The global economy Flashcards
1
Q
What is international trade?
A
Exchange of goods, services, and resources between nations
2
Q
Benefits of international trade?
A
- Increased competition
- Lower prices
- Greater choice
- Acquisition of resources
- More foreign exchange earnings
- Access to larger markets
- Economies of scales
- More efficient resource allocation
-More efficient production
3
Q
Absolute advantage?
A
Occurs when a country is able to produce a product using fewer factors of production than another country
4
Q
Comparative advantage?
A
When a country can produce a good or service at a lower opportunity cost than another country.
5
Q
Sources of comparative advantage?
A
- Factor endowments: Some countries naturally endowed to certain resources
- Exchange rate fluctuations: Appreciation of domestic currency means imports are cheaper while exports become more expensive for foreign buyers
- Price stability: Inflation in the domestic country causes demand for exports to fall while demand for imports will rise
- Levels in technology: Latest access to machinery and technology more productive. High income countries will have more financial ability to invest in better technology so comparative advantage over low income countries
- Investment in R&D: Countries that invest in R&D and innovation improves ability to increase productive capacity and lowers opportunity cost
6
Q
Limitations of theory of comparative advantage?
A
- creates a dependence on other countries which generates vulnerability
- impact of negative externalities of production is not considered
- distribution of the extra income is likely to be uneven
- certain industries are likely to shut down resulting in unemployment for some workers
7
Q
Trade protection
A
Government policies aimed to restrict imports to protect domestic producers: tariffs, quotas, subsidies, adminisrative barriers
8
Q
Tariffs
A
A tariff is a tax on imported goods/services. Higher price allows more inefficient domestic firms to increase their production and market share
9
Q
Tarrifs effects on stakeholders?
A
Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Worse off as they pay higher price for lower quantity
Foreign producers: Worse off as they sell at lower quantity at same price
Government: Earns tax revenue
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity
10
Q
How to calculate consumer expenditure tariff?
A
Consumer expenditure: Price X Quantity
Before Tariff: Pw X Q2
After tariff: (Pw+T) x Q4
11
Q
How to calculate consumer surplus tariff?
A
Before tariff: Area G,F,B,C,D,E
After tariff: Area G,F
12
Q
How to calculate producer revenue tariff?
A
Revenue = Price X Quantity
Before Tariff: Pw X Q1
After Tariff: (Pw+T) x Q3
13
Q
How to calculate producer surplus tariff?
A
Before Tariff: (Pw - min price) x Q1 / 2
After Tariff: ((Pw+T) - min price) x Q3 / 2
14
Q
How to calculate foreign producer revenue tariff
A
Revenue = Price X Quantity of imports
Before tariff = Pw X (Q2-Q1)
After tariff = Pw X (Q4-Q3)
15
Q
How to calculate government revenue tariff
A
Revenue = ((Pw-T) - Pw) X (Q4-Q3)
16
Q
How to calculate welfare loss tariff
A
(T x (Q3-Q1)) / 2 + (T x (Q2-Q4)) / 2
17
Q
Pros / Cons of Tariffs
A
Pros:
- Government receives revenue
- Supports domestic producers and jobs
Cons:
- Trade off between domestic employment and inefficient allocation of resources
- Consumers pay higher price and have less options
- Foreign producer revenue decreases
- May result to retaliation and long term breakdown of political relationships
- Encourages productive inefficiencies as domestic firms reliant on this form of protection rather than performing competitively
18
Q
Quota
A
A quota is a physical limit on imports. This limit is usually set below the free market level of imports
- As cheaper imports are limited, a quota raises the market price and create shortages
19
Q
Quota effect on stakeholders
A
Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Worse off as they pay higher price for lower quantity
Foreign producers: May generate higher or lower sales revenue depending on PED, PES and size of quota
Government: No tax revenue
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity
20
Q
Production subsidies
A
Refers to sum of money which government provides to domestic producers for producing each unit of the subsidized good
21
Q
How to calculate consumer surplus quota
A
Before : (Max price - Pw) x Q2 / 2
After : (Max price - (Pq)) x Q4 / 2
22
Q
How to calculate domestic producer revenue quota
A
Revenue = Price X Quantity
Before: Pw X Q1
After: (Pq) x Q3
23
Q
How to calculate producer surplus quota?
A
Before : (Pw - min price) x Q1 / 2
After : ((Pq) - min price) x Q3 / 2
24
Q
How to calculate foreign producer revenue quota
A
Revenue = Price X Quantity of imports
Before = Pw X (Q2-Q1)
After = Pq X (Q4-Q3)
25
How to calculate welfare loss quota
(Pq - Pw) x (Q3-Q1) / 2 + (Pq-Pq) X (Q4-Q3) / 2 + (Pq-Pw) X (Q4-Q3)
26
Production subsidy effect on stakeholders
Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Unaffected by subsidy, they will still pay same price and consume same quantity
Foreign producers: Generates lower sales revenue due to falling exports
Government: Must pay for subsidy
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity
27
How to calculate consumer expenditure quota?
Consumer expenditure: Price X Quantity
Before : Pw X Q2
After : (Pq) x Q4
28
How to calculate consumer surplus quota?
before: (Max price - Pw) x Q2 / 2
after: (Max price - (Pq)) x Q4 / 2
29
How to calculate producer revenue quota?
Revenue = Price X Quantity
Before: Pw X Q1
After: (Pq) x Q3
30
How to calculate producer surplus quota?
Before : (Pw - min price) x Q1 / 2
After : ((Pq) - min price) x Q3 / 2
31
How to calculate foreign producer revenue quota?
Revenue = Price X Quantity of imports
Before = Pw X (Q2-Q1)
After = Pq X (Q4-Q3)
32
How to calculate welfare loss quota?
(Pq-Pw) x (Q3-Q1) /2 + (Pq-Pw) x (Q4-Q3) / 2 + (Pq-Pw) x (Q4-Q3)
33
How to calculate consumer expenditure production subsidy?
Consumer expenditure: Price X Quantity
Before / After : Pw X Q2
34
How to calculate consumer surplus production subsidy?
before/after: (Max price - Pw) x Q2 / 2
35
How to calculate producer revenue production subsidy?
Revenue = Price X Quantity
Before: Pw X Q1
After: (Pw+sub) x Q3
36
How to calculate producer surplus production subsidy?
Before : (Pw - min price) x Q1 / 2
After : ((Pw+sub) - min price) x Q3 / 2
37
How to calculate foreign producer revenue production subsidy?
Revenue = Pw X Quantity of imports
Before = Pw X (Q2-Q1)
After = Pw X (Q2-Q3)
38
How to calculate government expenditure production subsidy?
(Pw+Sub - Pw) x Q3
39
How to calculate welfare loss production subsidy?
(Pw+sub - Pw) x (Q3-Q1) / 2
40
What is export subsidy?
Sum of money which government provides to domestic producers for each unit of subsidised good exported
41
Export subsidy effect on stakeholders?
Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Worse off as they pay higher price and lower quantity
Foreign producers: Other exporting countries lose portion of the market and worse off
Government: Must pay for subsidy
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity
42
How to calculate consumer expenditure export subsidy?
Consumer expenditure: Price X Quantity
Before : Pw X Q1
After: Pw+sub X Q3
43
How to calculate consumer surplus export subsidy?
before: (Max price - Pw) x Q1 / 2
after: (Max price - Pw+sub) x Q3 / 2
44
How to calculate producer revenue export subsidy?
Revenue = Price X Quantity
Before: Pw X Q2
After: (Pw+sub) x Q4
45
How to calculate producer surplus export subsidy?
Before : (Pw - min price) x Q2 / 2
After : ((Pw+sub) - min price) x Q4 / 2
46
How to calculate government expenditure export subsidy?
sub x (Q4-Q3)
47
How to calculate welfare loss export subsidy?
sub x (Q3-Q1) /2 + sub x (Q4-Q2) /2
48
What are administrative barriers?
Regulations which increase costs, difficulty and time required to import foreign goods and services. Examples:
- Health and safety regulations
- Product specifications
- Environmental regulations
- Product labelling
- Inefficient administrative systems
49
Arguments for trade protection
- Infant industries: To protect new firms that would be unlikely to succeed at start-ups due to the level of global competition.
- Sunset industries: Firms on the way out so government chooses to support them to help limit the economic damage
- Strategic Industries: Some industries like defence is essential to self-sufficiency and security. Being reliant on other countries is vulnerable
- Dumping: Exports sold at extremely low prices are anti competitive and can harm an industry
- Employment: Industries outsourcing production to other countries will experience structural unemployment, government will step into protect jobs
- Current account deficit: When Imports > Exports, amount of money leaving country to support foreign firms > domestic firms.
50
Balance of payments
record of all transcations made between domestic countries and rest of the world over period of time
- current account: transactions related to goods/services along with payments related to the transfer of income
- financial / capital account: all transactions related to savings, investment and currency stabilization
51
What are debits and credits?
Debits: Inflow of money from country
Credits: Outflow of money from country
52
Why ineffecient allocation of resources from tariffs
Market unable to achieve allocative effecinecy as more goods / services produced by less effecient producers. Domestic producers with trade protection against foreign producers may lack incentives to become more effecient
53
Arguments against trade protection
- Reduces both the quantity and variety of goods/services available
- Reduces the supply of goods/services which leads to higher prices
- May generate inflation in the economy and/or lead to a loss of employment
- governments may retaliate with their own measures which further harm free trade
- Reduces need to be efficient or to innovate, leads to higher prices and lower quality products
- Global welfare is reduced as production shifts from more efficient foreign producers to less efficient domestic producers
54
Arguments for free trade?
Better alllocation of resources
economies of scales
lower prices
more choice
domestive firms have incentive to become more effecient
increased export competitiveness
55
what is a preferential trade agreement (PTA)
agreement between 2 or more countries to lower trade barriers between each other. Members of governments sign trade to special or favorable terms and conditions or trade
- bilateral (2 countries)
- multilateral (3 or more countries)
56
what are trading blocs?
group of countries that agree to reduce trade barriers for purpose of encouraging free or freer trade and cooperation.
- free trade areas
- custom unions
- common markets
57
free trade areas
group of countries agree to remove trade barriers between them, members can decide level of trade barriers towards non members independently
58
custom unions
group of countries agree to remove trade barriers between them, member must adopt common external trade policy towards non members
59
trade creation
when demand shifts from high cost producer to lower cost producers within trading bloc as a result of formation
60
trade diversion
when demand shifts from low cost producer outside trading bloc to high cost producer within bloc as a result of formation
61
adv of trading blocs
- potential for economies of scale
- greater employment opportunities
- stronger bargaining power in new multilateral negotiations
- Greater political stability and cooperation between the countries
- Member countries can access new markets and increase their trade volumes.
62
dis of trading blocs
- Loss of sovereignty as nations increasingly give up their autonomy
- Trading negotiations become more challenging as countries within a trading bloc have to maintain the existing bloc rules
- Redirection of trade away from more efficient external suppliers towards less efficient internal suppliers. Leads to higher costs and reduced efficiency
63
monetary union
formed when member countries of common market adopt common currency and central bank responsible for monetary policy. Members do not have flexibility in excercising own monetary policy and forming requires members to limit inflation, government deficits, and debt
64
adv of monetary union
- eliminate exchange rate risk / uncertainty
- eliminates transaction costs
- encourages price transparency
- promotes higher level of inward investment / trade
65
dis of monetary union
- loss of monetary policy as instrument of economic policy -> loss of sovereignty
- changes in policy impacts differently on each member -> asymmetric impact
- loss of exchange rate flexibility
- changeover cost
66
what is the world trade organization?
established to
- promote trade liberalization
- oversee multilateral trade agreements
- resolve trade disputes between members
- enviornmental protection
- national security
- protect consumers from health hazards
67
objectives of WTO
- non discrimination of member nations
- more open international trade
- predictable / transparent trade policies
- promote competition and prevent protectionism
- support LEDC's
- protect enviornment
68
function of WTO
- platform for trade negotiation
- implementation and monitoring of trade agreements
- forum for systematic trade disputes resolutions
- building trade capacity for developing countries
- outreach to promote economic co-operation and growth
69
limitations of WTO
- high income countries subsidize domestic production of primary production of primary goods while imposing tariffs on primary good imports to protect domestic jobs
- in favor of MNC's and high income countries
70
floating exchange rates
The forces of demand and supply determine the rate at which one currency exchanges for another
- if there is excess demand for the currency, prices increase
- If there is an excess supply of the currency, prices fall
71
what happens when appreciation / depreciation occurs on exchange rate
- Demand shifts out / supply shifts in
- Demand shifts in / Supply shifts out
72
why might the demand curve increase in appreciation of currency
- Increased demand for exports hence foreign consumers demanding exports must purchase exports which increases demand
- increased investments as foreign firms fund FDI or through portfolio investement
- speculators may purchase expecting the value to increase
- fall in inflation rates thus exports cheaper
- rise in interest rates as it increases incentive to save and earn interest payments thus investors will exchange currency
73
why might the supply curve decrease in appreciation of currency
- fall in domestic demand for imports as residents import less goods and services
- fall in outward investment as domestic firms will fund FDI or domestic portfolio investment by selling domestic currency
- central bank may restrict supply through administrative barriers and currency only traded through approved outlets preventing governments / large group of investors to manipulate currency
74
why might the demand curve decrease in deppreciation of currency
- fall in demand for exports from domestic consumers
- fall in inward direct / portfolio investemnt
- fall remmitances
- speculation that exchange rate will fall
- rise in inflation rates
- fall in interest rates and growth rates
75
why might the supply curve increase in deppreciation of currency
- increase in domestic demand for imports
- increase in outward investment from domestic consumers
- fall in central bank intervention
76
effects of changes in floating exchange rates
E - Economic growth
L- Living standards
I - inflation
T - Trade balance
E- Employment
77
what are consequences of deppreciation?
- imported FOP's more expensive reducing producer willingness to produce leading to cost push inflation as SRAS shifts inward
78
consquences of appreciation?
- country's exports more expensive to foreign consumers
- imports cheaper to domestic consumers
- worsens trade balance decreasing economic growth and standard of living
- producers producer at lower output
- unemployment ast economy below full capacity
79
fixed exchange rate system
A system in which the country’s Central Bank intervenes in the currency market to fix the exchange rate in relation to another currency
- When they want their currency to appreciate, they buy it on forex markets using their foreign reserves, thus increasing its demand
- When they want their currency to depreciate, they sell it on forex markets, thus increasing its supply
80
devaluation
when central bank or government reduces the predetermined level of currency in fixed exchange rate systemrev
81
revaluation
when central bank / government increases the predetermined level of currency in fixed exchange rate system
82
arguments for and against fixed / floating exchange rate
- certainty:
- opportunity costs:
- currency liquidity
- speculation
- monetary policy
83
certainty of fixed exchange rates
fixed offers stability reducing fluctuations thus encourages FDI as it reduces risks for firms
84
opportunity costs of fixed exchange rates
fixed encourages improvement of long term competitiveness as it reduces market volatility. Although more incentive to improve country's intrinsic international competitiveness, central bank needs to carry more foreign reserves and incurring opportunity costs. Signifcant time needed to monitor market
In floating, long term improvements would appreciate currency, negating effects of reform
85
currency liquidity
availability of currency in market. Holding of foreign reserves reduces availabiltiy of currencies on global market for private investors which crowds out private investors
86
speculation
floating subject to speculation where investors may buy or sell currency depending on beliefs of future value of currency. Leads to fluctuations and increases volatility / uncertainty
87
monetary policy
in fixed central banks adjust interest rates to influence exchange rate thus less freedom to use monetary policy to achieve macroeconomic objectives
88
managed exchange rate
The exchange rate is allowed to fluctuate within a specified band around a desired valuation. If it goes outside of this band then the Central Bank will intervene to bring it back within the band
- When they want their currency to appreciate to back within the band, they buy it on forex markets using their foreign reserves, thus increasing its demand
- When they want their currency to depreciate back into the band, they sell it on forex markets, thus increasing its supply
89
overvalued / undervalued currency
overvalued: managed at value higher than its true floating exchange rate
undervalued: managed at value lower than its true floating exchange rate
90
Economic Development
Refers to the improvement in the standards of living and the quality of life for an economy as whole
91
Standard of living
Quantifiable metric measuring the level of wealth, comfort, goods, and services available to an economic area.
- Income per person
- Employment opportunities
- Cost of goods and services
- Poverty rates
- Economic Inequality
- Quality of healthcare, education, housing
92
Quality of life
Subjective concept on the measure of happiness in an economic area.
- Freedom from slavery
- Equal protection under law
- Freedom of movement
- Right to privacy
- Freedom of religion
93
Sustainable development
- Economic development that meets needs of present generations without compromising ability of future generations to meet their own needs
94
Social sustainability
- Ability of economy to develop social processes and structures that enable better standard of living and quality of life through better access to shelter, healthcare, and education
95
Factors contributing to social sustainability
- Equitable opportunities
- Ensuring basic needs
- Members of society having voice to facilitate better functioning government
- Promote diveristy for improved and sustained well-being
96
Economic sustainability
Response use of scarce resources in a way to ensure future generations are not disadvantaged in favour of today's generations
97
Factors contributing to economic sustainability
- Sustained and equitable growth
- Poverty alleviation
- Universal access to education
- Equitable distribution of income and wealth
- Widespread access to finance
98
Environmental sustainability
- Responsible use of natural resources so future generations have access to same resources
99
Factors contributing to environmental sustainability
- Use of renewable resources
- Preventing climate change
- Protection of ecosystems
- Protect common access resources from exploitation
100
Relationship between sustainability and poverty
- Poverty can result in unsustainable behavior of resource depletion, land degration, and pollution.
- LEDC often have poor institutions, public resource management, and waste management systems
- HEDC use more plastic per person but most plastic in LEDC not adequately disposed
101
Relationship between poverty and enviornment
- LEDC have large primary sector and underdeveloped secondary and tertiary sectors
- More reliant on agriculture, forestry, and mineral industries. Growth of these sectors dependent on soil conditions, land availability and climate conditions.
102
Relationship between poverty and education
- Education leads to growth in human capital that can increase household income and reduce poverty. Can facilitate research and innovation.
- LEDC, many children dont have widespread access to schooling limiting productivity of human capital in the long run.
103
Economic integration
occurs as countries reduce trading barriers between themselves and become more interdependent. Can occur through:
- through the development of trade agreements
- through the creation of trading blocs
- through the formation of a monetary union
104
Causes of exchange rate fluctuations
- Interest rates influence flow of money
- If inflation rises, exports more expensive so lower demand from foreigners, depreciating currency
- FDI creates demand for currency leading to currency appreciation
- increase in net exports, currency appreciation and vice versa
- Changes in tastes / preferences
- Traders may buy currency if expectation that it may rise
- Portfolio investment creates demand for currency leading to currency appreciation
105
Impact of appreciation or depreciation on economic indicators
- Current Account: Depreciation of currency causes exports to be cheaper for foreigners and exports to be more expensive. Extent to which currency depreciation improves currency account balance depends on PED of exports / imports
- Economic growth: Depreciation results in increase in net exports, more economic growth
- Inflation caused by depreciating currency, prices of imports increase
- Depreciation leads to increase in exports, unemployment likely to fall as more workers required
106
Fixed vs Floating exchange rate systems
- CB intervenes to maintained fixed rate / currency determined by market forces
- Stability / Predictability for trade and investment / greater flexibility as interest rates and money supply more manipulated
- Monetary policies limited as focus is on exchange rate / allows for automatic adjustments to external shocks
- Lower speculative trading and currency volatility
107
Current account
This account records the net income that an economy gains from international transactions
- Balance of trade in goods (export-imports)
- Balance of trade in services (exports-imports)
- Net income
- Current transfers
108
Capital account
records small capital flows between countries and is relatively inconsequential
- Capital transfers (Smaller flows of money between countries)
109
Financial account
Records the flow of all transactions associated with changes of ownership of the country’s foreign financial assets and liabilities
- Foreign Direct Investment (FDI)
- Portfolio Investment
- Official Borrowing
- Reserve Assets
110
Interdepence between the accounts
- current account should balance with the capital and financial account and be equal to zero
- If there is a current account deficit, there must be a surplus in the capital and financial account
- If there is a current account surplus, there must be a deficit in the capital and financial account
111
Relationship between current account and exchange rate
- closely linked in international trade: current account records the value of a country's trade while exchange rate determines the price of a country's currency
- A stronger exchange rate makes imports cheaper and exports more expensive
- A weaker exchange rate makes imports more expensive and exports cheaper
112
Relationship between financial account and exchange rate
- Changes in the financial account can impact the exchange rate: inflow of foreign investment into a country increases the demand for the country's currency, appreciating the currency and vice versa
- exchange rate influences the attractiveness of a country for foreign investment: stronger exchange rate makes foreign investments more expensive reducing appeal of investment and vice versa.
113
consequences of persistent current account deficits
- Depreciating exchange rates
- Increasing interest rates
- Increasing foreign ownership of domestic assets
- Increasing national debt
- Worsening international credit ratings
- Demand management conflicts
- Impact on long term economic growth
114
Ways to correct current account deficits
- Do nothing: Acts as self correcting mechanism but external factors may prevent currency depreciating
- Expenditure switching: Changing buying habits, imports to domestic goods but retaliation from partners leading to tariffs and quotas
- Expenditure Reducing: Reducing disposable income leading to fall in demand for imports but causes GDP growth to slow and unemployment to increase
- Supply side: Improve quality of products to lower cost of production but usually long term and government spending acts as opportunity cost
115
Marshall Lerner Condition
The extent to which this depreciation improves the current account balance depends on the Marshall-Lerner condition
- Revenue rule: to increase revenue, firms should lower prices for products that are price elastic in demand
- If elasticity of exports/imports less than 1, depreciation will worsen current account balance
116
J curve effect
time lag between the depreciation of the currency and any subsequent improvement in the current account balance
- takes time for firms and consumers to respond to changes in price
- Once price changes last for a longer time, firms and consumers change patterns
117
Implications of persistent current account surplus
- Rising consumption and investment
- Appreciating Exchange Rates
- Both an inflationary and deflationary effect on price levels: net effect on inflation will depend on the extent to which domestic firms rely on imported raw materials
- Rise in exports leads to lower unemployment from higher investment and more workers required resulting in higher disposable income
- Appreciating exchange rates will erode the nation's export competitiveness over time. Depends on PED, if inelastic then currency appreciation doesn't impact but if elastic then does.
118
Sustainable development
Economic development that meets the needs of the present generations without compromising the ability of future generations to meet their own needs
119
Single indicators of economic development
- GDP/GNI per person (per capita) at PPP
- Health and education indicators: Life expectancy, infant mortality rate, literacy rate, mean years in school
- Economic / social inequality indicators: Gini coefficient
- Energy indicators: Coal, electricity, oil consumption per person
- Environmental indicators: Co2 Emissions, agricultural water
120
Human development index (HDI)
Each indicator equal weighting in index, ranks countries between 0-1. 1 closer to higher level of economic development
- Health: Life expectancy
- Education: Combination of mean years of school and expected years for children
- Income: GNI per capita at PPP
121
Inequality adjusted HDI
measures the level of human development when inequality is accounted for:
- IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises which is represented by a percentage
- Insight into the differences in human development that exist in a country as opposed to the average human development
122
Adv of HDI
- more useful comparison metric than single indicators
- incorporates three of the most important metrics
- widely used all over the world
- provides goal for governments to use when developing their policies
- provides citizens with an understanding of how their quality of life compares
123
Dis of HDI
- doesn't measure the inequality
- doesn't measure or compare the levels of absolute and relative poverty
- does not provide useful short-term information as gathering the data is difficult.
124
Relationship between economic growth and development
economic growth often has a very positive impact on economic development
- can lead to higher income but equity of income influences level of economic development. Higher equity -> greater economic development
- In LEDC economic growth tied to 1 industry & generates negative externalities of production that standard of living decreases as growth increases
125
Poverty cycle in terms of development
1) Low wages: Result of unemployment, lack of skills or primary sector based economy
2) Low levels of education and healthcare: unable to afford education and harder to stay healty
3) Low levels of human capital: low education / healthcare leads to low level of human capital, reduces productivity
4) Low productivity: results in low wages and the cycle continues
126
Poverty cycle in terms of growth
1) Low wages: intersection of economic growth and human development
2) Low savings: low wage levels, harder to save as money spent on necessities
3) Low investment: banks have less money available for investment
4) Low economic growth: holds back productivity and economic growth
127
Types of economic barriers
- Dependency on the primary sector: Low YED so low scope to increase demand, little added value, prices volatile due to inelasticity of demand / supply
- Rising income inequality: more equal distribution means able to consume more wide range of G/S
- Lack of access to international markets: Countries can't access MEDCs due to trade barriers
- Low levels of human capital: Low education / heathcare reduces productivity
- Lack of access to infrastructure & appropriate technology: Good infrastructure reduces business costs and attracts FDI,
128
Types of political / social barriers
- Legal system: strong legal system builds confidence in an economy, attracts investment, easier for business to conduct so higher economic growth
- Tax structure: Progressive tax reduces income inequality
- Banking system: Low access to banks limits economic growth, lower ability to borrow money and use for investment
- Property rights: Lack of property prevents from property being main household asset
129
Trade strategies
Strategies aimed at Increasing international trade to increase economic growth and development. Includes: import substitution, export promotion, economic integration, diversification
130
Import substitution
Aims to increase domestic production and output by moving consumers away from imports by using tariffs or quotas to increase import prices. This encourages them to buy locally
131
Adv / Dis of import substitution
Adv:
- Less dependence on imports
- May increase employment in the country
- Supports local firms
Dis:
- Higher price / less choice
- Potential for retaliation
- Inefficient resource allocation as more inefficient firms increase production
132
Export promotion
Aims to increase the level of exports through subsidies or facilitating international trade fairs at which local firms can connect with international buyers
133
Adv / Dis of export promotion
Adv:
- Greater output generates higher economies of scale
- more employment
- International competition leads to innovation and increased efficiency
Dis:
- Some firms unable to compete internationally and fail
- There is an opportunity cost to the government
134
Economic integration
A process in which countries become more interdependent as they form an agreement which decreases barriers to trade
135
Adv/ Dis of economic integration
Adv:
- Decreases prices and increases choice
- Access to a wider range of technology
- More political cooperation between countries
- Expands markets for domestic firms
- Generates higher efficiency in the global allocation of resources
Dis:
- loss of national sovereignty may occur
- Common trade barriers to third party nations, limiting other opportunities for trade
136
Increasing diversification
Occurs when a country is able to increase the number of products that it offers for export and this reduces risk - if one product fails others may well still be successful
137
Adv / Dis of increasing diverisification
Adv:
- Reduces the problems associated with over specialization such as price volatility
- Creates new employment opportunities
- Reduces risk of failure during recessions or periods of economic slowdown
Dis:
- Firms may fail to compete as global competitors may be well established
- Takes time and money to create new industries
138
Social enterprise
focuses on meeting specific social objectives such as worker welfare, or profit sharing with workers, or providing equal ownership of the business to employees
139
Adv / Dis of social enterprise
Adv
- Raises motivation, productivity and output
- create new employment opportunities
- Raises disposable income
Dis:
- small and very localised
- difficult for them to generate economies of scale or to compete internationally
140
Adv / Dis of trade liberalisation
Adv:
- More trade increases output, employment & incomes
- Lowers costs of production for firms
- May result in lower prices for consumers
- More efficient global allocation of resources
Dis:
- Global competition intensifies and some firms may fail
- element of structural unemployment as inefficient industries die out
141
Adv of privatization
Adv:
- May increase competition leading to an increase in output, employment & incomes
- Private firms may be more efficient than government firms
- may result in cheaper prices for consumers
- money from the sale of assets can be used to provide more merit and public goods
142
Dis of privatization
Dis:
- Government assets are often sold off cheaply
- The quality of services may deteriorate as private firms focus on profit maximisation
- Unemployment may increase as private firms seek to cut their wages in order to maximise profits
143
Adv / Dis of deregulation
Adv:
- decreases costs which may result in greater supply
- innovation and more enterprise in an economy
Dis:
- create an environment of corruption leading to inefficiency
- increase the quantity of negative externalities
- allow foreign firms to monopolise industry leading to higher prices and less output
144
Transfer payments
usually given to the poorest & most vulnerable people in society and include unemployment & disability payments, pension payments, subisides and more
145
Adv / Dis of transfer payments
Adv:
- The poorest households are supported
- generates consumption in the economy and increases AD
Dis:
- Poorer countries have less money available to support the poor
- opportunity cost
- Supporting the poor sometimes politically unpopular
146
Education programmes
Education prorammes which are free at the point of consumption, but paid for with tax revenue
147
Adv / Dis of education programmes
Adv:
- helps to intervene and break the poverty trap by increasing human capital
- results in higher productivity and output
- lead to higher wages which improve the standard of living
- lead to more consumption and an increase in AD
Dis:
- Time lag
- Opportunity cost
- Education may still be under consumed in developing nations as children are required to work for the family
148
Health programmes
Healthcare services which are free at the point of consumption, but paid for with tax revenue
149
Adv / Dis of health programmes
Adv:
- improve life expectancy and productivity significantly
- helps to break the poverty trap
Dis:
- Opportunity cost
- How much health care should be provided is a normative issue and is subject to political pressure and ideology
150
Adv / dis of infrastructure projects
Adv
- improving the health and standard of living
- Improved exchange of knowledge and ideas which can improve human capital
Dis:
- Opportunity cost
- take a long time to complete
- subject to political pressure and lobbying
151
Inward FDI
occurs when investment by foreign firms results in more than a 10% share of ownership of domestic firms
152
Adv of Inward FDI
- major source of finance in less economically developed countries
- helps to generate extra national income which can increase the level of savings, increase in funds for domestic investement
- increased employment opportunities
- Government receive higher tax revenue
- Develop new infrastructure to support their business activity
- raise household income which helps to break the poverty cycle
153
Dis of Inward FDI
- local regulations exploited leading to poor working conditions and increased negative externality's of production
- Profits tend to be moved off-shore or returned to the home country
- MNCs pay very little tax to host nations
- Local firms may struggle to compete with MNCs
- MNCs have the power to keep wages low
- MNCs may use workers from their country for management roles and only employ local unskilled labour for manual tasks
154
Humanitarian / development aid and Adv / Dis
common forms are grants & soft loans
Adv:
- beneficial in times of distress
- helpful in response to natural large scale one off events
Dis:
breeds dependency, corruption & disincentivises individual responsibility
155
Debt relief
Many developing nations have borrowed significant sums of money in the past and repaid with interest over long period of time however significant opportunity cost in these repayments. Thus, significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so that they can focus on building their economies
156
Adv / Dis of debt relief
Adv:
- actual repayment of debt is removed or reduced
- opportunity cost of debt repayments is reduced or eliminated
- Government is able to use the money saved to provide new services and additional public/merit goods
Dis:
- may have a lot more funds available than before and can breed corruption
- many developing nations borrow more money and the cycle starts again
157
Official development assistance
government aid that promotes and specifically targets the economic development and welfare of developing countries. 2 most common forms of ODA are grants & soft loans
158
Adv / Dis of ODA
Adv:
- Funds available to the LEDC over a long-term period to help with the economic development
- Bilateral ODA can help to develop the relationship between the two countries, possibly facilitating the exchange of resources, ideas and technology
Dis:
- Countries may become dependent on the ODA
- Corruption may mean funds are diverted from their true purpose
- loans has to be repaid and these repayments carry an opportunity cost
159
NGOs
Typically voluntary, community-based organisations which do not aim to make a profit but seek to meet a need or provide a service
- major role in many LEDCs and their aid often comes with fewer conditions or expectations than ODA
160
Adv / Dis of NGOs
Adv:
- support for particular need from a very wide audience including the global public
- specialists working for them who provide in country support
- conduct research, gather data and as a result often make highly specific project proposals to directly improve standard of living
- can help develop human skills in the countries to break poverty trap
Dis:
- country receiving the aid can become overly dependent on it
- may be limited or only focused on one segment of the population
161
Multilateral organisations
made up of member governments from around the world to pool their resources together which enables large-scale development programmes to be funded
162
World bank
- provide reconstruction loans to countries devastated by war
- provide loans to developing countries to aid in their development
- provide loans to countries to assist with the development of infrastructure
- work with governments and institutions so as to encourage economic reform and trade liberalisation
163
International Monetary Fund (IMF)
aim of establishing a stable global financial system
- oversee exchange rates and the system of international payments
- monitor country policies and national, regional and global economic and financial developments through surveilance
- provide member countries with currency to help with BoP problems
164
Access to credit and banking
Financial institutions enable individuals and firms to borrow money which can be used for investment or to generate growth. lack of financial institutions prevents this from happening and causes the poverty trap to continue
165
The Advantages and Disadvantages of Permitting Property Rights
Adv:
- more legal protection of property rights, easier for households to access loans
- provide shelter security
- help households to generate income
Dis:
- property monopolies as wealthier individuals purchase multiple properties which
reduce the amount of property available for purchase or rent, raising prices
166
Adv of market orientated approaches
- more competitive the environment the more foreign firms are likely to invest as competition lowers costs and generates innovation
- result in better allocation of resources as the process is led by the market forces
- encourage entrepreneurship in the search of profit and this increases real GDP
- MNCs invest in economies where the markets are more open with less regulation
- Trade liberalization increases economic growth, raising household income
167
Dis of market orientated approaches
- amount of negative externalities will increase
- LEDCs have large informal sector and sector thriving on MNC, contributing to income inequality
- concentrated to those with assets as they continue to buy factors of production
168
Adv of government intervention
- Infrastructure projects improves the standard of living
- education increases skills leading to higher productivity
- support mechanisms for the vulnerable in society raises standard of living
- can even out the fluctuations in the business cycle
- able to regulate the disparity between rich and poor
- used to deal with national emergencies to help recover more quickly
169
Dis of government intervention
- focusses on services and not necessarily on generating profit, generates inefficiencies in resource allocation
- May lead to misuse of government funds and other forms of corruption
- powerful business people / conglomerates can control resources through influence
- poor planning and decision making
- government systems tend to result in wild fluctuations of policy, creating instability
