Market Orientated Stategies Flashcards
What (6)
Trade liberalisation
Promotion of FDI
Removal of government subsidies
Floating exchange rate systems
Micro finance schemes
Privatisation
What is trade liberisation (3)
Open market up to competition
Removes laws and barriers that stop trade
Allows specialisation = uk = finance
Example of trade liberisation (4)
Chinas economy has grown faster than India’s in past 40 years
Reason = China has greater integration into global economy
Individuals have higher incomes etc = export led industries
Now less reliant on exports
Trad liberisation good (5)
Comparative advantage
Economies of scale
Consumer choice
FDI = if firms are free to I/E there more Linley to invest
Innovation= faster spread of tech
Problems with trade liberisation (4)
Will have protection measures = tariffs = welfare loss
Example = us car manufacturers in Detroit when tariff put on steel = higher prices couldn’t cope
Inefficiency
Retaliation
What FDI (2+)
Multi-Nationals have the financial muscle to make major projects a reality
Can close the savings gap in a developing country or its foreign currency gap
Why FDI a thing (3)
Developing country may have natural resources waiting to exploited
Lacks the large amount of savings needed to provide the investment for capital
Sometimes the only option = invite MNC to make investment
Example - FDI (2)
French gov invest in nuclear power plant in uk
China large investors in Africa
Problems with FDI (3)
MNC drive out local firms out of business
May only be limited demand for local components – the rest will be imported
MNCs will repatriate profits out of the country = try to reduce their tax liability through transfer pricing
Removal of government subsidies - what (3)
Subsidising essential items = food or fuel
Effective way of minimising absolute poverty
Scarce resources allocated effectively
Problems with subsisted (3+)
Poorly targeted - how to stop wealthy taking advantage
Example = Fuel subsidies reduce cost of public transport BUT also benefit owners of private cars = wealthiest people in society
Opportunity cost
Removing subsidies effect on supply and demand and price (3)
Leads to inward shift in supply = increase price
Subsidies good is likely to be an essential good = demand will be inelastic
Increase in price therefore likely to be large = sharp increase in the cost of living
Vested interest in subsidy (3)
So many people = vested interest in the subsidy = removal is never an easy option
Criminal gangs buy subsidised items and sell them for vast profits in neighbouring countries
The best time to remove subsidy = when market price falls close to the subsidised price of the item
Floating exchange rates - what (2)
A freely floating currency does not require any intervention from the government
Gov has to raise IR to support the domestic currency = choke off consumer spending or investment
Problems with floating exchange rate
The exchange rate can lead to imbalances in a country’s balance of payments
Specific good and bad floating ER (2)
SPICED = exports fall and imports to rise = deficit
WpIDEC = exports rise and imports fall = surplus = excessive demand = inflation
Micro finance how did it start (2)
Microfinance is centuries old but arose in its modern form in the 1970s
Mohammed Yunus = economics professor in Bangladesh = began providing
very small loans to poor Bangladeshi women living in rural areas
Part 2 what is micro finance (3+)
Women used loans to expand their businesses
Buying more stock or employing an additional staff member
Provision of working capital to people with no alternative sources of finance = raise themselves out of poverty
What’s microfinance defined as
Provision of financial services to the unbanked
What do micro finance offer (4++)
Micro-insurance and money transfer services
Traditional banks have been unwilling to provide these services to the unsalaried and those working in the informal sectors
Muhammad Yunus and the Grameen Bank = joint winners of the 2006 Nobel Peace Prize
Grameen Bank has now disbursed US$6.6bn
How many don’t use firmal financial sercvces
70% of adults in the developing world do not use formal financial services
What - peivafisation
Governments start to sell off state-owned enterprises to the private sector
Negatives to micro finance (2)
Business sunsuccessful
Loans are very very smal
Why - privatisation (3)
State owned businesses have no incentive to cut costs
If a firm is not operating at lowest possible costs = not productively efficient
Private firms have to be allocativly efficiency = meet demand + supply whereas state don’t because they have monopoly
Problems with privatisation (3++)
State-owned firm = monopoly privatisation is not going to stop it being a monopoly when under private control
The privatised monopoly will be just as inefficient as it was when under state ownership = not productive or allocative efficient
Developing countries = corruption = easy way for politicians or government officials to get rich is to sell a state-owned company to a family member or friend at a price which is well below market value
