better quality of life and economic welfare in all countries
Economically developing and developed countries trade and investment
Developed economies tend to specialise in manufactured goods while developing economies specialise in primary products. Some developing economies rely on a single commodity for over half export earnings. Prices of primary products have declined although they are less dependent than they used to be. Primary production has more volatile supply so prices are less stable. Demand and supply of primary products is more price inelastic than secondary products. Demand for many primary products is more income inelastic. Most investment in developing economies has come from MNCs so profit goes back to home countries
Trade protection in developing countries
Developing economies have experienced problems that mean they have not gained as much as expected. Some have introduced different trade protection to replace imports with domestic goods while some aim to be export led
Activities of MNCs
Producing and selling goods and services
Exporting goods and services
Making significant investment in those countries
Buying and selling licences
MNCs
A company that has facilities and other assets in at least one country other than its home
Advantages of MNCs
Can bring jobs creating more income, multiplier effect reducing unemployment
Provide more choice for consumers and higher living standards
increased tax revenue for domestic govenrment
Bring technical knowledge so higher produtivity
Stimulates economic growth
If output is exported, could lead to improvement in current account
Disadvantages of MNCs
May use capital intensive production os not many jobs
Created jobs may be unskilled
Much of profit may go back to home country and not reinvested locally
May damage environment
May try to influence government and corruption
When they leave a country, void could be worse long term than if they didn’t
Foreign direct investment
Investment in a country by an investor from another country. If is a form of entry into a foreign market
Advantages of FDI
Foreign expertise can be important to improve technical processes
Can improve product and process quality
Can create jobs and reduce unemployment
Provides source of external capital that can improve economic development
Provides source of tax revenue
Disadvantages of FDI
Can be hinderance to domestic investment
Political issues can arise
Government could take investment for political reasons
Can influence exchange rates
Can be expensive and may be more expensive to locate production abroad than export
The nature of external debt
Refers to the proportion of a country’s debt that has been borrowed from foreign lenders. Represents that amount that a country owes to other countries. Includes both private and public sector debt and short and long term liabilities
Causes of external debt
Outstanding loans to foreign private sector financial institutions
Payments due to organisations
Outstanding payments for a balance of payments deficit
Existence of external debt can be an obstacle to economic growth and development. The funds to repay have an opportunity cost
Role of the IMF
Set up to secure international monetary cooperation, to stabilise currency exchange rates and international liquidity though access to hard currencies. Achieves its aims by overseeing economic development, lending and capacity development. Has stabilised exchange rates and so facilitated international payments as well as enforcing monetary discipline
Aims of the IMF
Reduce the extent of global poverty
Encourage international trade
Secure financial stability
Promote sustainable economic growth
Promote high employment
Foster global monetary cooperation
Role of the world bank (5 institutions)
Provide low interest loans, interest free credit and grants to MICs and LICs to reduce the extent of poverty. Improve the health, education and infrastructure of companies
Modernise the financial sector, agriculture and natural resources and environmental management
Globalisation
A process of interaction and integration among people, companies and governments. It refers to the increase of trade around the world especially by large companies producing and trading in different countries. Includes an increase in international competition through a global free market with companies able to gain a competitive advantage. Transport and financial development has facilitated this. Refers to the free movement of goods, services and people across the world and includes a process that enable financial and investment markets to operate internationally
Causes of globalisation
Describes an economic interdependence of countries fostered through the development of trade liberalisation and free trade. The reduction of protectionism, involving the removal or reduction of tariffs and other import controls has been a significant cause. Is also the result of deregulation and improvements in communications technology
Benefits of globalisation
Increases spread of products, technology, information and jobs
Has created new jobs and enhanced economic growth through international flows
Companies can reduce costs by manufacturing abroad and gain new customers
Improvements in living standards in many countries as free markets reduce poverty
Global competition has led to better quality products at lower prices
Limitations of globalisation
Job creation and economic growth are not distributed evenly
Specific industries have had disruption or collapse due to competition
Benefits large MNCs but mixed impact for workers and small firms
Detrimental environmental impact
Economic downturn in one country can impact many others