The international economy

Globalisation

The ever increasing integration of the world's local, regional and national economies into a single, international market

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FDI

Foreign Direct Investment - investment made by a company or entity based in one country, into a company or entity based in another country

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MNCs

Multinational Corporations - own or control the production of goods and services in multiple countries

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Characteristics of globalisation

Free trade of goods and services, Free movement of capital and labour, Free interchange of technology and intellectual capital

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What came with the spread of globalisation?

More trade between nations and more transfers of capital (FDI), Brands developed globally, Labour divided between several countries, More migration, More countries participate in global trade, Higher levels of investment, Interdependence

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Interdependence

Countries have become more interdependent - the performance of their country depends on the performance of other countries - 2008/9 Global credit crunch spread

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Factors contributing to globalisation (Categories)

Trade in goods, Trade in services, Trade liberalisation, MNCs, International financial flows, Communications and IT, Containerisation

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How has trade in goods contributed to globalisation?

Developing countries - capital and knowledge to manufacture goods - efficient forms of transport - easier and cheaper to transfer goods internationally - LDCs cost advantage of cheaper labour - MNCs move their production - Trade - LDCs access to good

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How has trade in services contributed to globalisation?

Tourism, call centre services, and software production (India) - increased from developing countries to developed countries

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How has trade liberalisation contributed to globalisation?

Growing strength and influence of World Trade Organisation (WTO) - advocates free trade - decline in trade barriers

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How have MNCs contributed to globalisation?

Used marketing to become global - take advantage of EoS (Risk-bearing) - spread of technological knowledge and EoS has resulted in lower costs of production - move production to another country

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How have international financial flows contributed to globalisation?

Flow of capital and FDI across international borders has increased - China and Malaysia - Foreign ownership of firms has increased - investment in factories abroad - removal of capital controls has facilitated this increase

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How have communications and IT contributed to globalisation?

Spread of IT - easier and cheaper communication - more interconnected - better transport links and transfer of information easier - 'death of distance'

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How has containerisation contributed to globalisation?

Cheaper ship goods-prices fall-competitive markets -easier to load/cheaper distribution-meet world demand-Cargo can be moved 20 times as fast-EoS exploited-Less labour (mainly MNCs who exploit - structural unemployment)

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Containerisation

Goods are distributed in universal containers - easier to load and cheaper to distribute using rail and sea transport

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The consequences of globalisation (Categories)

Individual countries, Governments, Producers and consumers, Workers, The environment

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The consequences of globalisation on individual countries

Trade imbalances between countries(US/China)-imbalances/inequalities in health,education and markets - income/wealth inequalities if globalisation benefits not evenly spread(China-vastly different levels of income/living), Loss of cultural diversity

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The consequences of globalisation on governments

Lose their sovereignty - increase in international treaties - hard to resist - countries become members of organisations, they will have to abide by their rules

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The consequences of globalisation on producers

Benefits of specialisation/EoS as firms larger-more competitive-lower AC-more efficient-Producer lower AC-cheaper labour-spread of tech-increased demand-^price raw materials

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The consequences of globalisation on consumers

General ^ world GDP-^ living standards/reduce absolute poverty-hard to calculate globalisation contributions to growth-^ avg consumer income-offset lower costs of production for firms-^£ commodities-^inequality-variety/availability-homogenisation

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The consequences of globalisation on workers

Advantage of job opportunities across globe-Structural unemployment(UK-Ship building/mining) - more efficient to manufacture abroad-lower labour costs-MNCs exploit labour - poor conditions(Sweatshops)- provide higher stable income than alternatives

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The consequences of globalisation on the environment

Industrialisation - increased consumer living standards - more pollution - increased production/transport - higher incomes may show more concern towards environment - deforestation,water scarcity and land degradation

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Absolute advantage

Produce a good or service using fewer resources and at a lower cost than another country

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Comparative advantage

Produce a good or service at a lower opportunity cost than another country - give up producing less of another good than another country,using the same resources - countries can specialise where they have comparative advantage - increases welfare

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Free trade

Act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations

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Benefits of free trade

Comparative advantage-^ output using fewer resources/^ world GDP(living standards),^efficiency-competitive market-lowers cost of production/^ output,Trade creation-fewer barriers-^ consumption/welfare,^X-More growth,EoS-lower AC

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Costs of free trade

Job losses - countries with lower labour costs have entered the market, Environmental damage - increase in manufacturing

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Trade creation

Increase in economic welfare from joining a free trade area-will occur when there is a reduction in tariff barriers, leading to lower prices. This switch to lower cost producers will lead to an increase in consumer surplus/welfare

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Reasons for changes in the pattern of trade between the UK and the rest of the world (Categories)

Comparative advantage,Impact of emerging economies,Growth of trading blocs and bilateral trading agreements,Changes in relative exchange rates,Protectionism

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How has comparative advantage changed patterns of trade between the UK and the rest of the world?

Growth X manufactured goods developing countries to developed-lower labour costs-production shifted abroad,deindustrialisation UK-manufacturing sector declined-manufacturing in China-UK services,Industrialisation CH/IN-^share world trade

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Why has wage competitiveness fallen in China?

Ageing population and the rise of the middle class who demand higher wages and consume more

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How has the impact of emerging economies changed patterns of trade between the UK and the rest of the world?

Collapse of communism-more countries participate world trade,International trade more important developing countries-UK manufacturers selling fewer manufactured goods abroad,China and India important in Euro area-trade and financial relations

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Evidence that International trade is more important for developing countries than developed countries

Contributes towards 20% of LDC economies compared to 8% of the US economy

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Between 1995-2005, how much has India's share of textile and clothing fell from and what has that industry been replaced with?

35% in 1995 - 16% in 2005, India's manufacturing sector now produces more engineered goods-UK manufacturers selling fewer manufactured goods abroad

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Has China's and India's share in agriculture, mining and fuel increased or declined?

Declined

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Why are China and India important for African infrastructure?

They have invested in their infrastructure in exchange for natural resources

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How has the impact of growth of trading blocs and bilateral trading agreements changed patterns of trade between the UK and the rest of the world?

Trading blocs-trade between members-diverted from elsewhere-Trade diversion,Protectionist barriers imposed on countries outside bloc,Policies of developed countries limited developing countries to X primary commodities

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Trade diversion

Trade shifts to a less efficient producer - trading blocs usually encourage this

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Example of policies of developed countries limiting the ability developing countries to export primary commodities

EU Common Agricultural Policy(CAP)-domestic farmers receive subsidies to encourage production and lower costs-increases income/protects industry-farmers in other countries hard to compete-not able to access market in developed countries-limits trade

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How has the impact of changes in relative exchange rates changed patterns of trade between the UK and the rest of the world?

China trade surplus with the US-China kept value of currency low(Renminbi)-Exports relatively cheaper,Could be argues that one of the reasons for the UK's current account deficit is the strength of the £ compared to Euro-in 2015 reached a 7year high

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Protectionism

The act of guarding a country's industries from foreign competition

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Methods of protectionism

Tariffs, Quotas, Export subsidies, Embargoes, Excessive administrative burdens ('red tape')

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Tariffs

Taxes on imports to a country - could lead to retaliation - exports might decrease - the quantity demanded of domestic goods increases, whilst the quantity demanded of imports decreases

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Tariff diagram

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Quotas

Limits the quantity of a foreign produced good that is sold on the domestic market - Physical limit on a specified good imported in a set amount of time - rise in the price of the good for domestic consumers - worse off

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Export subsidies

Government intervention encourage goods to be exported rather than sold on the domestic market - direct payments, tax relief, or provide cheap access to credit

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Embargoes

Complete ban on trade with a particular country - usually politically motivated

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Excessive administrative burdens ('red tape')

Increases the cost of trading-discourages imports-difficult to trade with countries imposing red tape-harmful developing countries-unable to access these markets,countries favour this type of protectionism-harder to notice

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Infant industries

Might need protecting - relatively new and receive support - Protectionism is usually short term

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Causes of countries adopting protectionist policies

Reduce trade deficit,Protect infant industries,Correct market failure,Improve CA deficit,Protect domestic jobs

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How do protectionist policies reduce trade deficits?

Importing less due to tariffs and quotas on imports

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How do protectionist policies correct market failure?

Deal with demerit goods and protect society from them

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Consequences of countries adopting protectionist policies

Distort the market and loss of allocative efficiency,extra cost on exporters,Tariffs regressive(inequality),retaliation,gov failure

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How do protectionist policies distort the market and loss of allocative efficiency?

Prevents competition-loss of consumer welfare-higher prices and less variety-firms have little or no incentive to lower their costs

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Customs Union

Established a common trade policy with the rest of the world(common external tariff),free trade between members(EU),free movement of capital and labour across the borders

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Features of a customs union

Safety measures for imported goods,Common customs rules and procedures,Structure for the combined administration of the nations,Common trade policy-Countries and blocs outside the customs union

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Main characteristics of the Single European Market (SEM)

Free movement of goods,services,capital and labour between nations,Administrative provisions,laws and regulators are approximated between member nations,Competition policy is common,Common external tariffs

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Consequences for the UK of its membership of the European Union(EU)

Trade creation and trade diversion,Reduced transaction costs,Economies of Scale,Enhanced competition,Migration

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Consequences for the UK of its membership of the European Union(EU)-Trade creation and trade diversion

Trading blocs-trade created between members-diverted from elsewhere,Trade creation-country consumes more imports from a low cost producer,and fewer from a high cost producer,Trade diversion-trade shifts less efficient producer-in a bloc more likely

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Who does the UK mainly trade with and at the expense of who?

Mainly trade with the EU, at the expense of former trade links in the Commonwealth

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Consequences for the UK of its membership of the European Union(EU)- Reduced transaction costs

No barriers to trade or no border controls, it is cheaper and simpler to trade

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Consequences for the UK of its membership of the European Union(EU)- Economies of Scale

Larger potential market-EU 500 million people, Specialising-exploit their comparative advantages-gains of efficiency and advanced technology

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Consequences for the UK of its membership of the European Union(EU)- Enhanced competition

More efficient - better allocation of resources, long run benefits of dynamic efficiency-not always spread evenly across each member

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Consequences for the UK of its membership of the European Union(EU)-Migration

Customs Union-Supply of labour is increased-fill labour shortages-some countries lose their best workers

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Role of the WTO in trade liberalisation

WTO promotes world trade through reducing trade barriers and policing existing agreements-settles trade disputes-organises trade negotiations,Every member follow rules-trade sanctions

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As of 2018, how many members of the WTO are there?

164

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Possible conflicts between regional trade agreements and the WTO

Blocs distort trade or affect those who do not belong to them-inefficient allocation of resources as a result of policies(EU CAP),members of WTO not treated equally

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Argument against the WTO

WTO is too powerful, ignores the problems of developing countries-developed countries do not trade completely freely with developing-limits their ability to grow

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How do trading blocs contradict the WTO's principles?

Conflicts between blocs-rise in protectionism,Common external tariff-protectionist barriers are imposed on those who are not members

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Balance of payments

Record of all financial transactions made between consumers, firms and the government from one country with other countries-how much is spent on imports and what the value of exports is

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Exports

Goods and services sold to foreign countries - positive in the BoP - inflow of money

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Imports

Goods and services bought from foreign countries - negative on the BoP - outflow of money

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What is the balance of payments made up of?

The current account, The capital account,financial account, Balancing item

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The current account

All economies transactions between countries - trade in goods and services, income and current transfers

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The capital account

Capital transfers - transfers of the ownership of fixed assets

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The financial account

Involves investment - direct investment, portfolio investment, reserve assets are part of the financial account

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Balancing item

BoP should balance - sum of the accounts should be zero - where there are imbalances, a balancing item is used to cover the discrepancies

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Current account surplus

Net inflow of money into the circular flow of income - UK has a surplus with services

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Current account deficit

Net flow of money out of the circular flow of income - Spends more on imports than they earn from exports - financial difficulties with financing the deficit for long periods of time - UK has a deficit with goods

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Causes of balance of payments disequilibrium

Appreciation of the currency, Economic growth, More competitive, Deindustrialisation, Membership of a trade union, Attractiveness to foreign investors

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How does appreciation of the currency cause a balance of payments disequilibrium?

Imports cheaper - exports relatively more expensive - current account deficit worsens

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How does economic growth cause a balance of payments disequilibrium?

Incomes increase - demand increases - increase demand for imports - UK high propensity to import

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How does a increase in a country's international competitiveness cause a balance of payments disequilibrium?

Internationally competitive - lower inflation - economic growth in export markets - exports increase - country becomes more productive - causes avg unit costs to fall - current account deficit to improve - increase the current account surplus

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How does deindustrialisation cause a balance of payments disequilibrium?

UK - manufacturing sector - declining since the 1970s - now have to be imported - worsens the deficit

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How does membership of a trade union cause a balance of payments disequilibrium?

UK - negative current transfers - fees are paid for membership of the EU

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How does a change in the attractiveness to foreign investors cause a balance of payments disequilibrium?

Current account surplus - incoming finance from the investors buying UK bonds, securities and financial derivatives - help fund a current account deficit

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Relation between current account and capital and financial account

Current account surplus - capital and financial account deficit, Current account deficit - capital and financial account surplus

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Effect of selling more exports to foreign countries to the UK economy?

Greater inflow of money - increases AD - improves the rate of economic growth

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Effect of a recession or economic decline on the current account

Current account deficit falls because consumer spending falls

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Effect of periods of economic growth on the current account

Higher incomes - can afford to consume more - larger deficit on the current account

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Effect of the price of imported raw materials becoming more expensive on the current account

Domestic cost-push inflation - firms face higher production costs - increase the current account deficit

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Effect of appreciation in the value of the pound on the current account

Imports become relatively cheaper and exports become more expensive - current account deficit worsens

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Effect of UK becoming more productive on the current account

More internationally competitive - exports increase relative to imports - improves the current account deficit

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Consequences of investments flows between countries

FDI - create employment, encourage innovation of tech and help promote long term sustainable growth - provides LEDCs with funds to invest and develop

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Difference between portfolio investments and FDI

Portfolio investment - passive - control over the company is not gained - aims to make a financial gain, FDI - allows investors to gain some control over the firm (pension funds, hedge funds and stock market money flows)

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How can fiscal policy be used to correct a deficit on the current account?

Increase income tax-reduce disposable income-reduce imports-impact domestic growth-spend less on domestic goods, Gov reduce spending-reduce AD-less imports-increasing exports-helps improve the disequilibrium

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Why is fiscal policy only effective in the short term at correcting a balance of payments deficit or surplus?

As soon as the policy measures end, household are likely to revert their expenditure back on imports

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Problems with using fiscal policy to correct a balance of payments disequilibrium

Only effective in SR,taxes imposed on trading partners-risk of retaliation-reduce demand X,Imperfect information-Gov failure,'green taxes'(carbon tax or min price on pollution permits)-competitiveness of domestic firms compromised - reduce exports

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Expenditure-reducing monetary policies

Aim to reduce demand in the economy, so spending on imports fall - High interest rates, reducing growth of money supply

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Expenditure-switching monetary policies

Aim to switch consumer spending toward domestic goods, and away from imports - Changing the exchange rate, reducing growth of money supply

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How can a bank manipulate monetary policy to improve the current account deficit?

Lower interest rates - depreciation in the currency - exports cheaper - inflationary for domestic economy - hot money flow out - investors not receiving a high return on their investment

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Problems with using monetary policy to correct a balance of payments disequilibrium

Hard to control the supply of money, time-lag with changing the interest rate and seeing an effect

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Supply-side policies which can be used to correct a BoP disequilibrium

Increased spending on education and training, make domestic economy more attractive to investors, deregulation and privatisation, government provide subsidies to industries

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Consequences of using the supply side policy of increased spending on education and training to improve the BoP disequilibrium

Increase productivity - increase international competitiveness - rise in exports, sig time lag - not effective as a immediate measure - effective in long term

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Consequences of using the supply side policy of deregulation and privatisation to improve the BoP disequilibrium

Domestic economy more competitive - firms lower their AC - could result in monopolies - will not increase efficiency

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Consequences of using the supply side policy of governments using subsidies to some industries to encourage production to improve the BoP disequilibrium

Retaliation from foreign countries - unfair protectionist measure

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Significance of deficits and surpluses for an individual economy

Imported raw materials more expensive-domestic cost-push inflation-higher production costs,Interdependence-economic conditions in one country affect another-X/M will change,Surplus/Deficit-unbalanced economy-too reliant on other economies

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Why can a current account deficit be unsustainable in the long run?

Difficult to attract sufficient financial flows in order to finance a current account deficit

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What do BoP imbalances suggest in the UK?

UK is reliant on the performance of other countries, export markets (EU) become weak - UK economic performance will be affected - 2008 financial crisis

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Consequence of a loss in confidence from Chinese investors in the US economy?

Difficult to finance deficit in LR-US CA deficit financed by Chinese investors buying securities at low IR-lose confidence-stop buying US debt-IR ^ to encourage-damaging US consumers who have a lot of debt-repayments would ^-less disposable income

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In the Eurozone, why are current account deficits of great concern?

Countries have a fixed exchange rate - cannot devalue the currency to restore their level of international competitiveness

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What puts China at risk of having unsustainable economic growth?

Since 2006 US deficit with China has narrowed and China's surplus also fell-surplus indicates low consumer spending and a low savings ratio, the government aims to grow the economy using domestic spending, rather than exports

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How did China make their exports more competitive?

Undervaluing their currency - imports more expensive - inflationary and could cause a boom or a bust, A stronger Yuan causes lower growth, lower inflation and reduces CA surplus

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Why would the US prefer a stronger Yuan?

It makers their domestic industries more competitive

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Exchange rate

An exchange rate is the price of one currency in terms of another – in other words, the purchasing power of one currency against another.

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Floating exchange rate

Value of the exchange rate determined by the forces of supply and demand

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Floating exchange rate diagram

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The demand for a currency =

Exports + Capital inflows

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The supply of a currency =

Imports + capital outflows

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How governments intervene by using fixed exchange rates

Value determined by the government compared to other currencies, the supply of the currency can be manipulated by the central bank - buy or sell currency to change price

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Fixed exchange rate diagram showing currency depreciation as a result of the central bank increasing supply by selling the currency

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How governments intervene using managed exchange rates

Combines fixed and floating - currency fluctuates but doesn't float freely - exchange rate floats but central bank buys and sells currencies to influence their exchange rate

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Examples of countries that use managed exchange rates

Japanese central bank-make exports more competitive by manipulating yen-even though it floats, Indian rupee fluctuates-central bank intervenes when it falls outside a set range

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Example of a country that has maintained a fixed exchange rate

China previously kept the Yuan undervalued by buying US dollar assets to make their exports relatively cheaper

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How governments use interest rates to influence the exchange rate

Relative increase in IR - more attractive to invest - higher rate of return - increases demand for the currency - appreciation in the exchange rate - hot money

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How governments use quantitative easing to influence the exchange rate

Stimulate the economy when standard monetary policy is no longer effective - inflationary effects - increase the money supply - reduce the value of the currency - Used when inflation is low and not possible to lower IR further

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How governments use foreign currency transactions to influence the exchange rate

Manage UK's gold and foreign currency reserves and manage the MPC's pool of foreign currency reserves-buying and selling foreign currency to manipulate the domestic currency, China kept large reserves of dollar-buying gov bonds to undervalue Yuan

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Advantages of fixed exchange rates

Allows for firms to plan investment-not be affected by harsh fluctuations in the exchange rate, Gives monetary policy a focused target to work towards

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Disadvantages of fixed exchange rates

Gov and central bank may not know better than the market, BoP does not automatically adjust to economic shocks, Costly and difficult for gov to hold large reserves of foreign currencies

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Advantages of floating exchange rates

Exchange rate automatically adjusts to economic shocks, Monetary policy more freedom to focus on other macroeconomic objectives

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Disadvantages of floating exchange rates

Unpredictable fluctuations make investment planning difficult, Also can effect X and M of a country-unemployment if an industry affected in particular, Exchange rate vulnerable to speculative shocks

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Advantages for a country of joining a currency union e.g. the Eurozone

More currency stability,less prone to speculative shocks,fewer admin fees and less red tape-travelling/exchanging,Benefits firms which trade(small firms-time and money saved),German monetary credibility-all member states having lower IR-^investment

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How does increased currency stability, after joining a currency union, benefit an individual country?

More currency stability-less prone to speculative shocks-future markets more certainty-more investment and growth potential

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Disadvantages for a country of joining a currency union e.g. the Eurozone

Labour mobility limited across Europe-language barriers,Difference in economic performance-common monetary policy may not be effective,EXR not flexible to meet each country's need,Loss of sovereignty,Sig one-off cost of joining-change labels/prices

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How do member nations lose sovereignty when there is a common monetary union?

Countries with a strong currency have to cooperate with countries that have weaker economies - cannot adapt their policies to meet each individual requirement

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Monetary union

Share the same currency-more economically integrated than a customs unions and a free trade area, Common central monetary policy, Use same interest rate

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When was a single European currency, the Euro, implemented?

1999

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Example of a monetary union using the same interest rate for all members

Euro floats against the US dollar and the Pound Sterling

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The four convergence criteria countries have to meet in order to join the Euro

Control gov finances so budget deficits cannot> 3% of GDP, Gross National Debt< 6% of GDP, Inflation< 1.5% of the three lowest inflation countries, Avg gov bond yield< 2% of the yield of the countries with the lowest IR-ensure exchange rate stability

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Optimal currency zone

Created when countries achieve real convergence - respond similarly to external shocks or policy changes,flexibility in product/labour markets-geographical and occupational mobility and wage and price flexibility in labour markets

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What can be used to even out some regional economic imbalances in order to achieve an optimal currency zone?

Fiscal transfers

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Economic growth

The increase in a country's real national output - increases in the quality or quantity of FoP - outward shift in the PPF

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Economic development

Living standards, freedom and life expectancy - covers a more moral side to economic growth and it is normative, how sustainable the economy + needs of future generations can be met

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Characteristics of LEDCs

Low life expectancies,High mortality rates,High dependency ratio,Low GDP,Fast population growth,Low levels of education,Poor standard of living,Poor nutrition,Lack of access to clean safe drinking water/sanitation,Poor health care provision

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Indicators of economic development

Human Development Index (HDI), Human Poverty Index (HPI), Gender-related Development Index (GDI)

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The three dimensions of the Human Development Index (HDI)

Education, life expectancy and standard of living

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Human Development Index (HDI)

Measures economic and social welfare of countries over time

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The education component of Human Development Index (HDI)

Combines the statistics of the mean number of years of schooling and the expected years of schooling

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The life expectancy component of Human Development Index (HDI)

Uses a life expectancy range of 25-85 years

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The standard of living component of Human Development Index (HDI)

Measures GNI adjusted to PPP per capita - reflects avg income per person

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How much did the avg world HDI rise to between 1970 and 2013 and why did it occur?

0.48 in 1970 to 0.70 in 2013 - growth of East Asia, the Pacific and South Asia

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A value close to 1 on the HDI is indicative of a.....

High level of economic development

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A value close to 0 on the HDI suggests a......

Low level of economic development

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Disadvantages of using the HDI to compare levels of development between countries and over time

Does not consider how free people are politically,their human rights,gender equality or people's cultural identity,Does not take environment into account,Does not consider distribution of income

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Advantages of using the HDI to compare levels of development between countries and over time

Does allow for comparisons between countries to be made, Much broader comparison between countries than GDP does, Education and health can provide info about the country's infrastructure and opportunities - how successful gov policies have been

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Human poverty index (HPI)

Measures life expectancy,education and the ability of citizens to meet basic needs, two types HPI-1 and HPI-2

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HPI-1

Measures poverty in developing countries - probability of living to the age of 40,Adult literacy rate, %of underweight children and %of people not using improved water sources

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HPI-2

Measures poverty in developed countries-Probability of not surviving to the age of 60,%of adults which do not have literacy skills,poverty calculated by those below poverty line(below 50% of median income)

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Gender-related Development Index (GDI)

Relative inequality between men and women - combines HDI with a consideration of gender - differences in life expectancies, income and education between genders

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Market-orientated strategies that affect growth and development

Make the economy more free with min gov intervention - Trade liberalisation, Promotion of FDI, Removal of gov subsidies, Floating exchange rate, Microfinance schemes, Privatisation

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Interventionist strategies that affect growth and development

Gov intervenes to try and influence growth and development - Development of human capital, Protectionism, Managed exchange rates, Infrastructure development, Promoting joint ventures with global companies, Buffer stock schemes

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Other strategies that affect growth and development

Industrialisation: the Lewis model, Development of tourism, Development of primary industries, Fairtrade schemes, Aid, Debt relief

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Barriers to growth and development

Primary product dependency,Savings gap,Foreign currency gap,Capital flight,Demographic factors,Debt,Access to credit and banking,Infrastructure,Education/skills,Absence of property rights,Corruption,Poor governance,Vulnerability to external shocks

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How does trade liberalisation affect growth and development?

Removes protectionist barriers to allow free trade - World GDP can be increased - output increases when countries specialise - living standards might increase - more economic growth

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How does the promotion of FDI affect growth and development?

Creates employment, encourages the innovation of technology, long term sustainable growth - provides LEDCs with funds to invest and develop

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How does the removal of government subsidies affect growth and development?

Gov subsidies distort market mechanism - gov failure - inefficient allocation of resources, gov might end up subsidising an industry which is failing or has few prospects

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Microfinance schemes

Borrowing small amounts of money from lenders to finance enterprises-small loans for usually unbankable ppl-high repayment rates-data collected on microfinance loans might not be reliable if there is dishonesty regarding where the money was spent

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How do microfinance schemes affect growth and development?

Increases the incomes of those who borrow-reduce their dependency on primary products-multiplier effect from the investment of a loan-break away from aid-borrowers financial independence-detach the poor from high interest,exploitative loan sharks

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How does privatisation affect growth and development?

Assets transferred pubic sector-private sector-Incentives to operate efficiently-increases welfare-profit incentive-firms have to produce what consumers want-increases allocative efficiency-higher quality,Selling asset - revenue 4 gov- 1 off payment

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How does the development of human capital affect growth and development?

Skill base improves-productivity-advanced tech,Businesses struggle to expand where there are skill shortages-limits innovation,By developing human capital-move production up the supply chain from primary products to manufactures -earn more

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Example of gov intervening to increase the development of human capital to improve economic growth and development

Primary school enrolment has increased from 80%-90%, Secondary and tertiary education enrolment is still low

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How does protectionism affect growth and development?

Reduce trade deficit-usually short term,Distorts market-loss of allocative efficiency-prevents competition-loss of consumer welfare-higher prices/less variety-firms lil incentive to lower CoP,Tariffs regressive(^inequality),Risk of retaliation

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How do managed exchange rates affect growth and development?

Currency fluctuates but does not float on a fully free market-Central bank of the country buys and sells currencies to try and influence their exchange rate

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How does infrastructure development affect growth and development?

Higher supply costs delay businesses and reduces mobility of labour

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Examples of physical infrastructure that can be improved in order to increase economic growth and development

Transport, Energy, Water and telecommunications

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India's physical infrastructure and it's affect on economic growth and development

Poor irrigation system-difficult to sustain food grain production if there is low rainfall-hurts poorest communities-rising food prices-regular power cuts-lack of continuous supply electricity affects transport,communications and healthcare

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How much needs to be invested into India's physical infrastructure (power) in order to meet the development goals?

$400 billion

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Asian Infrastructure Investment Bank (AIIB)

Led by China-funds Asian energy,transport and infrastructure-UK,Germany,Australia,South Korea-opportunity for British firms to invest in fast growing economies

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Evidence that infrastructure development is a top priority for the Chinese government

Late 1990s-2005, 100 million Chinese people benefited from improved power and telecommunications, Employment can be boosted with improved roads/railways-however some remote areas don't have mechanised means of transport

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Why is there a development gap between China and other emerging economies?

China invested 9% of their GDP in infrastructure in the 1990s and 2000s, whilst most emerging economies only invested around 2-5% of GDP

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Evidence of infrastructure development in China and how it affects growth and development

China has the first and only high speed Maglev train system in the world between the city centre Shanghai and its international airport-already almost 200 airport in China-80% of ppl live within 100km of airport

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How does the promotion of joint ventures with global companies affect growth and development?

International trade,without the responsibilities involved of it-help tech knowledge to be transferred-improve and develop small companies-open up new markets for small firms-saves time and £-helps firms penetrate foreign market-barriers of entry

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How do buffer stock schemes affect growth and development?

Agricultural market-To reduce price volatility gov buy up harvests during surpluses- sell-supplies are low(historically unsuccessful),farmers incomes stable-fluctuations reduced-^ welfare by ensuring prices are not in excess

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Problems with using buffer stock schemes to increase economic growth and development

Gov may not have money to buy up stocks, Storage is difficult and expensive-agricultural goods don't last long-admin costs

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The Lewis model

Explains how a developing country which focuses on agriculture could move towards manufacturing-Workers from agriculture are attracted to high wages in manufacturing-grows manufacturing sector-economy moves from agriculture to manufacturing

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What does 'The Lewis model' assume?

In agriculture- surplus of unproductive labour in developing countries-manufacturing sector wages are fixed, demand for labour increases as the productivity capacity of firms increases,in manufacturing sector-charge prices^ wage rate-profits-invest

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In reality why may industrialisation (The Lewis model) not be an effective way to increase economic development and growth?

Profits might not be reinvested into the firm-Capital investment might replace labour-Demand for labour could fall-Not always easy for labour in the agricultural sector to move to the manufacturing sector

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How does the development of tourism affect growth and development?

Can create thousands of jobs-shift a developing country away from primary products,Developing countries ^MPC-multiplier effect, diversify economy-country more attractive to FDI -developing infrastructure,Earning foreign currency,

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The significance of tourism on international economic development and economic growth

6% of world trade, 9% global gdp, LDCs-8% exports from tourism, One of the largest and fastest growing sectors-outward looking policy-more modern way to grow an economy-benefits similar to those of free trade

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Why is the development of tourism suited to LDCs to improve their economic growth and development?

Low technology and labour intensive

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Why may developing tourism not be an effective way of increasing economic growth and development?

Little rev retained in country(travel agents/hotel owners repatriate profits),Overcrowding and loss of habitats,Income unsustainable-relies on business cycle,Risky and expensive to invest,Environmental damage,Locals stigmatised

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How is Sri Lanka developing it's tourist industry to further their economic growth and development?

Building more hotels - $1 billion of revenue could be made - requires very good infrastructure such as roads and electricity

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How does the development of primary industries affect growth and development?

Some developing countries- abundance of raw materials-develop industry-Comparative advantages, Primary industries-livelihoods of the bulk of the population-only source of income for families-important that industry is supported

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How do fair trade schemes affect growth and development?

Help support incomes for farmers, community development and social projects,Ensuring working conditions meet a min standard,Sustainable production,promotes environmental protection,stops child labour,Self-sufficiency/Independence/Community

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How do fair trade schemes work?

Supermarkets buy a guaranteed quantity at a price above the market equilibrium-farmers have guaranteed income and certainty about their sales

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Critics of fair trade schemes to increase economic growth and development

Argue simply psychological influence on consumers who believe they are helping-distract from other policies,make producers not part of Fairtrade worse off-divides market,Distorts price signals-less efficient,Increases price of goods,reliance on sale

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How does Aid affect growth and development?

LEDCs MPC>MPS - limited incomes, Capital inflows(Aid) help fill this savings gap, Provides temporary assistance to a country, Can be used to reduce human capital inadequacies or to pay off debt-Improve infrastructure-more productive

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What are the benefits of Aid in increasing growth and development limited by?

Corrupt leaders, the size of the aid payment and the potential for the recipient country to become dependent on aid

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How much Chinese aid had Africa received by the end of 2009?

45.7% of China's cumulative foreign aid

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How does debt relief affect growth and development?

High levels of debt-financial resources diverted from infrastructure,education and healthcare,If a country defaults-hard to borrow in future,Debt relief-import more, increase standard of living, improves gov finances-public services funded

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Debt relief

Debt relief-partial or total forgiveness of debt,Developing countries-debt principal cause of poverty-human suffering/misery/hampers development,

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Why may debt relief not be a good way to increase economic growth and development?

Could encourage more borrowing in the future and there could be corruption

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Barriers to growth and development - Primary product dependency

Several developing countries rely on primary products-Volatility of commodity prices-hard for workers to plan-incomes fickle n hard to predict, Fall in price-Fall in export incomes-hard to fund infrastructure and education-Reliance not sustainable

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What does South Africa's ability to pay foreign debts and imports rely on?

Mining accounts for 60% of South Africa's exports

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Primary products

Raw materials in industries such as agriculture, mining and forestry

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Barriers to growth and development - Savings gap

Developing countries-limited wealth-money spent in SR-immediate needs-ensure survival, Harrod-Domar model

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Africa's saving rate as compared to middle income countries

Africa's savings rate is around 17% compared to 31%-more expensive for the African public and private sectors to get funds since they have higher borrowing costs-impedes capital investment

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Harrod-Domar model

Investment, saving and technological change are required in an economy for economic growth, Rate of growth increases-Savings ratio increases - increased investment and technological progress - higher productivity

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How is the rate of growth calculated in the Harrod-Domar model?

Savings ration / Capital output ratio

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Limitations of the Harrod-Domar model

Low MPS in some countries or poor financial systems, Funds might not lead to borrowing and investment, inefficiency in workforce, Paradox of thrift

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Paradox of thrift

An increase in savings could lead to an increase in investment, However an increase in savings means there is a reduction in spending which leads to a fall in AD

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Barriers to growth and development - Foreign currency gap

Country not attracting sufficient capital flows to make up for a deficit in capital account, Value of current account > capital inflows

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Barriers to growth and development - Capital flight

Capital and money leave the economy through investment in foreign economies, triggered by an economic threat (hyperinflation or rising tax), worsen an economic crisis and cause depreciation in currency

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Barriers to growth and development - Demographic factors

Population, link between keeping birth rates down and fighting hunger, poverty and environmental damage-rapid population growth complicated efforts to reduce poverty and eliminate hunger in Africa (current population 1.1b expected to double by 2050)

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Barriers to growth and development - Debt

Threatens the fight against poverty and inequality

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Barriers to growth and development - Access to credit and banking

Without a safe, secure and stable banking system - unlikely to be a lot saving in a country

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Barriers to growth and development - Infrastructure

Poor infrastructure discourages MNCs from setting up premises in the country - production costs increase where basic infrastructure not available

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Barriers to growth and development - Education/skills

Important for developing human capital - productive and produce goods and services of a high quality- generates employment and raise standards of living

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Barriers to growth and development - Absence of property rights

Entrepreneurs cannot protect their ideas, so do not have an incentive to innovate

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Barriers to growth and development - Corruption

In sub-Saharan Africa - the money lost from corruption could pay for the education of 10 million children per year in developing countries

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Barriers to growth and development - Poor governance/Civil war

Holds back infrastructure development - constraint on future economic development - destroy current infrastructure and force people into poverty

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Barriers to growth and development - Vulnerability to external shocks

Earthquake prone country likely to find it hard to develop their infrastructure, Nepal - one of the poorest countries in the world, but the Nepal earthquake in 2015 pushed more people into poverty

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