Theme 4 Flashcards
What is economic growth?
Increase in the economy’s capacity to produce goods and services.
- Narrow Measure
- AD/AS and change in GDP
What is economic development?
With HDI factors?
Measures the changes in living standards and level of welfare within an economy
> Broad Measure
> Human development index (HDI):
- Life expectancy
- School - average length of time in school
- GNI per capita
What does development require?
Stages…
Requires economic growth:
1. Increases GDP, creates more jobs and higher spending across the economy
2. Higher spending on important infrastructure such as health care and education
3. Productive capacity of economy expands
> Leading to development
What should sustainable and unsustainable growth to a diagram? While AD1 pushes outwards to AD2…
> Sustainable - push LRAS outwards (Econ. development)
> Unsustainable - LRAS stays in same place (No Econ. development)
What are the 7 indicators of economic development for developing countries?
- Low living standards
- Low labour productivity
- High population growth
- Primary sector production
- High unemployment rates
- High degree of market failure
- Lack of power in international markets
What low labour productivity means?
The cycle…
Low productivity -> Low incomes -> Low savings -> Low Investment -> Low productivity…
Why measuring economic development in useful?
- Compare across countries
- Question policy choices
- Debate policy priorities
- Target Aid
What are the limitations of diversity of developing countries?
- Resource endowment
- Historical background
- Economy structure
- Demographic composition
- political structure
- per capita income rates
What’s a composite index?
Indices composed of several variables to measure changes in phenomena that cannot be directly measured.
What HDI shows?
Health, education and living standards
Shows us which countries enjoy relatively high standards of living, and which are, by comparison, are under-developed.
Market-Orientated Strategies - Trade Liberalisation?
- Open up domestic markets to foreign competition
- Remove some barriers… tariffs, quotas, regulations
- Reciprocal exchange of goods and services
Liberialisation - export led growth?
Steps….
Increases a country’s openness and leads to increased international trade
- Increase in AD
- Increase incomes
- Growth in domestic competition
- Growth in domestic and export markets
- Concentrate on producing goods and services with a comparative advantage
Benefits of trade liberalisation?
- Increases specialisation
- Increased competition
- Reduces global prices
- Economies of scale
Costs of trade liberalisation?
- Structural unemployment
- Environmental damage
- Infant industries suffer
- Uneven benefits
Market orientated strategies - FDI?
Greenfield investment?
M&As?
Long-term investment by private multinational corporations (MNCs)
> build new or established facilities in foreign countries
> Merge or acquire existing firms in foreign countries
The statistic of FDI net flows to developing countries increasing from 2000 to 2015?
2000 - $230billion
2015 - $780billion
Why do MNCs invest in developing countries?
- Abundance of natural resources
- Market and sales potential
- Low Labour costs
- Less regulation = tax incentives
Advantages of FDI (market orientated strategies)
6…
3 factors drawn…
- Reduces savings gap (S-I)
- Higher employment
- Higher tax revenue
- Greater injection of capital
- Brings R&D + innovation
- Multiplier effect = growth
> Could improve product choice
Could improve economic efficiency
Big influence in Asian economies development
Disadvantages of FDI (market orientated strategies)
- MNCs hold too much power
- Externalities produced
- Exploitation of cheap labour
- Resource depletion
- Repatriate profits - send to home country
> Restrict the development rate of countries
What does deregulation do?
Do to SRAS
Reduction in the quantity and severity of business regulation
- will shift SRAS outwards while excessive regulation would shift SRAS inwards.
What does privatisation do?
- Sale of state-owned firms to the private sector
- Privately owned firms argued to be more efficient and productive
- Due to profit-maximising incentive
- Only works in competitive markets
What the core belief of interventionist strategies are?
Governments role maximised - supply and demand minimised
Whats import substitution?
leakages and injections…
stages…
Trade policy encouraging domestic production of imported goods imports = leakage domestic consumption = injection 1. Trade policy to deter imports 2. Increases domestic consumption 3. Increases domestic production 4. Increase in economic capacity and growth 5. Increase in competitiveness
What happens to lows of demand when a tax is imposed on imported goods? (trade protection)
Laws of demand…
Tariff raises price
Quantity of imports to fall
Marginal propensity to import falls
What happens when quotas are put in place?
Restricts imports
Pushes prices up
Encourages domestic production
Supply expands
What happens when subsides are in place?
Encourages domestic production
Subsidy payments help reduce price
Helps create economic growth
What are the benefits of import substitution?
Protects jobs
Protects infant industries
Protects against MNCs
Maintains domestic culture
What are the drawbacks of import substitution?
Only creates SR benefits
Lack of competition
Increases in prices
Retaliation
What is globalisation?
The ever increasing integration of the world’s local, regional and national economies into a single international market.
What can economic integration be broken down into to (4 areas)?
- Free trade across national boundaries of goods and services
- Free movement of labour between countries
- Free movement of capital between countries
- Free interchange of technology and intellectual capital across national boundaries
What are the 7 causes of globalisation?
- Trade in goods - growth and revenues
- Trade in services - growth and revenues
- Trade liberalisation - lower barriers for global trade
- Multinational companies - EOS, monopoly power, influence government decisions and technological knowledge
- International financial flows - becoming far greater - fast economic growth
- Foreign ownership of firms increasing
- Communications and IT - reducing time needed for economic agents to communicate
Whats the impact of globalisation on consumers?
- Consumer choice - increased
- Prices - changes some fallen and some rised
- Incomes - rised
Whats the impact of globalisation on workers?
- Employment and unemployment - pros and cons
- Migration, experience better living standards, increased productivity
- Wages - pros and cons - has depressed some wages - competition - demand pushing up
- Multinationals - create more jobs, however usually lower income jobs
Whats the impact of globalisation on producers?
- Specialisation and economic dependency
- Costs and markets - achieve lower costs
- Footloose capitalism - destroy jobs and prosperity in the wake as they globalise
- Tax avoidance - can avoid tax
Whats the impact of globalisation on governments?
- Can create prosperity but bring economic problems
- aware of tax avoidance - decrease their tax rates
- bribery and corruption
whats the impact of globalisation on the environment?
- leads to destruction of nature
- increase global warming
What are the benefits of globalisation?
- Lower prices and greater choice
- Economies of scale - lower prices
- Increased global investment
- Free movement of labout
- May reduce global inequality
What are the drawbacks of globalisation?
- Structural unemployment
- environmental costs
- tax competition and avoidance
- movement of highly skilled people moving abroad for higher wages (brain drain problem)
- Less cultural diversity
Who are the winners of globalisation?
- Firms with comparative advantage, e,g high-tech software firms
- High - income earners
- Wealthy who can invest abroad and take advantage of lower tax rates
- Workers who gain employment in export industry
- Consumers who benefit from cheaper prices
Who are the losers of globalisation?
- Unskilled manual labour who have seen a decline in employment opportunities with the structural change to the economy
- Average taxpayers who lose out from tax avoidance schemes
- The environment…
Global export value in 1970 to 2018?
318.02 billion (1970)
19,468.14 billion (2018)
What is global branding?
the strategy companies use to translate their values and identity into a limitless language
What is global sourcing?
Buying strategy in which a business buys goods and services from international markets across geopolitical boundaries to save money by using cheap raw materials or skilled labour from low-cost countries
Whats a transnational corporations (TNCs)
Companies that operate in more than one country. They often have factories in countries that are not as economically developed to take advantage of cheaper labour.
What is international trade?
Benefit…
Is the exchange of products - takes place between economic agents
If countries specialise in the production of certain goods and services and then trade with other countries there will be an increase in economic welfare.
Whats the difference between static and dynamic gains?
Static - improvements in allocative and productive efficiency
Dynamic - the gains in welfare from improved product quality, increased choice and faster and more innovative behaviour
What is free trade?
Free from artificial barriers such as import tariffs, quotas, and other trade barriers