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
Economic integration
A free trade area
A customs union
A monetary union
An economic union
Free trade area
Refers to a situation where countries come together to trade freely but where each maintains its own trade barriers with countries outside the free trade area. There is no common external tariff barrier between the members and other countries
Customs union
Refers to a situation where a number of countries come together to trade freely and they establish a common external tariff against all other countries that are not members
Monetary union
Refers to a situation where a group of countries come together and adopt a single currency. May also adopt a number of common monetary policies to support the operation of the currency
Economic union
Refers to a situation where a number of economic policies, rules and regulations are established which affect all member countries. May have a single currency but not necessary that they all agree to use the same one
Trade bloc
When a trading bloc is created business take advantage of free trade
Trade creation
There will be fewer trade barriers. New markets will open and businesses will try to take advantage of these opportunities. There will be increased specialisation and more trade so the overall effect is trade creation
Trade diversion
When a new trading bloc is established there may be some degree of trade diversion. The member countries may want to shift to buying more form member countries and buying less from non member countries. The absence of trade barriers between members encourages them to trade with each other rather than countries outside the bloc
The components of the balance of payments
The balance of payments is a record of the transactions a country has with the rest of the world. It consists of the current, financial and capital account and a balancing item
The financial account
Records the capital inflows into a country and the capital outflows out of a country resulting from investment. It comprises direct investment, portfolio investment, other investment and reserve assets
The capital account
Records capital movements in terms of assets and liabilities into and out of a country. These could include physical assets and dealings
Net errors and omissions
Some transactions may go unrecorded which are shown as net errors and omissions
The balancing item
When all the parts of the balance of payments are included the final figure should be 0. There may be an imbalance due to statistical discrepancies between payments in and out so the balancing item makes the accounts balance
The effect of fiscal policy on the balance of payments
If a country is experiencing a financial account deficit, this is not a problem as it will bring an inflow of profits, interest and dividends in the future. The government could reduce taxes or increase spending to improve confidence encouraging investment and a reduction of the financial account deficit. If a country is experiencing a financial or capital account surplus the government could increase taxes or reduce spending
The effect of monetary policy on the balance of payments
If a country is experiencing a financial or capital account deficit the government could increase interest rates. This will increase the flow of hot money into the country for higher interest. If a country is experiencing a financial or capital account surplus the government could increase the growth of the money supply or reduce interest
The effect of supply side policy on the balance of payments
If a country is experiencing a financial or capital account deficit the government could use supply side measures to improve economic performance. Privatisation and deregulation will increase competition and domestic efficiency improving quality and lowering costs. Increased spending on education and training could increase productivity leading to a movement of firms and funds into the country
The effect of protectionist policies on the balance of payments
If a country is experiencing a financial or capital account deficit the government could put a tariff on imports. This makes imports more expensive to discourage consumption and encourage consumption of domestically produced substitutes. This would attract investment and capital
The effect of exchange rate policies on the balance of payments
If a country is experiencing a current account deficit the government could lower the exchange rate to make exports more competitive. If it was experiencing a financial or capital account deficit the government could raise the exchange rate to encourage inward capital movements
Expenditure switching policies
Switch demand away from some products. They aim to encourage an increase in demand for exports and a decrease in demand for imports
Methods to reduce demand for imports
Tariffs
Import duties
Quotas
Subsidies to domestic producers of goods that are imported
Exchange controls
Embargoes
Excessive administrative burdens on imports
Voluntary export restraints
Problems with expenditure switching policies
Involve restraints on free trade so opposed by the WTO. This is why expenditure reducing policies are preferred. They also often generate retaliation from aggrieved trade partners
Expenditure reducing policies
Concerned with producing a more general reduction in the demand for all products
Effects of expenditure reducing policies
Demand for imported goods will fall
Demand from within an economy for all goods will fall so domestic producers will need to compensate by increasing exports
Strategies of expenditure reducing policies
The most efficient way to reduce or eliminate a balance of payments deficit is to improve the quality of goods produced and reduce the unit price or cost of production so more people will buy them domestically and abroad mainly done through supply side policies
Nominal and real exchange rates
A nominal value is expressed in money terms without inflation. This does not take into account the purchasing power of a nominal sum of one currency in relation to another. It is necessary to express it as a real exchange rate. They will be expressed in terms of purchasing power parity by taking into account price levels in different countries. PPP therefore accounts for differences in the cost of living in economies
Trade weighted exchange rates
Relates exchange rates to changes in a number of other trade partner currencies. These are weighted according to importance in international trade. A base year is selected and given a value out of 100
Fixed exchange rate system
Where exchange rates are set at a particular level by a government and not determined by the forces of supply and demand. The central bank continually buys and sells its domestic currency to maintain value. It needs sufficient foreign reserves when needing to buy. The central bank can change the interest rates to maintain a fixed exchange rate. if it is about to fall, interest rates are increased
Advantages of a fixed exchange rate
Greater certainty in relation to economic planning, encouraging more investment
Helps a government maintain a low inflation rate
Provides stability so limits speculation
Disadvantages of a fixed exchange rate
Limits a central banks ability to adjust interest rates for domestic reasons
Prevents adjustments when a currency becomes over or undervalued
If a currency becomes extremely over or undervalued there will need to be large devaluations or revaluations which can be disruptive
Requires large foreign reserves when under pressure
Managed exchange rate system
A government may allow the exchange rate to be determined by some market forces but will intervene to restrict the degree of float. It combines elements of a floating and fixed system with upper and lower limits (dirty float)
Revaluation
When the value of a fixed rate goes up
Devaluation
When the value of a fixed rate goes down
Changes in exchange rates under different systems
With a fixed system, changes occur periodically when the rate has been extremely over or undervalued. If there is an overvaluation there will be a devaluation. If there is undervaluation there will be a revaluation. With a managed system, minor changes occur continually but within a band
The Marshall - Lerner condition
The effect of an exchange rate depends on the PED of imports and exports. A depreciation will increase demand for exports because they are relatively cheaper and a reduction in demand for imports. If a depreciation is to improve a current account deficit, the sum of the PED for exports and imports needs to be more than one (this is the condition)
The J curve effect
A depreciation can encourage an increase in exports and a fall in imports. These may not happen immediately and there may be some time when the current account deficit gets bigger before better which is the J curve effect. It depends on PED for exports and imports. Buyers take time to adjust to price changes. Eventually the devaluation will have a positive effect on the external economy if export purchases are encouraged and imports discouraged
Indicators to compare development
Economic: differences in the balance of the economic structure
Monetary: differences in the level of income measured by GNI and the percentage of GNI spent on education and health
Non-monetary: differences in social factors
Demographic: differences in terms of population growth, birth, death and fertility rates
Population growth (characteristic of developing economies)
Relatively high so the size of the population is well above the optimum population
Population structure (characteristic of developing economies)
Relatively high proportion of young people creating a high dependency ratio
Income level and distribution (characteristic of developing economies)
Lower than in developed economies and usually a great deal of inequality in the distribution
Economic structure (characteristic of developing economies)
Large proportion are employed in the primary sector and a low proportion in the tertiary sector
Employment composition (characteristic of developing economies)
A smaller proportion of women work compared with developed economies for social, cultural and religious reasons
External trade (characteristic of developing economies)
Depend on the export of primary product that have greater price variations creating instability
Urbanisation (characteristic of developing economies)
Proportion of those in rural areas is higher in developing economies than in developed economies due to rural-urban migration, putting pressure on urban resources
Dependency (characteristic of developing economies)
Developing economies are dependent on developed economies and the role of MNCs but they bring employment, much of the profit being sent back to the home country
External debt (characteristic of developing economies)
Developing economies have a high level of external debt
Social (characteristic of developing economies)
Developing economies have more social problems
Classification of countries in national income in GNI per capita
LICs: <$1026
Lower MICs: $1026-3995
Upper MICs: $3996-12375
HICs: >$12375
Monetary indicators of development
Include real per capital national income statistics (GDP, GNP and GNI)
Purchasing power parity
Living standards and economic development in different countries is the value of the statistic in terms of what a given sum of money can buy in different countries
Informal economy (problem with GNI to compare living standards)
Economic activity that is not declared so not included
Non marketed products (problem with GNI to compare living standards)
Accurate when most of economic output is recorded through market transactions but there can be no price attached so go unrecorded
Government spending (problem with GNI to compare living standards)
Not always easy to value the output of something not sold in a market
Sustainability (problem with GNI to compare living standards)
May be a high rate of growth but will not be good if not sustainable
Distribution of income (problem with GNI to compare living standards)
Real GNI can be divided by population to show average standard of living but is misleading if unequal
Consumer and capital goods (problem with GNI to compare living standards)
A rise in living standards is due to an increase in consumer goods but in the short run capital goods may increase to make this possible
Exchange rates (problem with GNI to compare living standards)
To compare between different countries, the effect of exchange rates need to be taken into account
Problems with non-monetary indicators of living standards
Literacy: those with a low literacy rate may not produce accurate data
Working hours: does not take into account the way the output is produced
Political freedom: could assess different quality of lives
Composite indicators of living standards
HDI takes into account GNI per head, life expectancy and years of schooling. Measure of economic welfare includes elements such as leisure hours, crime rates and levels of pollution. Multidimensional poverty index focuses on the extent of deprivation in countries
Human development index
Means and expected years of schooling
Life expectancy
GNI per capital adjusted for PPP
Low = 0-0.54
Medium = 0.55-0.69
High = 0.7-0.79
Very high = >0.8
Measure of economic welfare
Value of GDP
Value of leisure time
Value of unpaid work
Value of environmental damage
Multidimensional poverty index
Child mortality
Nutrition
Years of schooling
Child school attendance
Electricity
Sanitation
Drinking water
Type of floor
Type of cooking fuel
Ownership of assets
Quality of life
Reflects the use of composite measures and is a broader concept than standard of living with a wider range of criteria
Kuznets curve
Shows that as an economy develops over time, economic inequality first increases and then decreases. It has been criticised for being overly simplistic. The Gini coefficient is on the vertical axis and the level of development on the horizontal axis
Comparison of growth over time
Real GNI data can be analysed over time to show trends in economic growth. Changes in productivity can explain growth overtime. When comparing living standards the trade deficit and persistence can be taken into account. If a country is experiencing a persistent trade deficit, it is living beyond its means. Also consider changes in the level of public debt and whether it is rising or falling as a percentage of GNI
Comparison of growth between countries
Similarities in economic growth rates occur due to technological developments, the role of MNCs and global shocks. Differences in economic growth rates occur due to government demand management policies, industrial relations and entrepreneurial culture
Birth rate
The number of individuals born into a population in a given length of time. It is measured by the annual number of live briths per 1000 people. Can change due to the need for large families so children can work at an early age (increase) and improvements in education and healthcare (decrease)
Death rate
The number of deaths in a population in a period of time. It is measured by the annual number of deaths per 1000 people. Can change due to an epidemic or pandemic (increase) and better food, nutrition and health services (increase)
Infant mortality rate
The number of deaths in a group less than 1 year old. It is measured as the annual number of deaths of those under 1 year old per 1000 live births. Can change due to an increase in infectious diseases (increase) and better healthcare (decrease)
Net migration
Difference between immigrants and emigrants over a given time period. Can change due to an increase in immigrants (increase) or a decrease in immigrants (decrease) providing emigrants numbers are constant
Optimum population
The ideal number of population taking into account available resources. Is variable depending on changes in quantity and quality of resources and technology. It is the size of the population enabling maximum per capita output to be achieved as well as the highest standard of living
Level of urbanisation
Is the movement of people from rural areas to urban areas. As countries develop, the level of urbanisation increases
The Gini coefficient
Is a way of measuring the extent of inequality in the distribution of income and wealth. Measured as the ratio of the area between the line of total equality and the Lorenz curve to the total area under the diagonal. The bigger the area, the more unequal the distribution. The lower the coefficient the more equal the distribution
The Lorenz curve
A graphical representation that shows the extent of inequality in the distribution of income. The more unequal the more divergent the Lorenz curve will be from the line of total equality
Employment composition
Mechanisation reduces the need for agriculture and raw material extraction so the percentage of employment in the primary sector falls. As a country industrialises many leave the primary sector and take jobs in the growing secondary sector. As a country develops further there may be deindustrialisation and the percentage of employment in secondary falls. The decline of primary and secondary sectors falls, the employment in the tertiary sector increases
Patterns of trade at different levels of development
Most the the exports of developing economies are primary and most imports are manufactured products. Developed economies have most exports from secondary and tertiary sectors. Favours developed economies since agricultural prices are lower
