The International Economy Flashcards
1
Q
How does technological change causes globalisation?
A
- Communication technology - such as internet, smartphones and satellite communication have made global interactions faster and more accessible.
- Transportation - cheaper and more efficient transportation systems, such as container shipping and air travel, have fostered the movement of goods and individuals (e.g. consumers & workers) across borders.
2
Q
How does trade liberalisation causes globalisation?
A
Reduction of tariffs, trade barriers, and protectionist policies encourages free trade between countries. Institutions like the WTO promote global trade agreements.
3
Q
How does FDI/ MNCs causes globalisation?
A
Multinational corporations have expanded operations worldwide, increasing economic integration. E.g. Apple, Coca-cola, McDonald’s.
4
Q
How does capital mobility and labour mobility causes globalisation?
A
- Capital mobility - The ease of moving capital and investments between countries facilitates globalization. Financial markets and international banking allow for rapid cross-border investments.
- Labour mobility - Increased migration of workers in search of better opportunities contributes to cultural exchange and the global labor market.
5
Q
What are characteristics of globalisation
A
- Increased international trade
- Global capital flows such as FDI, portfolio investments and remittances
- Global production by division of labour, for example, an iPhone designed in US, enhanced by software engineers in India and manufactured in China
- Economic interdependence - nations rely on each other, so economic shocks in one country often have ripple effects e.g. 2008 financial crisis.
- Migration within and between countries
6
Q
How does globalisation affect developed countries?
Do the advantages outweigh the disadvantages?
Can the disadvantages be removed or diminished?
A
Benefits:
1. Exporting high value goods and services e.g. technologies
2. MNCs expand operations abroad, cheap labour increasing profits & might contributing to GDP growth
3. Global markets give consumers more choices at a lower prices
Costs:
1. Global competition forces many industries to move production to low cost countries, leading to structural unemployment in SR (e.g. textile and steel) = income inequality
2. De-industrialisation could lead to a fall in exports of manufacturing goods, however, an increased in exports of financial services might outweigh this
3. Over-dependence on global supply chains = vulnerability
7
Q
What is MNCs?
A
A large business entity that operates in multiple countries
While it is headquartered in one country - the home country, it owns or controls production or services in at least one other country - the host country
For examples:
Technology: Apple, Microsoft, Samsung
Automotive: Toyota, Volkswagen, General Motors
Consumer Goods: Coca-Cola, Nestlé, Procter & Gamble
Retail: Amazon, Walmart, IKEA
8
Q
What is corporate social responsibility (CSR) ?
A
Corporate Social Responsibility (CSR) refers to the ethical and voluntary practices undertaken by businesses to contribute positively to society and the environment while balancing their economic objectives.
Apple: Committing to 100% carbon neutrality in its supply chain and products by 2030.
Unilever: Pioneering sustainable sourcing for palm oil and reducing plastic waste.
Starbucks: Supporting coffee farmers, reducing single-use plastics, and offering ethical sourcing.
9
Q
Why does the country want the MNCs?
What benefits could MNCs bring?
A
FDI inflows = capital flows boosting local economic growth
Job opportunities = improving living standards in host countries
Advanced technology = improve productivity = boost LR growth
Reinvestment in R&D = innovation in both home& host countries
Product diversity = wider range of products often at good prices
Improved human capitals through training = sustainable develop
Improved quality of goods and services usually at competitive price due to global standard = improve local living standards
Tax revenue = government can fund into public services and infrastructure
10
Q
What criticism MNCs might bring?
A
- Exploitation of resources & labour - low wages, poor working conditions, excessive use of natural resources = unsustainable
- Market domination - outcompete local small businesses or corrupt governments to get better deals
monopolies = reducing competition = driving up prices in LR - Profit repatriation - profits is often repatriated to the home country, limiting the economic benefits for the host country
- Industries like mining and manufacturing, often contribute to environmental damage
- MNCs may use tax havens and complex financial structures to avoid paying taxes, depriving governments of significant revenue = limiting economic growth
- Host countries may become overly reliant on MNCs for jobs and investments = economies vulnerable
11
Q
What is absolute advantage & comparative advantage?
A
A country (or producer) has an absolute advantage if it can produce a good or service more efficiently than another country (or producer) using the same amount of resources.
A country (or producer) has a comparative advantage in producing a good or service if it can produce that good at a lower opportunity cost compared to another country (or producer).
12
Q
Explain how comparative advantage associated benefits of trade with numerical example:
Country A can produce 10 tons of wheat or 5 units of cloth/ year Country B can produce 6 tons of wheat or 4 units of cloth/ year
A
A: Opportunity cost of 1 ton of wheat = 0.5 units of cloth
Opportunity cost of 1 unit of cloth = 2 tons of wheat
B: Opportunity cost of 1 ton of wheat = 0.67 units of cloth
Opportunity cost of 1 unit of cloth = 1.5 tons of wheat
Country A has a comparative advantage in wheat, and Country B has a comparative advantage in cloth.
Before trade:
Country A might use 5 resources for wheat and 5 for cloth, producing 5 tons of wheat and 2.5 units of cloth.
Country B might use 3 resources for wheat and 3 for cloth, producing 3 tons of wheat and 2 units of cloth
After trade:
Country A ends up with 6 tons of wheat (10 tons produced – 4 tons traded) and 2 units of cloth (received from Country B).
Country B ends up with 4 tons of wheat (received from Country A) and 2 units of cloth (produced on its own)
13
Q
What benefits and limitations of the principle of comparative advantage?
Ricardo suggested that countries specialise and trade in goods and services in which they have a comparative advantage as welfare gains.
A
- Specialising in the goods that have comparative advantage, countries can produce more with less resources, leading to greater global efficiency.
- Win-win outcome as both countries gain consumer welfare by large variety of goods and generate higher living standards based on comparative advantage.
- The model makes unrealistic assumptions e.g. two countries, two goods, similar size economies, full employment, perfect mobility of factors of production, constant opportunity costs.
- Over-specialisation = over-dependence = vulnerability to economic shocks.
- Protectionist policies can distort trade and reduce the benefits of comparative advantage.
14
Q
Advantages of international trade
A
- Economic growth = increased market size = business expand
- Lower prices for consumers = increased competition/ economies of scale
- Employment creation = job created as businesses expand
- Availability of resources = diverse products
- Specialisation (based on comparative adv.) = efficiency
- Technological transfer = spur innovation = boost productivity
- Strengthening alliances = better political relationships
15
Q
Disadvantages of international trade
A
- Structural unemployment = social challenges in sectors where a country does not have a comparative advantage
- Trade deficit = economic instability and currency devaluation
- Labour exploitation = while consumers may benefit from low prices, workers in industries may fave wage stagnation due to less stringent labour law in developing countries = inequality
- Resources overuse = pollution, deforestation& climate change
- Vulnerability to external shocks
- Protectionism = many countries impose tariffs, quotas, and other trade barriers to protect domestic industries = hinder the flow of goods and prevent countries from fully exploiting their comparative advantages
16
Q
Why the pattern of trade between the UK and the rest of the world might change?
A
Brexit and changes in EU relations
Globalisation and emerging markets
Deindustrialisation and economic restructuring
Technological advancements
Consumer preferences
Trade agreements and policies
Rise of emerging markets
Geopolitical factors
Exchange rate changes
Environmental and sustainability concerns
17
Q
How does Brexit changes the trade pattern between the UK and the world?
A
EU membership (1973-2020) - while a member of the EU, the UK must trade expensively with EU countries due to free trade agreements, single market access and customs union benefits.
After leaving the EU, the UK lost free trade privileges with the EU and faced new tariffs, customs checks and regulatory barriers, leading to a decline in trade with EU countries.
Post-Brexit, the UK focused on establishing trade agreements with non-EU countries, such as Japan, Australia, and Canada, which shifted its trade patterns away from Europe.
18
Q
How does globalisation and emerging markets change the pattern of the UK trade?
A
The growth of globalization has enabled the UK to trade more with fast-growing economies like China, India, and other emerging markets.
As Asia has become a dominant global economic region, the UK has increased trade with countries in the region, particularly in sectors like technology, manufacturing, and consumer goods.
19
Q
How does deindustrialisation changes the pattern of the UK trade?
A
Decline of Manufacturing - Over recent decades, the UK has transitioned from a manufacturing-based economy to a service-based economy. This shift has reduced the export of manufactured goods (e.g., textiles, machinery) and increased exports of services like financial, professional, and educational services.
Specialization in High-Value Sectors - The UK now focuses on high-value industries like pharmaceuticals, aerospace, and renewable energy, leading to changes in the nature of exports and trading partners.
20
Q
How does consumer preferences change the pattern of the UK trade?
A
Demand for Imported Goods - UK consumers increasingly demand diverse and affordable goods, leading to increased imports from countries like China (electronics) and India (textiles).
Sustainability and Ethical Sourcing - A growing focus on sustainability has influenced imports, with an emphasis on eco-friendly products and responsible supply chains.
21
Q
How does trade agreements and policies change the pattern of the UK trade?
A
New Trade Deals - Post-Brexit, the UK has actively signed trade agreements with countries outside the EU, including the United States, Japan, and members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These deals have influenced the direction and volume of trade.
WTO Membership: As a member of the World Trade Organization (WTO), the UK follows global trade rules, which impact tariffs, quotas, and trading relationships.
22
Q
How does rise of emerging markets change the pattern of the UK trade?
A
Economic Growth in Asia and Africa - Countries like China, India, and Brazil have become major players in global trade. The UK increasingly trades with these regions due to their rapid economic growth and expand consumer markets.
Diversification - The UK seeks to reduce reliance on traditional markets like the EU and the US by exploring trade opportunities in developing economies.
23
Q
How does rise of emerging markets change the pattern of the UK trade?
A
Economic Growth in Asia and Africa - Countries like China, India, and Brazil have become major players in global trade. The UK increasingly trades with these regions due to their rapid economic growth and expanding consumer markets.
Diversification - The UK seeks to reduce reliance on traditional markets like the EU and the US by exploring trade opportunities in developing economies.
24
Q
How does geopolitical factors change the pattern of the UK trade?
A
US-China Trade War: Tensions between major economies like the US and China can shift global trade flows, prompting the UK to adjust its trade strategies to avoid disruptions.
Regional Instability: Political conflicts and instability in regions like the Middle East can influence the UK’s energy imports and exports.
25
How does exchange rate changes the pattern of the UK trade?
Impact of the Pound’s Value - Changes in the value of the pound sterling affect the competitiveness of UK exports and the affordability of imports.
For example, a weaker pound makes UK goods cheaper for foreign buyers but increases the cost of imports.
26
How does environmental and sustainability concerns change the pattern of UK trade?
Green Trade Policies - The UK’s commitment to reducing carbon emissions and promoting sustainability has influenced its trade patterns, encouraging exports of renewable energy technologies and imports of sustainable products.
Global Climate Agreements - International efforts to address climate change have shifted trade towards greener industries and away from fossil fuel-based goods.
27
How does shift in comparative advantage changes the pattern of the UK trade?
Increased Reliance on Service Exports: The UK exports more services (e.g., finance, education, professional services) and fewer manufactured goods.
Diversification of Trade Partners: As the UK's comparative advantage evolves, it trades more with emerging markets and less with traditional partners like the EU.
Import of Low-Cost Goods: The UK imports more manufactured goods and raw materials from countries with a comparative advantage in these areas (e.g., China, Vietnam).
Specialization in High-Value Sectors: The UK has become a global leader in pharmaceuticals, renewable energy, and financial services.
Challenges for Traditional Industries: Industries where the UK has lost its comparative advantage (e.g., coal, textiles) have declined, leading to regional economic disparities.
28
What does main protectionism policies including?
Tariffs - taxes imposed on imported goods e.g. the US imposed 25% on China’s steel industry to protect domestic steelmakers.
Quotas - limits on the quantity of goods that can be imported e.g. The US limits the volume of Canadian beef to 199,000 tons that can be imported each year.
Embargoes - total bans on trade with specific countries e.g. a ban on Cuban imports to the US, an export ban on US goods to Cuba and restrictions on travel between the two countries.
29
What are key features of protectionism policies?
Restrictions on imports through tariffs, quotas, or other barriers to make foreign goods less competitive in the domestic market.
Support for Domestic Industries - The focus is on protecting domestic businesses, particularly in sectors that are considered strategically important or vulnerable to foreign competition.
National economic self-sufficiency, job preservation, and industrial growth over the benefits of free trade.
Short-Term Focus - Protectionist measures are often implemented as temporary solutions to address economic issues, such as unemployment or trade deficits, though they can have long-term consequences.
30
What are objectives of protectionism policies? (Causes)
Protect Infant Industries: Shield emerging industries from competition until they become competitive globally.
Safeguard Jobs: Prevent job losses in sectors threatened by cheaper imports.
Improve Trade Balance: Reduce reliance on imports and address trade deficits.
National Security: Protect industries vital to national security, such as defense or energy.
Prevent Dumping: Counteract foreign firms selling goods below cost to capture market share.
Preserve Cultural Identity: Protect industries that are culturally significant, such as local media or arts.
31
What does other protectionism policies including?
Subsidies - Financial assistance provided to domestic industries to reduce production costs and make local goods cheaper than imports. E.g. Subsidies to farmers to boost domestic agricultural output.
Non-Tariff Barriers - Regulations, standards, or bureaucratic hurdles that make it difficult for foreign firms to export goods.
E.g. Strict health and safety regulations targeting foreign food imports.
Exchange Rate Controls - Measures to manipulate currency values, making exports cheaper and imports more expensive.
E.g. Devaluing the currency to promote exports.
32
What advantages of protectionism policies are?
Domestic Industry Growth: Encourages local businesses to grow and develop.
Job Preservation: Protects jobs in industries at risk from foreign competition.
Reduces Trade Deficits: Limits imports and encourages domestic consumption.
Boosts National Security: Ensures critical industries remain domestically controlled.
33
What disadvantages of protectionism policies are?
Higher Consumer Prices: Tariffs and quotas make imported goods more expensive, reducing consumer choice.
Retaliation: Other countries may impose their own protectionist measures, leading to trade wars.
Inefficiency: Domestic industries may become complacent and inefficient without competition.
Global Trade Decline: Reduces the benefits of specialization and comparative advantage.
34
Could you give me a real world example of protectionism?
United States (US)
Tariffs on Steel and Aluminum (2018) - Under President Trump, the US imposed 25% tariffs on steel and 10% tariffs on aluminum imports to protect domestic industries.
China Trade War (2018–2020) - The US imposed tariffs on $360 billion worth of Chinese goods, targeting industries like electronics and machinery. China retaliated with tariffs on US exports.
Effects on Trade:
Domestic Industry Support - US steel and aluminum producers saw short-term gains, but industries relying on these inputs (e.g., automotive) faced higher costs.
Trade Tensions - Retaliatory tariffs from China affected US farmers, especially soybean exports, which dropped sharply as China turned to other suppliers (e.g., Brazil).
Higher Consumer Costs - The tariffs increased the prices of consumer goods like electronics and household appliances.
35
Real world example of protectionism policies 2
European Union (EU):
Common Agricultural Policy (CAP): The EU provides subsidies to European farmers and imposes tariffs on agricultural imports to protect its domestic agricultural sector.
Anti-Dumping Measures: The EU has imposed tariffs on goods like Chinese solar panels and steel to prevent "dumping" (selling below cost price).
Effects on Trade:
Agricultural Protection: The CAP ensures stable incomes for EU farmers but raises food prices for consumers and reduces opportunities for developing countries to export agricultural products to the EU.
Retaliatory Action: China's retaliation to anti-dumping measures included tariffs on European wines, which affected the EU’s wine industry.
36
What are main features of a customs union?
A customs union is a type of trade agreement between two or more countries, where member states coordinate trade policies and eliminate barriers to facilitate the movement of goods.
Free trade between member countries e.g. goods produced in Germany can be exported to France without tariffs, customs checks or duties
Common external tariffs (CET) on other non member countries e.g. the EU imposes the same external tariff on imports from non EU countries
Members cannot independently negotiate trade agreements or set their own tariffs with non member countries
37
What are advantages of a customs union?
Increased Trade Between Members: Eliminating tariffs boosts trade volume and economic efficiency.
Simplified Trade: Fewer administrative barriers streamline cross-border transactions.
Bargaining Power: Acting as a bloc increases leverage in trade negotiations with non-members.
Market Expansion: Firms gain access to a larger combined market without trade restrictions.
38
What are disadvantages of a customs union?
Loss of National Sovereignty: Members cannot set independent trade policies or tariffs for non-members.
Trade Diversion: Cheaper goods from non-members may be excluded due to the CET, leading to inefficiency.
Dependency on Collective Decisions: Disagreements among members can hinder decision-making and trade negotiations.
39
What are advantages of the single European market (SEM) also known as the internal market of the EU?
Its main aim is to ensure the free movement of goods, services, capital, and labour across member states
Increased Trade and Investment: Eliminating barriers boosts economic activity and dynamic efficiency.
Consumer Benefits: Greater choice, lower prices, and higher product standards might due to greater competition.
Economic Growth: Enhanced productive efficiency and resource allocation (reduced waste) stimulate growth.
Labour Mobility: Reduces skill shortages and provides job opportunities across borders.
40
What are disadvantages of the single European market (SEM) also known as the internal market of the EU?
Its main aim is to ensure the free movement of goods, services, capital, and labour across member states
Regulatory Burdens: Businesses may face compliance costs to meet EU standards.
Uneven Benefits: Smaller or less-developed member states may struggle to compete.
Political Resistance: Member states may resist deeper integration due to national sovereignty concerns.
Economic Disparities: Wealthier regions often benefit more than poorer ones.
41
The role of the world trade organisation (WTO)?
Facilitates global trade and economic growth.
Encourages cooperation among nations.
Prevents trade wars by providing a rules-based system.
Promoting Free Trade - aims to reduce barriers to trade and encourage global trade growth.
Negotiating Trade Agreements - provides a platform for member countries to negotiate and update trade agreements
Ensuring Trade Rules Are Followed - ensuring predictable trade.
Dispute Resolution - provides a neutral mechanism for resolving trade disputes between member countries. E.g. the US-China trade tensions or disagreements over EU agricultural subsidies.
Monitoring Trade Policies-ensure countries align with WTO rules.
Supporting Developing Countries - provides technical assistance and capacity-building programs to help developing nations integrate into the global economy.
Promoting Fair Competition - By addressing practices like dumping (selling goods below cost) and illegal subsidies, the WTO ensures fair competition.
42
What are the difference between the current, capital and financial accounts on the balance of payments?
Primary focus:
Trade in goods, services and income flow (primary & secondary)
Capital transfers (e.g. purchase on land) and non financial assets (transfer of funds related to migration)
Investment (FDI, direct and portfolio investment) and financial assets (loans, changes in reserves)
Significance:
Reflects a country’s economic transactions and trade balance
Relatively small, focuses on non-financial transfers
Shows inflows and outflows of financial capital
43
What is current account?
The current account records the flow of goods, services, income, and current transfers in and out of a country. It is primarily concerned with a country’s trade balance (exports and imports) and income flows from abroad.
A surplus occurs when exports exceed imports, and a deficit occurs when imports exceed exports.
Income Balance: Earnings from investments abroad (income received) and payments to foreign investors (income paid).
Current Transfers: Transfers of money or resources without anything in return, such as remittances, foreign aid, or gifts.
44
What is capital account?
The capital account records the flow of capital transfers and the acquisition or disposal of non-produced, non-financial assets. This account is typically much smaller than the other two and is not as significant in the overall BOP.
Capital Transfers: Transfers related to the purchase or sale of tangible assets, like land or buildings, or transfers of funds related to migration.
Non-produced, Non-financial Assets: Includes the acquisition of patents, copyrights, trademarks, and natural resources.
If a company in France buys a piece of land in Italy, the capital account would record this transaction.
45
What is financial account?
The financial account records the flow of financial assets in and out of a country. It tracks investments, loans, and financial securities, focusing on ownership of financial assets and liabilities.
Direct Investment: Investment by foreigners in a country’s businesses or assets (e.g., buying a company or establishing a subsidiary).
Portfolio Investment: Investment in financial assets such as stocks and bonds.
Other Investment: Loans, currency deposits, and other short-term and long-term financial transactions.
Reserve Assets: Changes in a country’s official reserves, like gold or foreign currency holdings.
If a Japanese company buys a controlling stake in a UK business, this will be recorded as a direct investment in the financial account.
46
What factors influencing the current account?
Exchange rates - WPIDEC = surplus & SPICED = deficit
Global economic growth = higher income & imports = deficit
Global inflation rates = higher price level & less exports = deficit
Trade policies e.g. protectionism policies = surplus
Global commodity prices = higher costs & price level = deficit
Competitiveness and productivity = lower price level = surplus
Consumer preferences
Interest rates = high interest rates = high savings = surplus
Demographic changes e.g. migration and aging populations
Fiscal policies = expansionary = economic growth = deficit
International trade agreements
47
What policies can be used to correct a balance of payments deficit?
Expenditure - reducing policies:
Contractionary fiscal policy ( reduce government spending & rise taxation = reduce economic growth)
Contractionary monetary policy ( rise interest rate or money supply = reduce economic growth)
Expenditure - switching policies:
Depreciation of currency
Tariffs and quotas
Subsidies for exporters
Supply - side policies:
Improving productivity
Trade promotion e.g. trade fairs and export credit guarantees
48
What policies can be used to correct current account surplus?
Reducing tariffs and quotas
Appreciation of currency
Expansionary fiscal policies ( increase government spending and reduce taxation = economic growth)
Expansionary monetary policies ( decrease interest rates and money supply = economic growth)
Providing aid to developing countries
Encouraging outward investment
49
Evaluation of policies
The effectiveness of policies depends on factors like the elasticity of demand, the global economic environment, and the country’s trade structure.
Policies like tariffs and subsidies risk retaliation or violation of trade agreements.
Supply-side reforms are essential for sustainable corrections but require long-term implementation.
Currency adjustments (devaluation or appreciation) may lead to currency wars or inflationary pressures.
50
What are expansionary - switching policies?
This policy seeks to change the composition of domestic and foreign demand by encouraging domestic consumption of locally-produced goods (instead of imports) and increasing foreign demand for a country's exports.
The goal is to improve the trade balance without reducing overall economic activity.
Currency depreciation
Tariffs and trade barriers
Subsidies for domestic producers
Limitations:
Risks retaliation from trade partners (e.g., trade wars).
Could violate international agreements (e.g., WTO rules).
Currency devaluation might lead to inflation due to higher import prices.
51
What are expenditure - reducing policies?
This policy seeks to reduce the overall level of domestic spending (expenditure) to curb excessive imports, while still trying to stimulate economic activity in other ways.
The aim is to manage a balance of payments deficit without causing significant harm to growth.
Expansionary fiscal policy
Monetary policy
Limitations:
May still lead to higher imports if consumers spend more on foreign goods.
Risk of inflation as domestic demand increases.
52
May the effect policies used to correct a deficit or surplus have upon other macroeconomic policy objectives.
Inflation vs. Competitiveness - Currency devaluation can improve the trade balance but may increase inflation, reducing real incomes and eroding purchasing power.
Growth vs. Balance of Payments - Expenditure-reducing policies (e.g., higher taxes or reduced government spending) can harm economic growth while addressing a BOP deficit.
Employment vs. Inflation - Correcting a deficit through tariffs or quotas may protect domestic jobs but increase costs for businesses and consumers, leading to inflation.
Long-Term vs. Short-Term Impact - Supply-side policies improve competitiveness and exports over time but do little to address immediate deficits or surpluses.
53
How does contractionary fiscal policy affect 4 main objectives?
Economic Growth: Likely to reduce growth due to lower domestic consumption and investment.
Employment: Higher unemployment as reduced demand leads to job losses in sectors dependent on domestic consumption.
Inflation: Can help reduce inflationary pressures, as lower demand leads to decreased price levels (demand-pull inflation declines).
Income Distribution: Austerity measures (e.g., tax hikes or spending cuts) may disproportionately affect lower-income households, worsening inequality.
54
How does expenditure - switching policy affect 4 main objectives?
Currency devaluation/depreciation, tariffs, quotas, and export subsidies.
Economic Growth: Can boost growth if exports increase significantly, although higher import costs may reduce real incomes.
Inflation: Likely to increase due to the higher cost of imports (imported inflation).
Employment: Jobs in export-oriented industries may grow, but industries reliant on imported inputs could face higher costs and layoffs.
Income Distribution: Higher import prices may disproportionately affect low-income households, as they spend a larger proportion of income on imported necessities (e.g., fuel or food).
55
How does supply side policies affect 4 main objectives?
Investments in education, infrastructure, and productivity improvements to enhance competitiveness.
Economic Growth: Positive in the long run, as improved productivity enhances growth potential.
Employment: Likely to increase as industries expand due to improved competitiveness.
Inflation: Neutral or slightly negative in the short term; can reduce inflationary pressures in the long run as efficiency improves.
Income Distribution: Can help reduce inequality by creating higher-skilled, better-paying jobs, though benefits take time to materialise.
56
How does expansionary policies affect 4 main objectives?
Fiscal stimulus (increased government spending or tax cuts) or monetary stimulus (lower interest rates).
Economic Growth: Boosts growth by increasing domestic demand.
Employment: Likely to increase as higher demand stimulates job creation.
Inflation: May increase, especially if the economy is near full capacity.
Income Distribution: Benefits depend on the nature of fiscal policy. Tax cuts for lower-income households or spending on public services can reduce inequality.
57
Explain the significance of deficits. (Positive aspects)
Access to Foreign Investment and Goods:
A deficit can signal that a country is attracting foreign investment or benefiting from importing capital goods and technology to support growth. E.g. Emerging economies like India often run deficits to finance infrastructure and development.
Consumer and Business Benefits:
A deficit might reflect a high standard of living, as consumers have access to a wide variety of imported goods and services.
Businesses can access cheaper or higher-quality inputs from abroad.
58
Explain the implications of deficits. (Negative aspects)
External Debt Accumulation:
Persistent deficits may lead to borrowing from foreign creditors, increasing external debt and vulnerability to financial crises. E.g. Greece's prolonged current account deficits contributed to its debt crisis.
Currency Depreciation:
Deficits can put downward pressure on the domestic currency, making imports more expensive and potentially leading to inflation.
Dependence on Foreign Capital:
A deficit financed by short-term capital inflows (e.g., portfolio investment) can expose the economy to sudden capital flight and financial instability.
Loss of Competitiveness:
A deficit may indicate that domestic industries are less competitive in global markets, potentially leading to deindustrialization and job losses.
59
Explain the significance of surplus. ( positive aspects)
Economic Stability:
A surplus provides financial stability, as it generates foreign exchange reserves that can be used to stabilize the currency or finance future deficits. E.g. China has built significant foreign exchange reserves through its sustained trade surpluses.
Export-Led Growth:
Surpluses often result from strong export performance, which supports economic growth and employment in export-oriented industries. E.g. Germany's manufacturing sector thrives due to its export surplus.
Creditor Nation Status:
A surplus enables a country to become a net lender, providing loans or investing in foreign markets and earning income from abroad.
60
Explain the implications of surplus. (Negative aspects)
Global Imbalances:
Large surpluses can contribute to global economic imbalances by suppressing demand in surplus economies and increasing reliance on deficit economies for growth. E.g. Persistent surpluses in China and deficits in the US have fueled trade tensions.
Domestic Demand Weakness:
A surplus may indicate underconsumption or weak domestic demand, as seen in Japan, where high savings rates have led to slower growth in domestic consumption.
Currency Appreciation:
Surpluses may lead to currency appreciation, making exports less competitive in global markets and potentially harming the export sector over time.
Overreliance on Exports:
Economies reliant on exports for growth may become vulnerable to global economic downturns or protectionist measures by trading partners.
61
Evaluation of significance of deficits and surpluses
Size and Duration: A small or temporary deficit/surplus is less concerning than a persistent or large one.
Economic Context:
In developing countries, deficits can support growth if used to finance productive investments.
In developed economies, persistent deficits may indicate structural issues, such as lack of competitiveness.
Global Impact: Large deficits or surpluses can affect global trade balances and lead to tensions, such as trade wars.
Policy Response: Effective fiscal, monetary, and trade policies can mitigate the negative impacts of deficits or surpluses.
62
What implications for the global economy when major economies take corrective action on imbalance?
Deficit Economies such as the United States, the UK, and India.
Expenditure-Reducing Policies:
Contractionary fiscal policies (e.g., tax hikes or spending cuts).
Contractionary monetary policies (e.g., raising interest rates).
Expenditure-Switching Policies:
Currency depreciation to make exports cheaper and imports more expensive.
Implementation of tariffs, quotas, or subsidies to reduce imports and boost domestic production.
Slower Global Growth - Contractionary policies = reduce domestic demand = slowing global trade = affecting export-dependent economies. E.g. If the U.S. reduces spending, China and other countries that rely on U.S. consumer demand may experience lower export revenues.
Increased Trade Tensions - Protectionist measures, such as tariffs and quotas = trigger retaliatory actions from trade partners = trade wars. E.g. The U.S.-China trade war (2018–2019) disrupted global supply chains and created uncertainty in financial markets.
Currency Fluctuations - Currency devaluations = competitive devaluations = other countries also lower their exchange rates to maintain competitiveness (a "currency war"). E.g. A weaker U.S. dollar can put upward pressure on the currencies of other economies, making their exports less competitive.
Capital Flow Volatility - Higher interest rates in deficit economies = attract capital flows from other nations = strengthening the domestic currency but creating instability in emerging markets reliant on foreign investment. E.g. U.S. interest rate hikes have historically caused capital outflows and currency depreciation in emerging markets.
63
Explain the implications for the global economy when major economies take corrective action on imbalances.
Surplus economy such as China, Germany, Japan, and oil-exporting nations.
Encouraging Domestic Consumption:
Fiscal stimulus measures, such as increasing government spending or reducing taxes, to boost domestic demand.
Policies to encourage higher wages and social spending.
Reducing Export Dependence:
Allowing currency appreciation to make exports more expensive and imports cheaper.
Reducing export subsidies or removing trade barriers for imports
Boost to Global Demand - Increased domestic consumption in surplus economies can stimulate global trade by creating more demand for imports. E.g. If China shifts from export-led growth to consumption-driven growth, countries exporting consumer goods (e.g., the U.S. or EU nations) benefit.
Rebalancing of Trade Relationships - Corrective actions can help reduce trade imbalances between major economies, alleviating tensions and promoting fairer trade. E.g. If Germany increases domestic spending, it can reduce its trade surplus with EU partners and improve economic stability in the bloc.
Currency Appreciation Effects - Allowing currency appreciation in surplus economies can make their exports less competitive, benefiting competitors in other countries. E.g. A stronger yuan or euro can create opportunities for U.S. or emerging market exporters.
Impact on Global Investment - Reduced surpluses may decrease capital outflows from surplus economies, affecting investment in deficit economies. E.g. If China invests less in U.S. Treasury bonds, it could lead to higher borrowing costs in the U.S.
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How exchange rates are determined in freely floating exchange rate systems?
Demand > Supply: The currency appreciates (its value rises).
Supply > Demand: The currency depreciates (its value falls).
Trade in Goods and Services - If a country exports more = greater demand for its currency, as foreign buyers need it to pay for goods and services = appreciation of the currency
Capital Flows (Investment) - Foreign investors buying domestic assets (e.g. stocks, bonds, or property) = increase demand for the currency = appreciation of the currency
Interest Rates - Higher domestic interest rates attract foreign investors seeking higher returns = increasing demand for the currency = depreciation of the currency
Economic Performance - Strong economic growth and stability attract investment and demand for the currency.
Speculation - If traders expect a currency to strengthen, they will buy it, increasing demand.
65
How governments can direct intervention to influence the exchange rate?
Buying or Selling Currency - The central bank can buy its domestic currency using foreign reserves to increase demand and strengthen the currency.
It can sell its domestic currency to increase supply and weaken the currency.
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How government use indirect policies to influence the exchange rate?
Monetary Policy - Raising interest rates attracts foreign capital, increasing demand for the currency and causing appreciation.
Lowering interest rates reduces demand for the currency, leading to depreciation.
Fiscal Policy - Expansionary fiscal policy (e.g., increased government spending) can lead to a weaker currency due to higher imports.
Contractionary fiscal policy can strengthen the currency by reducing demand for imports.
Exchange Rate Pegs or Bands - A country may fix its exchange rate to another currency (e.g., China pegging the yuan to the U.S. dollar) or maintain it within a set range, requiring periodic intervention to adjust the rate.
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How government influence exchange rate?
Governments can restrict the flow of capital to stabilize the exchange rate, such as limiting foreign currency transactions or imposing taxes on capital flows.
68
What are the advantages of fixed exchange rate systems?
A system where a country's currency value is pegged to another currency, a basket of currencies, or a commodity like gold.
Stability and Certainty:
Provides predictability for international trade and investment as exchange rates remain stable.
Low Speculation:
Reduces the risk of speculative attacks on the currency if the peg is credible.
Encourages Discipline:
Governments must maintain sound monetary and fiscal policies to sustain the fixed rate.
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What are the disadvantages of fixed exchange rate system?
A system where a country's currency value is pegged to another currency, a basket of currencies, or a commodity like gold.
Loss of Monetary Policy Independence:
Central banks cannot adjust interest rates freely to respond to domestic economic conditions.
Risk of Overvaluation/Undervaluation:
If the fixed rate does not reflect economic fundamentals, it can harm exports or lead to trade imbalances.
Vulnerability to Speculative Attacks:
If investors doubt the sustainability of the peg, they may sell the currency en masse, forcing a devaluation.
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What are the advantages of floating exchange rate system?
A system where the currency's value is determined by supply and demand in the foreign exchange market without government intervention.
Automatic Adjustment:
Exchange rates adjust to correct trade imbalances (e.g., depreciating currency boosts exports).
Monetary Policy Independence:
Central banks can use interest rates to address inflation or economic growth without worrying about exchange rate effects.
Reduced Need for Reserves:
No need to hold large foreign currency reserves to maintain a peg.
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What are the disadvantages of floating exchange rate system?
A system where the currency's value is determined by supply and demand in the foreign exchange market without government intervention.
Volatility:
Exchange rates can fluctuate widely, creating uncertainty for trade and investment.
Speculation:
High levels of currency speculation can destabilize markets and economies.
Potential for Inflation:
Currency depreciation can increase import costs, leading to higher inflation.
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What are the advantages for a country of joining a currency union e.g. the eurozone
Elimination of Exchange Rate Uncertainty:
Countries within a currency union share a common currency, removing exchange rate fluctuations between member states. This promotes cross-border trade, investment, and tourism.
Price Transparency:
Using the same currency makes it easier to compare prices across borders, increasing market efficiency and competition.
Lower Transaction Costs:
No need for currency conversion, which reduces costs for businesses and consumers when trading or traveling within the union.
Enhanced Economic Integration:
Sharing a currency fosters closer economic cooperation and political unity among member countries.
Monetary Stability:
Smaller or less stable economies can benefit from the credibility of the larger, more stable economies within the union (e.g., Greece benefiting from the stability of Germany).
Access to Larger Financial Markets:
A shared currency allows easier access to larger, integrated financial markets, potentially reducing borrowing costs
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What are the disadvantages of joining a currency union e.g. the eurozone
Loss of Monetary Policy Independence:
Member countries cannot set their own interest rates or use monetary policy to respond to local economic conditions, as the central bank (e.g., the European Central Bank) sets a single policy for all members.
Asymmetric Shocks:
Countries in the union may experience economic shocks differently (e.g., recessions in some areas but growth in others). Without exchange rate adjustments, these shocks can be harder to manage.
Lack of Fiscal Flexibility:
Fiscal rules in the union (e.g., EU's Stability and Growth Pact) may restrict government spending and borrowing, limiting a country's ability to address economic challenges.
Risk of Contagion:
Economic problems in one member country (e.g., a debt crisis) can spread to others due to the interconnected nature of the currency union.
Example: The Eurozone debt crisis following the 2008 financial crash.
Adjustment Challenges:
Without the ability to devalue a national currency, countries facing trade deficits or low competitiveness must rely on internal adjustments (e.g., wage cuts or austerity), which can be politically and socially painful.
Initial Costs of Transition:
Switching to a shared currency involves significant one-time costs, such as converting prices, updating systems, and educating the public.
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What are the differences between growth and development?
Nature:
Growth = Quantitative (measured by GDP).
Development = Qualitative (measured by well-being and social indicators).
Focus:
Growth = Economic expansion.
Development = Improvement in living standards.
Indicators:
Growth = GDP, employment rates, industrial production.
Development = Health, education, inequality, environment.
In short, growth is about economic increase, while development is about improving the quality of life.
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What are the main characteristics of less developed economies?
Low Income Levels = low per capita income
High Levels of Poverty = high Gini coefficient = A large proportion of the population in LDEs lives below the poverty line
Low Industrialisation = primarily based on agriculture and natural resource extraction
High Unemployment and Underemployment = working in low-productivity, informal jobs
Limited Access to Education and Healthcare = shorter years of schooling and life expectancy
Poor Infrastructure = underdeveloped infrastructure (e.g., transportation, electricity, water supply)
Dependence on Primary Sector = relies heavily on primary industries like agriculture, mining, and fishing
Political Instability and Weak Institutions = political instability, corruption, and weak institutions
High Population Growth = rapid population growth, placing further strain on limited resources and infrastructure
External Dependence = dependent on foreign aid, loans, or remittances, and may rely heavily on exports of primary goods to developed countries
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What are the main indicators of development, including the Human Development Index (HDI)?
Human Development Index (HDI):
A composite index used to measure and rank countries based on three key dimensions:
Life expectancy (health and longevity),
Education (mean years of schooling and expected years of schooling),
Income (GDP per capita adjusted for purchasing power parity).
The HDI provides a broader view of development than GDP alone, incorporating health and education indicators to reflect human well-being.
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What are factors that affect growth and development?
Human capital = Higher levels of education and healthcare = improve a workforce’s capabilities = growth & development
Physical capital e.g. investments in infrastructure such as roads, school, energy and machinery = increase production capacity
Natural resoucres = growth in SR but over reliance = volatility
Technological progress = improve productivity = growth & development
Political stability = growth but corruption = hinder development
International trade = growth & development & innovation
Access to capital and credit = growth
Gender equality, social inclusion, and cultural factors = a country’s development
Foreign aid and FDI = growth
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Explain how does investment affect growth and development.
Increased Capital Stock:
Physical Capital Investment (e.g., infrastructure, machinery, and technology) increases a country's production capacity. More capital allows for greater efficiency, which leads to higher output and productivity. This drives economic growth and can also stimulate job creation.
Technological Progress:
Investment in research and development (R&D) fosters technological innovation. New technologies enhance productivity and can open up new industries, leading to economic diversification and long-term growth. Technological advancements often improve living standards by making goods and services more affordable and accessible.
Human Capital Development:
Investment in education and training improves the skills and productivity of the labor force. A more educated and skilled workforce is essential for both economic growth and sustainable development, as it can better adapt to technological changes and contribute to more advanced industries.
Infrastructure Development:
Investment in infrastructure (such as transportation, energy, and communication systems) facilitates trade, reduces costs, and enhances access to markets. This boosts productivity and allows businesses to grow more efficiently. Well-developed infrastructure also improves access to essential services like healthcare and education, improving overall well-being.
Private Sector Growth:
Investment in businesses (through capital markets, foreign direct investment, or entrepreneurship) encourages innovation, creates jobs, and leads to increased production. As businesses expand and become more competitive, they contribute to higher national output and employment levels.
Improved Living Standards:
Investment in social infrastructure (e.g., healthcare, education, sanitation) directly improves the quality of life for individuals. Healthier and more educated populations are more productive and contribute to sustainable development.
Attracting Foreign Investment:
A well-invested economy (in terms of infrastructure, education, and technology) can attract foreign direct investment (FDI), which provides additional capital and expertise. FDI can drive growth by introducing new technologies and creating jobs, and it can also help countries integrate into the global economy.
Multiplier Effect:
Investment can create a multiplier effect, where initial investments lead to further economic activity. For example, investment in a new factory not only creates jobs within the factory but also in related sectors (e.g., transportation, services, and retail), leading to broader economic growth.
Structural Changes:
Investment can drive structural transformation by shifting the economy from traditional sectors (such as agriculture) to more advanced sectors (like manufacturing or services). This change is crucial for long-term economic development, as it typically leads to higher value-added industries and better job opportunities.
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Explain how does education affect growth and development?
Improved Human Capital:
Education enhances human capital by improving the skills, knowledge, and abilities of the workforce. A more educated population is more productive, which leads to higher economic output and growth. Skilled workers can perform complex tasks, innovate, and adapt to new technologies, contributing to a more competitive and efficient economy.
Increased Productivity:
Educated workers are typically more efficient and innovative, leading to increased labor productivity. As individuals acquire skills and knowledge, they can produce more goods and services in less time, boosting overall economic growth.
Technological Innovation:
Education is closely linked to technological advancement. A well-educated workforce can develop and implement new technologies, driving innovation. This leads to the creation of new industries, products, and services, fostering economic diversification and long-term growth.
Entrepreneurship and Innovation:
Education fosters entrepreneurship by equipping individuals with the knowledge and skills to start and manage businesses. Entrepreneurs play a critical role in economic development by creating new jobs, producing goods, and stimulating competition. Education also helps individuals to identify opportunities and manage risks, leading to the creation of innovative solutions and businesses.
Social Benefits and Human Development:
Education improves social outcomes, including health, life expectancy, and gender equality. Educated individuals are more likely to make healthier lifestyle choices, understand the importance of sanitation and healthcare, and contribute positively to society. This enhances quality of life, which is a critical aspect of overall development.
Additionally, education empowers women and reduces inequality. Educated women are more likely to participate in the labor force, invest in their children’s education, and improve the well-being of their families, which leads to broader societal development.
Attraction of Foreign Investment:
Countries with a well-educated workforce are more likely to attract foreign direct investment (FDI). Investors seek regions with skilled labor that can handle complex tasks and contribute to productivity gains. Education increases the attractiveness of a country as an investment destination, leading to greater economic integration into the global economy.
Reduced Poverty and Inequality:
Education is a powerful tool in poverty reduction. It provides individuals with the skills needed to access better-paying jobs and improve their living standards. Over time, this contributes to a reduction in income inequality, as education helps bridge gaps between different socioeconomic groups.
Educational attainment also provides individuals with mobility opportunities, allowing them to move beyond their socioeconomic background and break the cycle of poverty.
Demographic Transition:
Education, particularly for women, is linked to lower fertility rates. As women gain access to education, they tend to delay marriage and childbirth, resulting in smaller family sizes. This can contribute to a demographic transition, where the working-age population grows faster than the dependent population, leading to a "demographic dividend" that boosts economic growth.
Long-Term Economic Growth:
The cumulative effect of investing in education can lead to sustained economic growth. Over generations, as more people gain access to education and contribute to the workforce, economies experience a continuous increase in productivity, technological adoption, and innovation.
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Explain how does training affect growth and development?
Enhanced Skill Development:
Training helps individuals acquire specific skills that are essential for improving job performance and productivity. Skilled workers are more efficient, make fewer mistakes, and can perform tasks that contribute to higher output. This increase in individual productivity can drive overall economic growth, as businesses become more efficient and competitive.
Increased Labor Market Efficiency:
Training helps workers better match the demands of the labor market. When workers are trained in areas where there is high demand, they can fill job vacancies more easily. This reduces unemployment, as skilled workers are more likely to find jobs. Moreover, well-trained workers can move between different sectors or industries as needed, supporting greater labor market flexibility.
Boosting Productivity:
Well-trained workers are typically more productive, which directly contributes to economic growth. By improving both the quantity and quality of output, increased productivity enhances the overall efficiency of the economy. Training can also help workers utilize new technologies or improve their ability to manage complex tasks, leading to innovation and higher value-added industries.
Innovation and Technological Adoption:
Training in new technologies and methodologies enables workers to adopt and utilize the latest innovations. This is crucial for industries that rely on technological advancement and process improvement. As workers learn to operate advanced machinery, use new software, or implement cutting-edge production techniques, the economy becomes more competitive and able to innovate.
Entrepreneurship and Business Growth:
Training in business management, finance, marketing, and entrepreneurship can empower individuals to start their own businesses or improve existing ones. Entrepreneurs with strong training are more likely to succeed in scaling their businesses, creating new jobs, and contributing to economic development by fostering competition and innovation.
Improved Job Satisfaction and Employee Retention:
Training opportunities can increase job satisfaction and employee retention. Workers who feel supported by their employers and see opportunities for personal and professional growth are more likely to stay in their jobs, reducing turnover rates. This leads to a more stable and experienced workforce, contributing to long-term productivity and growth.
Social Mobility and Poverty Reduction:
Training programs help individuals from disadvantaged backgrounds acquire the skills needed to secure higher-paying jobs. This can significantly reduce poverty by providing individuals with the opportunity to improve their economic status. As more people gain access to training, there is greater social mobility, and overall income inequality may decrease, leading to a more balanced and inclusive economic development.
Human Capital Formation:
Training is a key component of human capital development. A well-trained workforce is an asset to any economy, as it allows businesses to compete more effectively both domestically and internationally. Investing in the development of human capital helps build a resilient economy, ready to adapt to new challenges and seize opportunities.
Increased Global Competitiveness:
Countries that invest in training are better positioned to compete on the global stage. By creating a skilled labor force, these countries attract foreign investment and businesses seeking to take advantage of a high-quality workforce. As a result, countries with better training programs tend to have stronger export sectors, leading to enhanced economic growth.
Reduced Skills Gaps and Labor Shortages:
Training helps address skills gaps in the labor market. By aligning the skills of the workforce with the needs of industries, training ensures that there are enough qualified individuals to meet demand in key sectors. This reduces labor shortages and allows industries to operate at full capacity, contributing to growth.
81
Explain the barriers to growth and development
corruption
institutional factors
poor infrastructure
inadequate human capital
lack of property rights
82
Explain how corruption affects growth and development
In some developing countries, funds allocated for public projects, like building roads or hospitals, are misappropriated, leading to subpar development or none at all.
Corruption diverts public resources meant for development projects into private hands. Government officials and institutions may prioritize personal gain over national development, leading to inefficient allocation of resources.
It undermines trust in institutions and the rule of law, discouraging both domestic and foreign investment. Investors may avoid countries where corruption is rampant due to the risks involved, reducing the capital inflow necessary for economic growth.
Corruption can also reduce the quality of public services, such as education, healthcare, and infrastructure, which are crucial for long-term development.
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Explain how institutional factors affect growth and development
Countries with unstable legal systems may face challenges in attracting foreign investment, as businesses may fear the expropriation of their assets or unfair legal outcomes.
Strong institutions (such as an independent judiciary, transparent regulatory systems, and efficient public administration) are essential for economic growth. Weak institutions lead to poor governance, inefficiency, and difficulty in enforcing laws and regulations, which can hinder development.
Countries with political instability or frequent changes in leadership may struggle to implement long-term development plans, as leadership changes can disrupt policy continuity.
The lack of effective property rights or protection of intellectual property can discourage individuals and businesses from investing in new ventures or technologies.
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Explain how poor infrastructure affect growth and development
A country with poor road networks may have difficulty transporting agricultural products to markets, which can lead to high food prices and reduced exports.
Infrastructure (such as transportation networks, energy systems, and communication technologies) is a key enabler of economic growth. Poor infrastructure increases the cost of doing business, limits access to markets, and reduces the ability to efficiently distribute goods and services.
Inadequate roads, electricity, and internet access can limit the productivity of businesses and slow the movement of goods, hindering both industrial development and trade.
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Explain how inadequate human capital affect growth and development
In some regions, high rates of illiteracy or malnutrition may result in a labor force that is underproductive and unable to meet the demands of a growing economy.
Human capital refers to the skills, education, and health of a workforce. A lack of investment in education and healthcare limits the potential of individuals to contribute productively to the economy.
Without access to quality education and training, workers may lack the skills necessary for modern industries, reducing labor productivity and stalling technological advancements.
Health issues (such as widespread diseases) can also prevent individuals from working effectively, further limiting economic output.
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How does lack of property rights affect growth and development
In countries with weak land tenure systems, farmers may not have clear title to their land, preventing them from obtaining loans to improve their production methods or expand their businesses.
Property rights refer to the legal ownership and protection of assets, whether land, intellectual property, or other resources. If individuals and businesses do not have secure property rights, they may be less willing to invest in assets or engage in economic activities that require significant capital.
Without clear property rights, businesses may face the risk of land seizures or the inability to use property as collateral for loans, leading to reduced investment and stagnation in industries like agriculture and housing.
The lack of legal frameworks to protect investments and intellectual property can also discourage innovation, as entrepreneurs fear their ideas may be stolen or copied without compensation.
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What is free market based strategies?
Market-based strategies emphasize minimal government intervention and rely on the functioning of free markets to drive growth and development.
Privatisation - based on the idea that private firms operate more efficiently than state-run entities as they are motivated by profit.
Deregulation - reduce regulations that may restrict business activity or investment including simplifying laws on business formation, labor markets, or capital markets.
Trade Liberalisation - Policies that reduce trade barriers such as tariffs and quotas are implemented to encourage global trade and increase competition. The idea is that countries should specialize in goods and services where they have a comparative advantage.
Focus on Incentives - aim to create an environment where entrepreneurs and businesses are incentivized to innovate, invest, and improve efficiency.
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Advantages of free market based policies
Efficiency: Free markets allocate resources efficiently, with prices determined by supply and demand.
Innovation: Encourages competition and innovation, leading to technological progress and economic growth.
Entrepreneurship: The reduced regulatory burden allows businesses and entrepreneurs to start and grow, contributing to economic dynamism.
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Disadvantages of free market based policies
Income Inequality: Market-based strategies may exacerbate income inequality, as wealth may become concentrated in the hands of a few.
Market Failures: In cases where markets fail (e.g., externalities, public goods), there may be underinvestment in important sectors like education or healthcare.
Short-term Focus: A focus on short-term profits can sometimes undermine long-term development goals, especially in sectors like environmental sustainability or public welfare
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Examples of free market based policies
Chile: In the 1980s, Chile embraced market-based policies by privatizing state-owned companies, deregulating industries, and reducing trade barriers, leading to significant economic growth.
Hong Kong: The government has historically maintained a laissez-faire approach, emphasizing free trade, minimal regulation, and low taxes, contributing to its economic success.
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What are interventionist policies?
Interventionist strategies involve a more active role for the government in guiding and regulating economic activities to promote growth and development.
State Investment - directly invest in key sectors such as infrastructure, healthcare, education, R&D to spur economic development.
Protectionism— such as tariffs, quotas, or subsidies to protect domestic industries from foreign competition and encourage the development of certain sectors.
Monetary and Fiscal Policies - such as subsidies, tax breaks, and public spending to stimulate demand, create jobs, and promote industrialization.
Targeted Development Goals - set specific development targets in areas like poverty reduction, infrastructure development, or technological advancement and implement policies to achieve them.
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Advantages of interventionist policies
Addressing Market Failures: Intervention can correct market failures, such as providing public goods (e.g., education, healthcare), regulating monopolies, or addressing externalities (e.g., environmental protection).
Social Welfare: Governments can promote inclusive growth by redistributing wealth, reducing inequality, and ensuring access to basic services.
Long-Term Planning: Intervention allows for the implementation of long-term development strategies that focus on infrastructure, human capital, and industrialization, potentially leading to more sustainable growth.
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Disadvantages of interventionist policies
Inefficiency: Government involvement can sometimes lead to inefficiencies, as state-owned enterprises may be less responsive to market signals and competition than private firms.
Corruption: Excessive government control or intervention can lead to corruption and the misallocation of resources.
Over-dependence on the State: Heavy reliance on government intervention may lead to dependency on state support, which can stifle innovation and entrepreneurship.
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Examples of interventionist policies
South Korea: In the 1960s and 1970s, South Korea implemented state-led industrialization, focusing on heavy investment in manufacturing and infrastructure. The government played a key role in fostering development through targeted investment in education, technology, and export-oriented industries.
China: China adopted interventionist policies after the 1949 revolution, with the government guiding the economy through central planning, state-owned enterprises, and later through investment in infrastructure and human capital. More recently, China’s state capitalism model has been focused on achieving specific economic goals.
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What types of aids there are?
Bilateral Aid: Direct aid from one country to another.
Multilateral Aid: Aid provided through international organizations like the United Nations (UN), World Bank, and International Monetary Fund (IMF).
Humanitarian Aid: Focuses on addressing immediate needs such as food, healthcare, and disaster relief.
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What benefits does aid might bring?
Infrastructure Investment: Aid can be used to fund essential infrastructure projects like roads, schools, hospitals, and electricity, which are critical for development.
Human Capital Development: Aid supports investments in education and healthcare, leading to improved literacy rates, better health outcomes, and a more skilled workforce.
Poverty Reduction: Aid can directly address poverty, providing essential services and helping reduce income inequality.
Stabilizing Economies: In times of crisis, aid can stabilize economies, providing short-term relief and fostering long-term recovery.
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What challenges aids might have?
Dependency: Long-term reliance on aid can create dependency, discouraging self-sufficiency.
Misallocation: If not properly managed, aid can be misused or misallocated due to corruption or inefficiency.
Distortion of Markets: Aid, especially in the form of food assistance, can disrupt local markets and hinder the development of domestic industries.
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What benefits that trade might contribute to growth and development?
Access to Markets: Trade allows countries to export their goods to international markets, which increases demand and fosters economic growth.
Specialization and Efficiency: Countries can specialize in producing goods where they have a comparative advantage, leading to more efficient production and better resource allocation.
Technology Transfer: Through trade, countries gain access to advanced technologies and expertise that can enhance productivity and development.
Increased Investment: Trade opens up opportunities for foreign direct investment (FDI), which brings capital, technology, and expertise into the developing country.
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What challenges that trade might face?
Trade Barriers: Developing countries may face barriers such as tariffs, quotas, and subsidies from developed countries, limiting their access to markets.
Unequal Benefits: The benefits of trade are not always equally distributed. Wealthier nations often capture the most significant gains, leaving less-developed countries at a disadvantage.
Volatility: Developing countries that rely heavily on exports may face risks from price fluctuations in global markets, which can destabilize their economies.
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What is the role of aid and trade in promoting growth and development?
Aid is useful for short-term relief and funding development projects, particularly in countries facing critical challenges like poverty, infrastructure gaps, and health crises. However, over-reliance on aid can create dependency and market distortions.
Trade promotes long-term growth by encouraging specialization, access to international markets, and technology transfer, although trade barriers and inequality in benefits can undermine its effectiveness.
In practice, a combination of both aid and trade is often necessary to promote sustainable growth and development, addressing both immediate needs and long-term structural challenges.
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Examples of aid promoting growth and development
Marshall Plan (Post-World War II - Western Europe)
Aid Type: Bilateral and Multilateral
Details: The U.S. provided over $12 billion (around $130 billion today) in aid to help Western European countries rebuild their economies after World War II. The funds were used to rebuild infrastructure, stabilize economies, and stimulate industrial production. This aid significantly contributed to the recovery and long-term growth of Western Europe, leading to the European Economic Community's formation.
Impact: Rapid industrialization, reduced poverty, and increased living standards in Western Europe.
102
Examples of trade promoting growth and development
China’s Economic Growth through Trade (1978-Present)
Trade Policies: China’s shift toward market-oriented reforms in 1978 led to an increase in international trade, including becoming a member of the World Trade Organization (WTO) in 2001.
Impact: China became the world’s largest exporter, experienced rapid industrialization, and lifted hundreds of millions of people out of poverty. The country’s comparative advantage in manufacturing and exports played a critical role in its economic rise.
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Examples of trade promoting growth and development 2
Vietnam's Trade Liberalization (1986-Present)
Trade Policies: In 1986, Vietnam launched the Đổi Mới (Renovation) reforms, transitioning from a centrally-planned economy to a socialist-oriented market economy. This included greater engagement with international trade.
Impact: Vietnam became a major exporter of goods like electronics, garments, and agricultural products, leading to significant economic growth, a reduction in poverty, and an improvement in education and infrastructure.
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Examples of trade and aid working together
The European Union’s Trade and Development Aid (EU and Developing Countries)
Aid and Trade Policies: The EU provides trade preferences to developing countries through the Everything But Arms (EBA) initiative, which allows least-developed countries (LDCs) to export nearly all products duty-free. Additionally, the EU offers development aid through programs like the European Development Fund (EDF).
Impact: This combination of trade benefits and development assistance has helped countries like Bangladesh, Cambodia, and Uganda increase exports, diversify economies, and reduce poverty.
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Challenges and limitations in both aid and trade
Aid Dependency: In some countries, over-reliance on aid has led to dependency, weakening the incentive for governments to invest in domestic economic growth strategies (e.g., Haiti).
Trade Barriers: While countries benefit from trade, many face challenges due to trade barriers in advanced economies. For example, many African countries struggle with tariffs and subsidies imposed by richer nations, limiting their export potential.
Unequal Benefits: Countries with better infrastructure and political stability tend to benefit more from trade. For example, Bangladesh has benefited from trade through the textile industry, but countries like Chad struggle to access international markets due to poor infrastructure and political instability.
