Topic sheet 7 emerging and developing economies

Question 1

What are the three components of the Human Development Index.

Answer 1

• Long and healthy life (measured by life expectancy)
• Knowledge (measured by mean years schooling)
• A decent standard of living (Measured by GNI per capita at PPP)

Question 2

How are they combined

Answer 2

They are turned into index numbers and the 3 index numbers are combined with equal weight into the HDI

Question 3

What are the advantages of using HDI to measure development over time?

Answer 3

It is a composite indicator: It considers more factors than just GNI per capital – factors that are important for development, such as health and education

GNI is calculated per capita, which is an advantage because it shows the average income, and it is at Purchasing Power Parity, meaning that the exchange rate has taken into consideration differences in the cost of living.

The measures within it are commonly collected, so data is available for many countries for comparison purposes

Question 4

What are the limitations of using HDI to measure development over time?

Answer 4

The concept of development includes many other factors such as political freedom which are not included in the indicator.

HDI does is also not adjusted to take into account differences in inequality in a country – the average GNI is used which may be misleading in economies with a very unequal income distribution

HDI does not show difference in development between regions of countries either, for example life expectancy may be very high in some areas, but low in others

HDI shows long term changes such as education and health, but may not adjust quickly to short term influences that may be affecting development

Question 5

Name and explain 3 other measures of development

Answer 5

• IHDI = the inequality adjusted HDI
• HPI = Human Poverty Index
• Multi-dimensional poverty index
• Ratio method = the % of income spent on basic necessities

Question 6

What is meant by a primary product dependency?

Answer 6

When a country relies on a primary product for a large % of GDP, or export revenue.

Question 7

How can primary product dependency act as a constraint to growth and development?

Answer 7

This is because of supply and demand shocks which are prevalent in these markets – for example weather events and conflicts can cause supply shocks. In addition, supply and demand tends to be inelastic, so it takes time for consumers and producers to respond to the change in price.

This means they are exposed to a fall in GDP in one of these times

Question 8

What is Prebisch-Singer hypothesis and what does this tell you about countries with high product dependencies.

How did this lead to a constraint on growth?

Answer 8

This hypothesis states that the terms of trade for primary products tends to fall over time relative to manufactured goods. This is because manufactured goods have a higher income elasticity of demand, and when global incomes are rising this means that demand for manufactured goods rises and therefore prices of these goods rise relative to primary goods

Because it means that exporters of primary products may see a fall in their bargaining power, and will have to give up more output/primary goods, for the same amount of manufactured goods. This effectively makes them poorer

Question 9

Who is the main regulatory body in the UK and outline their roles and powers?

Answer 9

• CMA, the competition and markets authority. The main role is to protect the consumers’ interest. They do this by investigating mergers and either refusing or putting conditions on firms wanting to merge, where the combined market share is more than 25%, there is a danger that consumer interest would deteriorate following the merger.
• The industry regulators such as OFCOM etc. their main role is to regulate the privatised utilities, and ensure there is effective competition where possible, or apply price caps and service level agreements.
• The Secretary of State for business innovation and skills. Their role is oversee competition law, and they can overturn decisions by the CMA, or instruct the CMA to conduct an investigation.

Question 10

What are the main pillars of the equal competition act 1988?

Answer 10

• Anti competitive agreements
• Cartels
• Abuse of a dominant position

Question 11

What is the role of the CMA?

Answer 11

To protect the consumers interest by applying competition law, encouraging con testability and investigating reports of market abuses. They are a non-ministerial government department.

Question 12

What must be the combined market share of two firms who are planning to merge, before a CMA will automatically undertake an investigation?

Answer 12

-25% or more.

Question 13

What can they do if they believe a merger is against the consumer’s interest?

Answer 13

They can prevent the merger, or they can put conditions upon it, such as requiring one of the firm to sell part of the firm.

Question 14

What can the CMA do if the firm has violated the 1988 competition act?

Answer 14

• Apply firms of up to 10% of global turnover for three years.
• Apply fines for non-compliance with an investigation, of 30,000 plus 15,000 per day thereafter.

Question 15

What are the advantages and disadvantages of government intervention?

Answer 15

• It helps to mitigate the negative effects of monopoly.

- Dis, it can lead to government failure and sometimes there are benefits of monopoly to be unregulated.

Question 16

Define privatisation?

Answer 16

-When an asset is transferred from the public sector into the private sector. Eg the selling of shares in a previously public owned firm like the Royal Mail.

Question 17

Name 5 industries that have been privatised?

Answer 17

• Water
• Gas/ British Gas
• Electricity
• Railway
• Post/ Royal Mail

Question 18

Define competitive tendering?

Answer 18

-A way to introduce competition into government provided services by contracting out aspects of the service and requiring several companies to bid for the work.
Eg several companies bidding to provide the building of a school.

Question 19

Define deregulation?

Answer 19

-Deregulation is when rules and licenses are removed form an industry in order to encourage more competition into the market. EG removing state support from airlines.

Question 20

Define franchising

Answer 20

• Franchising is when government acknowledge that it is not possible to introduce competition into some markets because of natural monopoly and so companies bid for a franchise or right to run a part of the service.
• Every 5-10 years the franchise expires and the government will invite companies to bid again.
• This means the company must do a good job or the franchise will be taken away from them.
• This a

Question 21

Define licensing?

Answer 21

-When a firm is given a license to produce, or they may have to buy a license to produce. The issue of licenses is done by the government, and so they can limit the number issued.
Or increase the number issued to alter the competitive pressures in a market.

Question 22

Identify and explain 5 advantages of privatisation?

Answer 22

• Improved efficiency- this is because the profit motive means that firms must keep costs under control in order to survive in the market.
• Increased competition- this is because new firms are able to enter the market an compete with the previous national firm.
• Raises revenue for the government in selling the asset.
• Widening of share ownership- more of the population have become aware of buying shares as a way to store wealth. Which expands an entrepreneurial culture.
• Removal of government interference - this means that government cannot make changes just to win an election

Question 23

Identify and explain 4 disadvantages of privatisation?

Answer 23

• Natural monopolies- where the industry is a natural monopoly, it may not be possible to introduce competition, which means private sector monopolies might be created which do not act in the consumer’s interests
• Externalities- when a firm is nationalised they can have objectives other than profit maximising like environment. If privatised it may lead to negative externalities as they no longer have the same concern.
• loss of economies of scale- when the firm does not have competition they can benefit from large economies of scale and they can be very large. Competition will reduce market power and thus decrease economies of scale.
• Redistribution of wealth- the rich benefit from more privatisation as they have the funds to repurchase shares. Inequality went up in the 1980s and some blame it on privatisation.
• Job losses, When privatisation takes place and the profit motive kicks in, firms will look for ways to cut costs, including making large scale redundancies.

Question 24

Why do privatised monopoly need an industry regulator?

Answer 24

-This is because without one they will exploit consumers and make huge-super normal profits that are not in the interest of the consumers.

Question 25

Identify 5 industry regulators?

Answer 25

• OFCOM (communications)
• OFRR (rail and road)
• OFWAT (water)
• OFGEM (energy)

Question 26

Identify and explain the 4 main methods of intervention used by the industry regulators?

Answer 26

-RPI- X price capping, this is where firms are required to change prices by the rate of inflation - X%. X represents x inefficiency and therefore the expected savings a firm can make. This means that firms can make a price cut in real terms equal to the amount the government can reduce costs or be efficient by.

RPI + K price capping, this is where firms can increase prices by RPI inflation + an amount of K%, which represents the amount of investment needed in this firm. Means firms are allowed to increase prices in real terms, but by only the amount the firms’ costs are increasing because of investment.

• Profit regulation, this is where privatised firms are allowed to keep a profit up to a certain point, then they are taxed 100% on any profit thereafter. This is to prevent firms from making to much profit and exploiting customers.
• Service level agreements, this is where firms’ minimum service standards such as when there is a power cut it must be up within 8 hours.
• performance targets, these are more general and may include SLAs but could be target on other aspects like reducing costs.

Question 27

How does the government promote contestability in markets?

Answer 27

• By deregulating markets, this makes it easier for other firms to enter the market and take profits and market share from the incumbent firm.
• they can also subsidise firms entering the market to encourage efficiency in firms.
• Finally, they can regulate the behaviour of the incumbent firms so they are not creating barriers.

Question 28

How does the government act to restrict monopsony power on firms and employees?

Answer 28

• On employees, the government prevents wages from falling below the National Minimum Wage- this means that monopsonists cannot pay their workers this amount.
• Thee is also anti-discrimination policy which means the monposonist must treat workers fairly.
• However, non government orgs like trade unions can protect the rights of workers from monopsony buyers.

Question 29

Define nationalisation?

Answer 29

-When there is a transfer of ownership of assets owned by the private sector into the public sect

Question 30

What are the arguments for nationalisation ?

Answer 30

-For
government can run organisations that can pursue objectives other than profit maximisation. Eg environmental goals or protecting employee welfare.

• Consumers not exploited with higher prices.
• economies of scale can achieved as there is a single large producer (natural monopoly).
• Provides funds for investment into infrastructure without needing profit/ return in the short term

Question 31

What are the arguments against nationalisation?

Answer 31

• Government run organisations can be inefficient as they do not have the profit motive.
• Moral hazard as any overspends will be covered by the gov
• Investment funds have an opportunity cost, so may not always be available.