Econ Theme 4 - Emerging + developing economies 2

Question 1

Poor education

Answer 1

poor education -> low human capital -> low productivity
-> LRAS left -> limit real GDP -> limit economic development

FUTHERMORE…
citizens take low level paying jobs -> low income tax revenue -> gov. have no money to invest in development

e.g. President of Madagascar wanted to rid trace of French Empire so banned French teachers and Malagasy was going to be used, but even with training, teachers weren’t ready producing generation children called the lost generation
GNI feel from $460 - $240 (1980-1990)

Question 2

Improving Education

Answer 2

Madagascar government trained more teachers and built more schools in remote areas
chain of reasoning

Question 3

Improving education EVAL

Answer 3

• In Madagascar it’s common for children to work.
• children now going to school in remote areas mean families income decrease in SR
• consumption will decrease
• AD decreases
• real GDP decreases
• less income tax revenue
  FUTHERMORE…
• even in long run, if the standard of education is poor then students will leave school with low levels of human capital
• will not make them more productive.
• economic growth will be limited.

Question 4

Poor infrastructure

Answer 4

Poor infrastructure -> less productive firms -> left shift of LRAS -> low real GDP -> constraining development
FUTHERMORE..
Lowe productivity -> higher costs -> shift SRAS to the left -> firms will have higher prices -> less competitive -> less profit -> lower corporation tax revenue -> lower gov. spending

e.g. India has poor infrastructure, dirt roads, poor transports, frequent blackouts, vital delays to India businesses

Question 5

Improving Infrastructure

Answer 5

Promote FDI -> increase business profit -> increase investment -> increase corporation tax revenue

-India is investing in high speed bullet trains to increase productivity

India lowered corporation tax + reduced wage costs (easier to fire workers in small businesses) encouraging FDI
- in 2015 $31billion in FDI

Question 6

Improving infrastructure EVAL

Answer 6

• reducing wage costs by lowering minimum wage -> lower incomes -> lower consumption -> lower AD -> reduction in real GDP
• lower corporation tax which reduces their tax revenue

Question 7

Poor Health

Answer 7

poor healthcare
poor sex education
-> workers fall ill ->take sick days -> lowers productivity -> LRAS shifts lefts -> constraining development

-> lowers productivity -> less output -> less profit -> lower corporation tax revenue -> less gov spending on development

-> workers fall ill -> can’t work -> no income -> children have to work in their place -> children have low human capital

e.g. Kenya affected the worse by HIV/AIDS because leaders claimed it didn’t exist in their country so didn’t use resources to combat it
1.6 million ppl have HIV infection

Question 8

Improving health

Answer 8

AID -> improve healthcare -> high productivity
- LRAS right -> increase real GDP
- increase income -> higher income tax revenue
- children don’t have to work -> more education-> increase human capital

e.g. 2016 US -> $650m -> Kenya
spent on HIV programs

Question 9

Improving health - EVAL

Answer 9

• corruption
• AID money goes to corrupt officials
• In 2017 US suspended $21M from AID money for failing to tackle corruption problem

Question 10

Rapid Population growth

Answer 10

More children surviving -> more parents stay home to care for them -> not developing their careers -> low income -> low income tax revenue

schools/ hospitals are being overrun -> quality of education/healthcare decreasing -> low human capital/poor health

e.g Tanzania pop. nearly doubled in 20yrs due to improvements in medicine

Question 11

dealing with rapid pop. growth

Answer 11

• improving education
  
  • access to education for girls (immaculate heart sisters of Africa improving education for girls in Tanzania)
    Improved education → Higher human capital → Higher productivity → Higher incomes → Decrease birth rate → Higher quality education → Increases economic development
  • sex education (teach about contraception- prevent pregnancy and reduce brith rate)

Question 12

The Harrod-Domar Model

Answer 12

the cycle
low incomes->low savings-> low investment-> low growth-> low income -> low savings ……..

Question 12

dealing with rapid pop. growth -EVAL

Answer 12

-Religion
- Most ppl in Tanzania are Christian
- using condoms is a sin
- still sexually active ppl will have babies

• Cultures
• believe women should stay at home
• 17% of women in Iran work
• so less productive, high birth rate

Question 13

Savings Gaps

Answer 13

savings gaps - gap between savings and the money firms want to borrow from bank

e.g. Bangladesh
for every citizen there was less than $5 started in savings in banks
-low incomes
-low access to banks
so when firms need to borrow money they weren’t able to get one

Question 14

reducing savings gaps

Answer 14

-Microfinance
small loans provided to small businesses who otherwise wouldn’t that access to financial services

productivity increases -> cost of production decreases-> lower prices-> meaning she will be more competitive-> sell more products-> income increase -> can save more money
e.g. 1983 Grameen bank aims to provide small loans

Question 15

reducing savings gaps - EVAL

Answer 15

-high interest rate
- no extra income so no money to save
- may even cause bankruptcy if firm cannot afford payments

Question 16

Absence of property rights

Answer 16

property rights - legal right over their own property, can go to court if it stolen
-without it nothing can be done if it is stolen

dead capital - property without property rights which means cannot be used as collateral for loans
THEREFORE..
those in the remote mountains cannot get loans and so low investment so low productivity / low income

e.g. Columbia

Question 16

reduce dead capital

Answer 16

• Enforcing property rights
  
  • NPTC aims to establish gov. presence in remote areas of Columbia
  • set up police stations and courts

Question 17

reducing dead capital -EVAL

Answer 17

Studies in Argentina and Peru have found that poor people with property rights are no more likely to take out loans than those without property rights (fears of getting their property taken)

Question 18

Corruption

Answer 18

Corruption= people working for gov. use public funds for their own private expenses.

tax revenue, foreign aid may go to corrupt officials instead of development
poor education, infrastructure ,health

e.g. Venezuela
over the last decade $300bn gone missing from fund

Question 19

reducing corruption

Answer 19

-fairtrade scheme
e.g. US coffee company ‘Orinoco’ sell coffee from Venezuela at a higher price fair-trade price where a part goes back to farmers

however this increase income tax revenue will just back to the corrupt officials so to solve this there is the fair trade premium (part of the fair trade price)
-it is a communal fund that the fair trade farmers can spend on development themselves

Question 20

reducing corruption -EVAL

Answer 20

• Fair trade foundation doesn’t keep track of how much of the higher fair trade price goes to the farmers
  e.g. in one case it was found that less than 1% of extra price was received by farmers

Question 21

Landlocked countries

Answer 21

-expensive to import/export
-shipping costs of landlocked countries are double than that of coastal countries
-SRAS kept left -> real GDP low
-> higher prices -> less competitive -> reduce profit -> less corporations tax revenue -> have to take on national debt to afford everything -> all tax revenue spent on paying off interest payments

e.g Burundi - landlocked
-far more money on shipping costs due to transporting through countries like Mozambique to get too coast
- but there are violent civil wars so sometimes it would have to transport to South Africa(4500km)

Question 22

help indebted landlocked countries

Answer 22

-Debt Relief
-Heavily Indebted Poor Countries Initiative world bank provides debt relief to poorest countries
-e.g. 2009 Burundi relieved of $833m debt
- they money to fund development

Question 23

help indebted landlocked countries -EVAL

Answer 23

- Corruption - Lots of Burundi's extra money just went to corrupt officials

Question 24

Infant Industries

Answer 24

industries which are too small to benefit from EoS infant industries -> high costs -> high prices -> uncompetitive -> less profit -> less corporation tax revenue e.g. Malawi Tobacco infant industry while in Brazil it was massive industry exploiting EOS

Question 24

Protecting infant industries (free trade)

Answer 24

-protectionism -protecting domestic producers from more competitive foreign producers e.g. 2006 Malawi gov. would subside cost of fertiliser for tobacco farmers Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → More development

Question 25

Protecting infant industries(subsidies) - EVAL

Answer 25

- some farmers got dependent on subsides and just didn't work as hard not caring to get a profit so Q produced decreased so profit/corporation tax revenue limited -SRAS does not shift out a lot -> real GDP does not increase much -> growth is limited

Question 26

Protecting infant industries (ER)

Answer 26

- Competitive devaultion - when a country lowers their fixed exchange rate. - make domestic exports cheaper to foreign consumers so more competitive DO THIS BY : - sell domestic currency - decrease the IR e.g. China's car industry was small compared to Japan's China sold lots of yuan - increasing its supply Investment in machinery → Decrease average costs → Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → Increases development

Question 27

Primary Product Dependency Characteristics

Answer 27

PP = A product made from raw materials. - demand for PP is price inelastic ( a necessity with few substitutes) - supply for PP is price inelastic (hard to store or long time/difficult to produce ) - demand for PP is income inelastic (demand curve shifts out very little to right if incomes rise) THIS CAUSES: -price instability if supply/demand were to change a little price would change a lot e.g. The price of copper in Chile fell by around 50% after the global recession caused a slight reduction in demand.

Question 27

Protecting infant industries (ER) - EVAL

Answer 27

- Currency War e.g. Thailand/Indonesia not happy with China's devaluation as they stole their consumers so Thailand retaliated by decreasing their IR and Indonesia retaliated as-well this meant imports became very expensive and so SRAS shifted left

Question 28

Price instability

Answer 28

- unstable prices make it harder for investors to predict future price...future profits Unstable prices -> Low levels of investment -> Keeps AD left -> Limits real GDP -> Limits economic development Unstable prices -> Low levels of investment -> Decreases productivity -> Left shift of LRAS -> Decrease real GDP -> Limits economic development Unstable prices -> Low levels of investment -> Decrease productivity -> Increase unit costs -> Increase prices -> Less competitive -> Less profit -> Less corporation tax revenue -> Less government spending on development

Question 29

Price instability - solution

Answer 29

- Buffer Stock Schemes - diagram to explain on notes -where the government buys/sells PP from market to reduce price fluctuations. - good harvest = buy PP decreasing supply, increasing price - bad harvest = sell PP stock increasing supply, increasing price - keep price in a range (price ceiling -price floor)

Question 30

Price instability solution-EVAL

Answer 30

-farmers have incentive to overproduce as the gov. has guaranteed to buy any excess stock -So buffer stocks can quickly become expensive to run, meaning the government has less money available to spend on development - if several bad harvests gov. may not have enough stockpile to release

Question 31

Prebisch-Singer Hypothesis

Answer 31

Manufactured goods income elasticity of demand = elastic PP income elasticity of demand = inelastic - as world income grows demand for manufactured goods increase a lot so price rises a lot, while demand for PP increase a little so prices rise a little e.g. Swaziland big exporter of sugar and so of high import of manufactured goods so TOT will worsen - countries who depend on primary product and import their manufactured goods will see their TOT worsen = Prebisch-Singer Hypothesis

Question 32

Prebisch-Singer Hypothesis constraint on growth

Answer 32

-As TOT deteriorates, money they earn from their PP exports will be able to buy fewer imported capital goods. - so investment decreases

Question 33

Prebisch-Singer Hypothesis constraint on growth solution

Answer 33

- Industrialisation - As countries industrialise manufacturing firm make lots of profit and attract workers form agricultural jobs with higher wages (Lewis Model) e.g. Coca Cola was only manufacturing company in Swaziland they are a monopsony. This means that they can pay very low wages, so can make SNP, and use it to invest demanding more workers increasing wages and attracting new workers from agricultural job increasing everyone incomes. - increasing income tax revenue, AD, not dependent on PP.

Question 34

Prebisch-Singer Hypothesis constraint on growth solution - EVAL

Answer 34

- transfer pricing (avoiding corporation tax) “selling” the product to the same firm in a different country at a very low or a very high price - corporation tax revenue decreases

Question 35

Foreign Currency Gap

Answer 35

A foreign currency gap is when net exports of foreign currency are greater than net imports -The most common cause is when net imports are greater than net exports A foreign currency gap leads to a depreciation in the value of a country’s currency. This is problematic for countries with a trade deficit. An increase in the price of imports leads to cost-push inflation, which will in turn lead to an economic downturn. e.g. Lebanon

Question 37

Diversification of exports

Answer 37

e.g. Ethiopia - no taxes for new companies for first 5 years + increase FDI which

Question 38

Diversification of exports - EVAL

Answer 38

- impacts only seen in long run - increased budget deficit - increase in the levels of national debt.