E+D Economies - Infant Industries

Question 1

Constrains because…

Answer 1

Infant industry - industries which are too small to benefit from EOS
- Low productivity - high costs - less competitive - no EOS - Malawi tobacco industry infant industry - SRAS shifts left - low real GDP - limited growth - higher prices - less competitive - tiny profits - low corp tax rev - decrease government spending - limited development

Question 2

Fix 1

Answer 2

• Protectionism - restrictions on free trade
• ^^ 2006 Malawi launched Agricultural Input Subsidy Programme - subsidise fertiliser - decrease COP - SRAS shift out - increase real GDP
• ^^ SRAS shift out - lower prices - more competitive - more profit - more corp tax revenue - more government spending - increase development

Question 3

Eval 1

Answer 3

• Some farmers didn’t care for extra profit - depend on subsidies - decrease costs - not work as hard - decrease productivity and output - encourage inefficiency
• ^^ SRAS shift out very little - not as much profit made - less corp tax rev - less gov spending

Question 4

Example

Answer 4

2006 Malawian tobacco farms vs Brazil tobacco farm industry with large EOS

Question 5

Fix 2

Answer 5

Competitive devaluation - 1994 Chinese car industry - not big enough to benefit from EOS
- ^^ devalue - depreciate currency - decrease interest rate or sell domestic currency
- ^^ exports cheaper/more competitive - increase profit - increase investment - increase dynamic efficiency - low COP - SRAS shift right - high profit - high corp tax rev - increase gov spending - increase development

Question 6

Eval 2

Answer 6

• 1994 - China devaluation - Thailand not happy - consumers left Thailand to buy from China
• Thailand devalued exchange rate - cheaper exports - China retaliated by devaluing exchange rate further - Thailand retaliated - so cheap that Indonesia also started - currency war
• ^^ imports became very expensive - increase COP - SRAS shift in - increase prices - decrease competitiveness - less profit - less corp tax rev - less government spending - development limited