International Economy

Question 1

Definiton of globalization and the characteristics of globalization

Answer 1

Globalization is the process of greater integration and inter connectedness. Between countries

It involves the free trade of goods and services, the free movement of capital and labour and the free interchange of technology and intellectual capital.

With the spread of globalisation came more trade between nations and more transfers of capital including FDI (foreign direct investment).

Moreover, brands developed globally and labour has been divided between several countries.

There is more migration and more countries participate in global trade, such as China and India, as well as higher levels of investment.

Additionally, countries have become more interdependent, so the performance of their own country depends on the performance of other countries. This could be seen in 2008 and 2009, when the effects of the global credit crunch spread across the globe.

Characteristics
- growth international trade
- trade liberalization
- enhance mobility of labour and capital
- increase cultural exchange
- increase outsourcing
- falling transport cost
- growth of MNCs

Question 2

Factors contributing to globalization

Answer 2

Trade in goods
Developing countries have acquired the capital and knowledge to manufacture goods. The efficient forms of transport make it easier and cheaper to transfer goods across international borders, Some developing countries have the cost advantage of cheaper labour, so MNCs move their production abroad. This causes developed countries to trade with these developing countries, so they can access the same manufactured goods,

Trade in services:
For example, the trade of tourism, call centre services, and software production (particularly from india) has increased from developing countries to developed countries.

Trade liberalization
The growing strength and influence of organisations such as the World Trade Organisation (WTO), which advocates free trade, has contributed to the decline in trade barriers.

Multinational
• MNCs are organisations which own or control the production of goods and services in multiple countries.
They have used marketing to become global, and by growing, they have been able to take advantage of economies of scale, such as risk-bearing economies of scale.
The spread of technological knowledge and economies of scale has resulted in lower costs of production.

Conteinerisation
• This has resulted in it becoming cheaper to ship goods across the world= causes prices to fall= helps make the market more competitive.
Containerisation means that goods are distributed in standard sized containers, so it is easier to load and cheaper to distribute using rail and sea transport. This helps to meet world demand. Cargo can be moved twenty times as fast as before, economies of scale can be exploited and less labour is required.
• However, it is mainly MNCs which have been able to exploit this, and it could result in some structural unemployment.
This video provides a good background to containerisation

International financial flows
For example, the flow of capital and FDI across international borders has increased. China and Malaysia have financed their growth with capital flows.
Also, the foreign ownership of firms has increased. There has been more investment in factories abroad.
• The removal of capital controls has facilitated this increase.

Communication and IT
The spread of IT has resulted in it becoming easier and cheaper to communicate, which has led to the world being more interconnected. There are better transport links and the transfer of information has been made easier.

Question 3

The consequences of globalization

Answer 3

There could be trade imbalances between countries. E.g. the us runs a large current account deficit with CHina , who has a large current account surplus

• There could be imbalances and inequalities in consumers’ and countries’ accesses to health, education and markets:

Within individual countries, there could be income and wealth inequalities if the benefits and costs of globalisation are not evenly spread. This is evident in China, where the population in the rural and urban areas have vastly different levels of income and living standards
.
Culture could spread across the globe. Some might say this has weakened culture and that there has been a loss of cultural diversity due to global brands. However, others will argue that the spread of culture has been positive and helped to improve their quality of life.

Consumers and producers can earn the benefits of specialisation and economies of scale as firms become larger.
Firms operate in a more competitive environment, which encourages them to lower their average costs and become more efficient.

Producers can also make their average costs lower by switching production to places with cheaper labour. The spread of technology has resulted in firms being able to “ employ the most advanced machines and production methods.

Globalisation leads to a general increase in world GDP due to increase in trade between countries, which increases consumer living standards and helps lift people out of absolute poverty. However, it is hard to calculate the proportion of growth which was due to globalisation.

Consumer have more choice

Some consumers gain more from globalisation than others. Globally, there are few people in extreme poverty, but this has not been the case in Sub-Saharan Africa.
There could be increased inequality. Oxfam research in 2015 suggested that 1% of the world own more than the rest of the world

Reduce competition = MNC can push out small firms

Workers

Workers can take advantage of job opportunities across the globe, rather than just in their home country.

However, there could be structural unemployment.
For example, in the UK after the collapse of the ship building and mining industries, there was a lot of structural unemployment.
This is because it was more efficient for manufacturing to occur abroad, so production shifted to lower labour cost nations.

When production shifts to lower labour cost countries, the creation of jobs could be seen as either beneficial or harmful.
On one hand, MNCs could be exploiting their labour and providing poor working conditions in, for example, sweatshops. On the other hand, working in a sweatshop might provide a higher, more stable income than any alternatives, such as agriculture.

The environment
Although industrialisation and increased consumer living standards might lead to more pollution through increased production and increased car use, consumers might show more concern towards the environment as their average incomes increase.
Depletion of natural resources

Some of the negative impacts on the environment could include deforestation, water scarcity and land degradation.

• countries can become over dependent on certain industries such as tourism, oils, mining= risky position go into decline

Question 4

The distinction between absolute and comparative advantage

Answer 4

A country has absolute advantage in the production of g/s if it can produce it using fewer resources and at lower cost of production

Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. This means they have to give up producing less of another good than another country, using the same resources.
Countries can specialise where they have comparative advantage. This increases economic welfare.

Question 5

Benefits of free trade

Answer 5

Free trade is the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations.

Free trade provides the following benefits:
- Countries can exploit their comparative advantage, which leads to a higher output using fewer resources and increases world GDP. This improves living standards. rerade nosta production afieres establishing a competitive market. This
- By freely trading goods, there is trade creation because there are fewer barriers. This means there is more consumption and large increases in economic welfare.
- More exports could lead to higher rates of economic growth.
- Specialising means countries can exploit economies of scale, which will lower their average costs.

Question 6

Cost of free trade

Answer 6

Has resulted in some job losses, since countries with low labour cost have entered the market

Have contributed to some environmental change = especially from the increase in manufacturing

Question 7

Reasons for changes in the pattern of trade between UK and rest of the world

Answer 7

COMPARATIVE ADVANTAGE
There has been a recent growth in the exports of manufactured goods from developing countries to developed countries. This is because developing countries have gained an advantage in the production of manufactured goods, due to their lower labour costs, so production shifted abroad.

The deindustrialisation of countries such as the UK has meant the manufacturing sector has declined. This means that production of manufactured goods has shifted as tihar countries, such as China, whist the UK now focuses more on series, such This has led to the industrialisation of China and India. Their share of world trade has and the volume of manufactured goods that they export has increased.
However since China population now aging = wage competitiveness has fallen. This is also due to rise of the middle class in China who demands higher wages and consume more.

IMPACT OF EMERGING COUNTRIES
The collapse of communism has meant that more countries, especially developing countries, are participating in world trade.
International trade is arguably more important for developing countries than developed countries. It contributes towards 20% of LDC economies compared to 8% of the US economy.

China and India are important for African infrastructure. They have invested in their infrastructure in exchange for natural resources.
Both China’s and India’s share in agriculture, mining and fuel has declined. Both countries are important in the Euro area, with trade and financial relations. China is a main import source, whilst both are important for capital.

TRADING BlOCKS
With more trading blocs, trade has been created between members, but diverted mom elsewhere.
Trade creation occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer.
Trade diversion occurs when trade shifts to a less efficient producer.
Usually, a country might stop importing from a cheaper producer outside a trading bloc to a more expensive one inside the trading bloc.
Moreover, protectionist barriers are often imposed on countries who are not members, so trade is diverted from producers outside the bloc to producers within the trading bloc.
The policies of developed countries have limited the ability of developing countries to export primary commodities. For example, the EU Common Agricultural Policy (CAP) means domestic farmers receive subsidies to encourage production and lower costs. This increases the incomes of domestic farmers and protects the industry, but farmers in other countries find it hard to compete with them.
Therefore, they are not able to access the market in developed countries, which limits their participation in trade.

CHANGES IN RELATIVE EXCHANGE RATES
For a long time, China has been running a trade surplus with the US. Since 2006, the US trade deficit has narrowed with China, and China has reduced their trade surplus, too. China has planned this change from export-led growth to growth fuelled by domestic consumption. When running the trade surplus, China had kept their currency’s value, the Renminbi, low, in order to make their exports relatively cheap.
It could be argued that one of the reasons for the Uk’s current account deficit is the strength of the pound compared to the Euro.

Question 8

What is protectionism

Answer 8

Is the act of guarding a country industries from foreign companies

Question 9

Methods of protectionism and their impacts

Answer 9

Tariffs
are taxes on imports to a country. It could lead to retaliation, so exports might decrease. The impact of tariffs is that the quantity demanded of domestic goods increases, whilst the quantity demanded of imports decreases.

quota
limits the quantity of a foreign produced good that is sold on the domestic market.
It sets a physical limit on a specific good imported in a set amount of time
= leads to a rise in the price of the good for domestic consumers, so they become worse off.

Export subsidies
This is a form of government intervention to encourage goods to be exported rather than sold on the domestic market. The government might use direct payments, tax relief, or provide cheap access to credit.

Embargoes
This is the complete ban on trade with a particular country. It is usually politically motivated.

Excessive administrative burdens (‘red tape’)
Excessive administration increases the cost of trading, and hence discourages imports. It makes it difficult to trade with countries imposing red tape, and is particularly harmful for developing countries which are unable to access these markets.
It is harder to notice this type of protectionism, which is why it is favoured among some countries.

Question 10

The causes and consequences of countries adopting protectionist policies.

Answer 10

l If a country employed several protectionist measures, then a trade deficit would reduce. This is because they will be importing less due to tariffs and quotas on imports.

Infant industries might need protecting. These are industries which are relatively new and receive support. Protectionism is usually short term until the industry develops, at which point the industry can trade freely.

• Protectionism could be used to correct market failure. It can deal with demerit goods and protect society from them.

Governments might employ protectionist measures to improve the current account
deficit.

Governments might want to protect domestic jobs.

Consequences
could distort the market and lead to a loss of allocative efficiency= prevents industries from competing in a competitive market and there is a loss of consumer welfare.
Consumers face higher prices and less variety.
By not competing in a competitive market, firms have little or no incentive to lower their costs of production.

imposes an extra cost on exporters, which could lower output and damage the
economy.

Tariffs are regressive and are most damaging to those on low and fixed incomes.

There is a risk of retaliation from other countries, so countries might become hostile.

Protectionism could lead to government failure.

Question 11

What are custom unions

Answer 11

Countries in a customs union have established a common trade policy with the rest of the world. For example, they might use a common external tariff.
It also has free trade between members.

The European Union is an example of a Customs Union.

Common markets establish free trade in goods and services, a common external tariff and allow free movement of capital and labour across borders. When the EU was established, it was a Common Market. EU citizens can work in any country in the EU.

Other features of a customs union include:
- Safety measures for imported goods, such as for food, are common across all members.
There are common customs rules and procedures.
- There is a structure for the combined administration of the nations within the Customs Union.
-There is a common trade policy. This helps to create and guide trading relationships with countries and blocs outside the Customs Union.

Question 12

The main characteristics of single European market

Answer 12

• free movement of goods and service, capital and labour between nations

Administrative provision, laws and regulations are approximated between member nations = could mean some law. Better suited to some countries and not much to others

Competition policy is common across the whole of the EU

There’s common external tariffs

Question 13

Role of the WTO in trade liberalisation:

Answer 13

The WTO promotes world trade through reducing trade barriers and policing existing agreements.

It also settles trade disputes, by acting as the judge, and organises trade negotiations.

Every member of the WTO must follow the rules.
Those who break the rules face trade sanctions. In addition to trade in goods, the WTO covers the trade in services and intellectual property rights.

There are 164 member state in WTO

Question 14

Possible conflict between regional trade agreements and the WTO

Answer 14

Trading blocs might distort world trade or adversely affect those who do not belong to them. There could be an inefficient allocation of resources as a result of policies such as the EU CAP.

Conflicts between blocs could lead to a rise in protectionism. A common external tariff contradicts the WTO’s principles, since although there is free trade between members, protectionist barriers are imposed on those who are not members.

Some countries might argue that the WTO is too powerful, or that it ignores the problems of developing countries. This could be since developed countries do not trade completely freely with developing countries, which limits their ability to grow.

Setting up a customs union or a free trade area could be seen to violate the WTO’s principle of having all trading partners treated equally.
This is especially if a common external tariff is applied. However, they can complement the trading system and the WTO strives to ensure that non-members can trade freely and easily with the members of a trade bloc.

Question 15

The difference between the current, capital and financial accounts on the balance of payments.

Answer 15

The balance of payments is made up of:
- The current account:
This includes all economic transactions between countries.
The main transactions are the trade in goods and services, income and current transfers.

The capital account and financial account: Capital transfers involve transfers of the ownership of fixed assets. The financial account involves investment. For example, direct investment, portfolio investment and reserve assets are part of the financial account.

Balancing item: The components of the Balance of Payments should balance.
That is, the sum of the accounts should be zero. Where there are imbalances, a balancing item is used to cover the discrepancies.

Question 16

What is the balance of payments

Answer 16

This is a record of all financial transactions made between consumers, firms and the government from one country with other countries.

It states how much is spent on imports, and what the value of exports is.

Exports are goods and services sold to foreign countries, and are positive in the balance of payments. This is because they are an inflow of money.

Imports are goods and services bought from foreign countries, and they are negative on the balance of payments. They are an outflow of money.

Question 17

Current account deficits and surpluses

Answer 17

current account surplus means there is a net inflow of money into the circular flow of income. The UK has a surplus with services, but a deficit with goods.

The UK has a net current account deficit. This means the UK spends more on imports from foreign countries, than they earn from exports to foreign countries. If the deficit is large and runs for a long time, there could be financial difficulties with financing the deficit.

Firms are less competitive in manufacture of goods= Globalization increases = UK reliance on imported goods

Question 18

The factors that influence a country’s current account balance

Answer 18

Strong exchange rate:Appreciation of the currency: a stronger currency means imports are cheaper and exports are relatively more expensive, which means the current account deficit would worsen.

Economic growth: when consumer incomes increase, demand increases. This could increase demand for imports. This is especially true of a country such as the UK, where consumers have a high propensity to import.

• More competitive: if a country becomes more internationally competitive, such as with lower inflation or if there is economic growth in export markets, exports should increase. This also occurs when a country becomes more productive, since that causes average unit costs to fall. This could cause the current account deficit to improve, or increase the current account surplus.

Deindustrialisation: In the UK, the manufacturing sector has been declining since the 1970s. The goods that the UK previously made domestically now have to be imported, which worsens the deficit.
Membership of trade union: The UK has traditionally had negative current transfers, since fees are paid for membership of the EU.

• Attractiveness to foreign investors: A capital account surplus could be caused by incoming finance from investors buying UK bonds, securities and financial derivatives. This could help fund a current account deficit.

By definition, where there is a current account surplus, there is a capital and financial account deficit. A current account deficit means there will be a capital and financial account surplus.

In the UK, during periods of economic decline or recessions, the current account
deficit falls. This is because consumer spending falls.

If imported raw materials are expensive, there could be cost-push inflation in the UK,
since firms face higher production costs.
When the pound appreciates, imports become relatively cheaper and exports
become more expensive.
Inflation reduces competitiveness of economy by raising prices making exports less attractive

-If the UK becomes more productive, the UK will be more internationally competitive=This causes exports to increase relative to imports.

Question 19

By selling more exports to foreign countries…

Answer 19

the UK will have a greater inflow of
money into the circular flow of income. This will increase AD and improve the rate of economic growth.

Question 20

consequences of investment flows between countries

Answer 20

FDI is the flow of capital from one country to another, in order to gain a lasting interest in an enterprise in the foreign country.
FDI can help create employment, encourage the innovation of technology and help promote long term sustainable growth. It provides LEDCs with funds to invest and develop
.
Portfolio investments are passive such that control over the company is not gained. The investment aims to make a financial gain.

FDI, on the other hand, allows the investor to gain some control over the firm. It includes finance such as pension funds, hedge funds and stock market money flows.

Question 21

How can fiscal policy be used to correct balance of payments deficit or surplus

Answer 21

If there is a deficit on the current account, income tax could be increased. This will reduce the amount of disposable income consumers have, which will reduce the quantity of imports.

However, it might also impact domestic growth, since consumers will also spend less on domestic goods.

Governments could also reduce their spending. This would reduce AD and lead to less imports. It forces domestic firms into increasing exports, which helps improve the disequilibrium.

Fiscal policy is effective in the short term, but not so much in the long term. As soon as the policy measures end, household are likely to revert their expenditure back on imports.

• If taxes are imposed on trading partners, there is the risk of retaliation, which could reduce demand for exports, too.

Governments might have imperfect information about the economy, so it could leadto government failure.

If ‘green taxes’ are implemented, such as carbon taxes, or if there are minimum prices on pollution permits, the competitiveness of domestic firms could be compromised. This could reduce exports from domestic firms.

Question 22

How can monetary policy be used to correct a balance of payment deficit or surplus

Answer 22

Expenditure reducing and expenditure switching

Expenditure-reducing policies aim to reduce demand in the economy, so spending on imports fall.

Expenditure-switching policies aim to switch consumer spending towards domestic goods, and away from imports.
Reducing the growth of the supply of money in an economy can be expenditure-reducing or expenditure-switching

If there is a current account deficit, the bank might lower interest rates to cause depreciation in the currency. This causes exports to become cheaper, but it could be inflationary for the domestic economy.

Moreover, hot money might flow out of the country, since investors are not receiving a high return on their investment.

High interest rates could be expenditure-reducing, since the demand for imports falls and inflation might fall.

Changing the exchange rate could be a government expenditure-switching policy.

However, it is hard to control the supply of money in reality. Moreover, there is a significant time lag with changing the interest rate and seeing an effect.

Question 23

How can supply side policy help correct balance of payments

Answer 23

Supply-side policies could help increase productivity with increased spending on education and training, which could result in the country becoming more internationally competitive. This could lead to a rise in exports.

However, this incurs a significant time lag, so it is not effective as an immediate measure. In the long term, this can be an effective policy.

Supply-side policies could also help make the domestic economy attractive to investors.

The domestic economy could be made more competitive through deregulation and privatisation, which will force firms to lower their average costs. However, privatisation could result in monopolies being formed, which will not increase efficiency.

-l If governments provide subsidies to some industries to encourage production, there could be retaliation from foreign countries that see this as an unfair protectionist policy.

Question 24

The significance of deficits and surpluses for an individual economy

Answer 24

If imported raw materials are expensive, there could be cost-push inflation in the domestic economy, since firms face higher production costs.

• International trade has meant countries have become interdependent. Therefore, the economic conditions in one country affect another country, since the quantity they export or import will change.

A surplus or deficit on the current account could indicate an unbalanced economy, and it could mean the country is too reliant on other economies for their own growth.

It could be difficult to attract sufficient financial flows in order to finance a current account deficit. This could make it unsustainable in the long run.

Question 25

The implications for the global economy of a major economy or economies with imbalances deciding to take corrective action

Answer 25

An imbalance suggests that the UK is reliant on the performance of other countries.

If export markets, such as the EU, become weak, UK economic performance will be affected. This was seen during the 2008 financial crisis.

• It could become difficult to finance the deficit in the long run. In the US, the current account deficit is financed by Chinese investors buying US securities at low interest rates. If they lose confidence in the US economy, they would stop buying US debt.

The interest rates would then have to be increased to encourage investors to buy the debt. This would be damaging to US consumers who have a lot of debt, since repayments would increase, and they would have less disposable income as a result.

• In the Eurozone, current account deficits are of greater concern because the countries have a fixed exchange rate. This means they cannot devalue the currency to restore their level of international competitiveness.

Since 2006, the US deficit with China narrowed and China’s surplus also fell. A surplus indicates low consumer spending and a low savings ratio, which puts China at the risk of having unsustainable economic growth.
However, the government now aims to grow the economy using domestic spending, rather than exports.

• China made their exports more competitive by undervaluing their currency. This makes their imports more expensive, however, so it could be inflationary and cause a boom or bust. A stronger Yuan causes lower growth, lower inflation and reduces the current account surplus.

The US would prefer a stronger Yuan since it makes their domestic industries more competitive.

Question 26

How exchange rates are determined in freely floating exchange rate
systems

Answer 26

The exchange rate of a currency is the weight of one currency relative to another.

Floating:
The value of the exchange rate in a floating system is determined by the forces of supply and demand.

In a floating exchange rate system, the market equilibrium price is at P1. When demand increases from D1 to D2, the exchange rate appreciates to P2.
The demand for a currency is equal to exports plus capital inflows. The supply of a currency is equal to imports plus capital outflows.

Question 27

How governments can intervene to influence the exchange rate.

Answer 27

Fixed:
A fixed exchange rate has a value determined by the government compared to other currencies.

In a fixed exchange rate system, the supply of the currency can be manipulated by the central bank, which can buy or sell the currency to change the price to where they want. In the diagram, the supply has been increased (S1 to S2) by selling the currency so more is on the market (Q1 to Q3). The currency depreciates as a result (P2 → P3), which makes exports more competitive.

Managed:
Managed exchange rate systems combine the characteristics of fixed and floating exchange rate systems. The currency fluctuates, but it doesn’t float on a fully free market. This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate.

Governments might try and influence their currency, such as by maintaining a fixed exchange rate. For example, China has previously kept the Yuan undervalued by buying US dollar assets to make their exports seem relatively cheaper.

Interest rates:
An increase in interest rates, relative to other countries, makes it more attractive to invest funds in the country because the rate of return on investment is higher. This increases demand for the currency, causing an appreciation. This is known as hot money.

Quantitative easing:
This is used by banks to help to stimulate the economy when standard monetary policy is no longer effective. This has inflationary effects since it increases the money supply, and it can reduce the value of the currency. QE is usually used where inflation is low and it is not possible to lower interest rates further.

Foreign currency transactions:
The Bank of England uses this to manage the Uk’s gold and foreign currency reserves, as well as managing the MPC’s pool of foreign currency reserves. It involves buying and selling foreign currency to manipulate the domestic currency.
China kept large reserves of the US Dollar by purchasing government bonds, in order to undervalue the Yuan.

Question 28

The advantage of fixed and floating exchange rate systems

Answer 28

Fixed
Advantages
Allows for firms to plan investment as they know they will not be affected by harsh fluctuations in the exchange rate
It gives the monetary policy a focused target to work towards

Disadvantage
The gov and the central bank do not necessarily know better than the market where the currency should be

The balance payment does not automatically adjust to economic shocks

It can be costly and difficult for gov to hold large reserves for foreign currencies

Floating
Advantages
The exchange rate automatically adjust to economic shocks
It gives the monetary policy more freedom to focus on other macro objectives

Disadvantage
The fluctuation in the price of exchange rate can be unpredictable which can make investment planning difficult

It also can affect the export and import of a country which could cause a lot of unemployment if an industry is affected in particular

It could make the exchange rate vulnerable to speculative shocks

Question 29

joining a currency union such as the eurozone

Answer 29

Members of a monetary union share the same currency. This is more economically integrated than a customs union and free trade area. The Eurozone is an example of this.

A common central monetary policy is established when a monetary union is formed.
The single European currency, the Euro, was implemented in 1999 to form the Eurozone.

Monetary unions use the same interest rate. The Euro, for example, floats against the US Dollar and the Pound Sterling. Member nations are required to control their government finances, so budget deficits cannot exceed 3% of GDP. This is one of the four convergence criteria countries have to meet in order to join the Euro. The other three are:
- Gross National Debt has to be below 6% of GDP
-Inflation has to be below 1.5% of the three lowest inflation countries
- The average government bond yield has to be below 2% of the yield of the countries with the lowest interest rates. This ensures there can be exchange rate stability.

Member countries have to respond similarly to external shocks or policy changes.
There has to be flexibility in product markets and labour markets to deal with shocks.
This could be through the geographical and occupational mobility of labour, and wage and price flexibility in labour markets. Fiscal transfers could be used to even out some regional economic imbalances.

Question 30

Advantages of joining a currency union

Answer 30

The participating countries have more currency stability, and the currency is less prone to speculative shocks. This gives future markets more certainty, so there is more investment and growth potential.

There are fewer admin fees and less red tape when travelling abroad or exchanging money.

This also benefits firms which trade with the different member states. It is especially beneficial to small firms, who benefit from the time and money saving of a common currency.

The German monetary credibility might result in all member states having a lower interest rate. This might encourage more investment and spending, which might create more jobs.

Question 31

Disadvantage of joining in a currency union

Answer 31

Labour mobility is limited across Europe due to language barriers. Moreover, the differences in economic performance between member countries means a common monetary policy might not be effective.

The exchange rate is not flexible to meet each country’s need, such as if they need a boost in exports.

Member nations lose sovereignty when there is a common monetary union. This means that countries with a strong economy have to cooperate with countries that have weaker economies. They cannot adapt their policies to meet each individual requirement.

The one-off cost of joining a currency union of changing labels and prices can be significant.

Question 32

Economic growth and developments

The difference between growth and development

Answer 32

• economic growth is the increase in a country real national output. This is caused by increase in the quantity or quality of FOP, which causes an outward shift in PPF

Economic development refers to living standards, freedom and life expectancy
Essentially it covers more moral side to economic growth and its normative.

Development is also concerned with how sustainable the economy is and whether the needs of future generation can be met

Question 33

Economic growth and development

The main characteristics of less developed countries

Answer 33

Less economically developed countries (LEDCs) tend to be characterised by the following features:
- Low life expectancies
High mortality rates
High dependency ratio
Low GDP
Fast population growth
- Low levels of education
Poor standard of living
- poor nutrition, lack of access to clean , safe drinking water and a lack of sanitation
-poor or absent health care provision

Question 34

The main indicator of development

Answer 34

HDI
The components of HDI are education, life expectancy and standard of living, measured by real GNI at purchasing power parity (PPP) per capita.

It measure economic and social welfare of countries over time

The education component combines the statistics of the mean number of years of schooling and the expected years of schooling.

Life expectancy components used life expectancy of 25 to 85 Years
Gni reflects average income per person

The Human Development Index (HDI) of the United Kingdom has increased from 0.804 in 1990 to 0.929 by 2021, indicating that the UK has reached very high levels of human development.

A value close to 1 indicative of a high level of economic development . A value close to 0 suggest a low level of development

Question 35

The advantages and limitations of using the HDI to compare levels of development between countries and over time

Answer 35

Disadvantage
HDI does not consider how free people are politically, their human rights, gender equality or people’s cultural identity.

HDI does not take the environment into account. It could be argued that this should be included to focus on human development more.

HDI does not consider the distribution of income. A country could have a high HDI
but be very unequal. This can mean many people might still be in poverty.

Maybe gender related development index is better— measure the relative inequality between men and women. It combine HDI with a consideration of gender. For example it will consider difference in life expectancies , income and education between gender

Advantages
HDI does allow for comparisons between countries to be made, based upon which
countries are generally more developed than other countries.

It provides a much broader comparison between countries than GDP does.

Education and health are important development factors to consider, and it can provide information about the country’s infrastructure and opportunities. It also shows how successful government policies have been.

Question 36

Factors affecting growth and development( market orientated strategies)

Answer 36

• these are measure which make the economy more free,with minimum gov intervention

Trade liberalization
Free trade is the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations. World GDP can be increased using free trade, since output increases when countries specialise. Therefore, living standards might increase and there could be more economic growth.

Promotion of FDI
FDI is the flow of capital from one country to another, in order to gain a lasting interest in an enterprise in the foreign country.
FDI can help create employment, encourage the innovation of technology and help promote long term sustainable growth. It provides LEDCs with funds to invest and develop.

• Removal of government subsidies
Government subsidies could distort price signals by distorting the free market mechanism. A free market economist would argue that this could lead to government failure. There could be an inefficient allocation of resources because the market mechanism is not able to act freely.
For example, the government might end up subsidising an industry which is failing or has few prospects.

Floating exchange rate system
The value of the exchange rate in a floating system is determined by the forces of supply and demand.

Privation
means that assets are transferred from the public sector to the private sector. In other words, the government sells a firm so that it is no longer in their control. The firm is left to the free market and private individuals.

Free market economists will argue that the private sector gives firms incentives to operate efficiently, which increases economic welfare. This is because firms operating on the free market have a profit incentive, which firms which are nationalised do not.

Since they are operating on the free market, firms also have to produces the goods and services consumers want. This increases allocative efficiency and might mean goods and services are of a higher quality.
By selling the asset, revenue is raised for the government. However, this is only a one-off payment.

Question 37

Factor affecting growth and development (interventionists strategies)

Answer 37

The government intervene in the market to try and influence growth and development using interventionist strategies

Development of human capital
By developing human capital, the skills base in the economy would improve.
This would improve productivity and allow more advanced technology to be used, since workers will have the necessary skills.
Businesses struggle to expand where there are skills shortages. It also limits innovation.

• gov can fund for better education , training
  Primary school enrolment has increased from about 80% to around 90% of children. However, secondary and tertiary education enrolment is still low.

By developing human capital = the country can move their production up in supply chain from primary product, to manufactured goods and to service which can earn them more

Protectionism
- protectionism can help reduce a trade deficit. This is due in Importing less tariffs and quotas on imports

It can protect infant industries, which are relatively new and need support.
Protectionism is usually short term until the industry develops, at which point the industry can trade freely.
However, protectionism could distort the market and lead to a loss of allocative efficiency
=prevents industries from competing in a competitive market and there is a loss of consumer welfare.
=Consumers face higher prices and less variety. By not competing in a competitive market, firms have little or no incentive to lower their costs of production.
Moreover tariffs are regressive and are most damaging to those on low and fixed income

There is also the risk of retaliation from other countries, so countries might become hostile

Infrastructure development
Example of physical infrastructure include transport, energy, water and telecommunications

Higher supply cost delay business and reduced mobility of labour

Infrastructure development is a top priority for the Chinese government.
From the late 1990s to 2005, 100 million Chinese people benefited from improved power and telecommunications. Employment can be boosted with improved roads, railways and airport constructions. However, some remote areas still have non-mechanised means of transport.

Some economists argue that the development gap between China and other emerging economies is due to its focus on infrastructure projects. China invested 9% of their GDP in infrastructure in the 1990s and 2000s, whilst most emerging economies only invested around 2%-5% of GDP.

Promoting joint venture with global companies
Promoting joint venture with global follow
This occurs when a partnership is formed between two firms based in multiple countries.

They allow the firm to participate in international trade, without the responsibilities involved of it. They help technological knowledge to be transferred, which can help improve and develop small companies.

Joint ventures open up new markets for small firms, so they can distribute their products to customers. This saves them time and funds. It also spreads their risk, which is important in industries where developing a product is expensive.

A joint venture with a global company also helps firms penetrate a foreign market, which is usually difficult because of barriers to entry.

Question 38

Other strategies

Answer 38

Tourism- can create thousands of jobs and help shift a developing country away from dependency on primary products
It helps diversify economy and it could make the country more attractive to FDI = as well as developing their infrastructure

In 2019 tourism accounts for 7 percent of world trade
The Low tech and labour intensive work in tourism is suited to LDC
However there’s little revenue retained in the country since travel agents and hotel owners are likely to repatriate their profits.

Income from tourism is likely to be unstable, since it relies heavily on the business cycle in developed countries.

Investing in tourism can be risky and expensive, however. States have to focus where tourism is attracted, such as transport, land availability and improving infrastructure.

Locals could feel stigmatised by tourism, especially if they cannot afford the luxuries that the tourists have. There could also be some environmental damage, such as pollution.

Development of primary industries

Some developing countries have an abundance of raw materials, so some governments might choose to exploit this advantage and develop the industry so the country can have a comparative advantage in its production.

Moreover, primary industries, especially those allied to farming, form the livelihoods of the bulk of the population. It is sometimes the only source of income for most families. Therefore, it is important that the industry is supported.

Question 39

Barriers to growth and development

Answer 39

Poor infrastructure
Poor infrastructure discourages MNCs from setting up premises in the country. This is since production costs increase where basic infrastructure, such as a continuous supply of electricity, is not available.

Inadequate human rights / less fund in education and skills
This is impertant for developing human capital. Adequate human capital ensures the economy can be productive and produce goods and services of a high quality. It helps generate employment and raise standards of living.

Demographic factors

The population can impact the growth and development of a country. There is a link between keeping birth rates down and fighting hunger, poverty and environmental damage. Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa. The current population of 1.1 billion is expected to double by 2050, which is not sustainable.

Debt
The debt crisis emerging in the developing world threatens the fight against poverty and inequality

Weak or absent property rights mean entrepreneurs cannot protect their ideas, so do not have an incentive to innovate.

Corruption
In sub-Saharan Africa, the money lost from The population can impact the growth and development of a country. corruption could pay for the education of 10 million children per year in developing countries.

Poor governance / civil war
This could hold back infrastructure development and is a constraint on future economic development. It could destroy current infrastructure and force people into poverty.

Vulnerability to external shocks
For example, an earthquake prone country is likely to find it hard to develop their infrastructure, and people might be pushed into poverty. Nepal was already one of the poorest countries in the world, but the Nepal earthquake in 2015 pushed more people into poverty.

Question 40

The role of aid and trade in promoting growth and development

Answer 40

Aid provides temporary assistance to a country, such as humanitarian aid offered to countries after conflicts or natural disasters. Aid could also be a grant for a project that a country might not have the funds for.

Aid could be used to reduce human capital inadequacies or to pay off debt. It can improve infrastructure, which can help make the country more productive.

However, the benefits of aid are limited by corrupt leaders, the size of the aid payment and the potential for the recipient country to become dependent on aid.

Question 41

Policies that might be adopted to promoted economic growth

Answer 41

• supply side polices
• fiscal policy
• monetary policy