Chapter 20 Strategies to promote economic growth and economic development

Question 1

Consequences of import substitution

Hint: only one good consequence

Answer 1

Good consequence:
* Domestic industries are able to grow and compete with foreign producers and be competitive in global markets
Bad consequences:
* Inefficient and misallocation of resources:
Protections from government reduces the competition for domestic producers, resulting in higher costs of production, inefficiency in both private and public sectors and misallocation of resources
* The country might overvalue their currency:
To reduce the price of imported capital goods (cost of production) and increase the price of exports (revenue of domestic producers)
* Making agricultural exports to be more expensive -> worsening rural poverty
* Cheap imported capital goods encourage capital-intensive production methods (inappropriate technologies) + the neglect of small producers -> Worsening unemployment and income inequality; Growth of the informal economy in urban areas
* Deterioration in the balance of payments:
Increase in imports for capital equipment as factors of production
* Increase in need for food as agricultural sector is neglected for import substitution
* Limiting the possibilities for protected domestic industries to grow

Question 2

Possible disadvantages of export promotion

Hint: there r 3

Answer 2

• Over dependent on exports -> resulting in recession when trade partners are suffering recession as well (buy less exports)
• Rely on low wages -> domestic workers do not benefit from economic growth caused by export promotion
• Trade disputes from trade surplus -> trade deficit for trade partners -> protectionist policies due to excessive imports

Question 3

Typical policies for export promotion

求其up 6個黎聼下啦noob

Answer 3

• Financial assistance to targeted key industries
• Production subsidies
• Provision of incentives for R&D
• Subsidized credit by state banking industry
• Requirements on multinational corporations to
  o Transfer of technologies
  o Training of labour
  o Uses of local inputs
  o -> maximize the benefits of FDI
• Depreciation/ Undervalued currency

Question 4

Define foreign direct investment (FDI)

Answer 4

A long-term investment by a multinational corporation based in the home country in production activities in the host country, (where the foreign investor owns more than 10% of the host company).

Question 5

Define multinational corporation (MNC)

Answer 5

A firm involved in FDI and based in the home country and undertakes productive investments in the host country with control of at least 10% of the firm in the host country.

Question 6

Define foreign aid

Answer 6

The international transfer of capital, goods, or services from a country, or international organization to developing countries with the main objective to bring out improvements in their economical, social or political conditions.

Question 7

U must have noticed there r so many names for diff foreign aids.

So, pls state what do the following aids mean:
Bilateral aid, multilateral aid, tied aid, grants

Answer 7

Bilateral aid: funds that go directly from the donor government to the developing country

Multilateral aid: funds that go indirectly from the donor governments to the developing country through international organizations that composed of a number of countries

Tied aid: Grants or funds given to a developing country under the condition that a portion of the funds will be used to purchase goods and services from the donor country

Grants: gifts of money or goods and services that do not need to be repaid