Infant industries

Question 1

What are internal economies of scale?

Answer 1

A decrease in long run average costs due to an increase in the quantity produced

Question 2

Chain of reasoning on infant industries

Answer 2

Infant industry → Low output → High average costs → Left shift of SRAS → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development → Limits development

Question 3

Which of the above combinations shows a way in which a reduction in average costs can increase economic development?

Answer 3

Subsidies → Decrease average costs → Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → Increases development

Question 4

What are the two effects of an outward shift of a country’s short run aggregate supply curve?

Answer 4

An increase real Gross Domestic Product and an increase in corporation tax revenue

Question 5

Which of the following explains why protectionism and subsidies might not lead to economic development?

Answer 5

Protectionism and subsidies can create a culture where businesses become overly dependent on government support, which can mean that they become inefficient.

Question 6

A devaluation occurs when

Answer 6

A devaluation occurs when a country lowers or decreases or reduces their fixed exchange rate.

Question 7

There are two main ways to depreciate a currency:

Answer 7

There are two main ways to depreciate a currency:

1. Decrease the interest rate
2. Sell the domestic currency

Question 8

How will lower costs for Chinese manufacturers affect the economy?

Answer 8

Investment in machinery → Decrease average costs → Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → Increases development

Question 9

A competitive devaluation is when

Answer 9

A competitive devaluation is when you devalue your

fixed exchange rate in order to keep your exports competitive.

Question 10

Infant Industry

Answer 10

A young industry which does not yet produce enough output to benefit from economies of scale.

Question 11

Competitive Devaluation

Answer 11

Where a government reduces the value of their fixed exchange rate in order to make exports more competitive.

Question 12

What is a competitive devaluation?

Answer 12

A competitive devaluation is when you devalue your fixed exchange rate in order to keep your exports competitive.

Question 13

What are the two effects of an outward shift of a country’s short run aggregate supply curve?

Answer 13

Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → More development

Question 14

Limitation of competitive devaluation

Answer 14

A competitive depreciation might not lead to growth and development if other countries retaliate by also depreciating their currency. This means that you will need to depreciate your currency even more and eventually there could be a currency war .

Question 15

Are protectionism and devaluing exchange rates a market based or interventionist policy for development?

Answer 15

Protectionism and devaluing exchange rates are interventionist policies for development as the government is actively intervening in the foreign exchange market and to protect the country from imports.

Question 16

Which of the following shows the impact that infant industries can have on economic development?

Answer 16

Infant industry → Low output → High average costs → Left shift of SRAS → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development → Limits development

Question 17

How can protectionism be used to increase economic development?

Answer 17

Protectionism can take the form of giving subsidies to producers.

The chain of reasoning is:
Subsidies → Decrease average costs → Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → Increases development

Question 18

Why might protectionism not be beneficial in increasing economic development?

Answer 18

Protectionism and subsidies can create a culture where businesses become overly dependent on government support, meaning that they become inefficient and output doesn’t increase as much.
If SRAS doesn’t shift out as much, real GDP won’t increase as much and businesses won’t make as much extra profit. This means the government won’t collect as much corporation tax and so economic development will be limited.