Theme 4 Flashcards
(58 cards)
Trade liberalisation vs. protectionism
Protectionism => import substitution - as there is a reduced ability for consumers to import foreign goods, they must substitute these for now cheaper domestic goods
Trade liberalisation => economic theory suggests that in the long run, output and growth of output will be lower than it would otherwise have been as the country cannot benefit from specialisation & protectionism leads to dynamic inefficiency because there is no incentive to reduce costs or improve products as the there is a lack of foreign competition - opposite for liberalised trade
Problems with subsidies
- poorly targeted if everyone in the population can buy the good (both rich and poor benefit) as it widens the income gap
- economic theory would suggest that welfare would probably be higher if poor households were given cash payments rather than subsidies, since this would allow them, as rational consumers, to make the spending decision in their own best interest
- large opportunity cost may develop
- can become a major source of corruption internationally, involving smuggling due to different costs e.g. fuel from Venezuela
- the eventual removal of subsidies can be problematic => can be alright if removal is during fall in market price for instance
+/- of floating ER system
+ no intervention required & no worries about gold and foreign currency reserves
- volatile currency -> may deter investors who prefer stability & can lead to large swings in macroeconomic variables like X and M which may damage a country’s economy, especially if it is reliant on exports for instance
What is a tiered ER system and why does it not work in reality
It looks to fix a number of different ERs, for instance different ones for M and X.
Generally does not work because of: black markets, imperfect information, corruption
+/- of developing a financial sector
Consumers/firms/government must be able to save and borrow money to increase its spending power, as well as enabling the transferring of assets and liabilities from now into the future and having insurance - saving facilitates borrowing.
HOWEVER: unlikely to be successful with very low-income households - solution might be microfinance & mobile phone banking services
+/- of FDI and joint ventures
+ inflows of FDI add to the resources which can be given over to investment, helping to close an savings gap* or foreign currency gap* and associated transfers of knowledge to add to human and physical capital
- can be associated with exploitation of smaller firms
+/- of privatisation
+ market forces result in firms cutting their average coasts to a minimum leading to productive efficiency
- privatised monopolies face no competitive pressure & there may be corruption in the process of privatisation
+/- of buffer stock schemes
+ encourages firms to invest by stabilising (commodity) prices & prevents sharp falls in prices, that may send the poorest farmers into absolute poverty through net falls in income & consumers will also benefit from less price volatility
- hight capital, administrative and transport cost & those funding the stock must feel there are sufficient gains for themselves as there may be positive externalities towards third parties & minimum prices tend to be set too high, which is unsustainable in the long term & may be issues with deterioration of food stocks for instance
Explain the Lewis Model
The industrialisation of the economy can be seen as an objective of development. Assuming that marginal workers in rural areas add nothing to the output of the rural economy, the workers could gradually be transferred into the urban higher productivity sector - the rate of transfer dependent on the rate of capital accumulation in the modern sector of the economy
Issues with the Lewis Model
Causality - government built infrastructure ( => forced industrialisation) will not necessarily spark economic growth. It has tended to lead to a waste of scarce resources as these industries have failed.
Marginal workers cities often have as low incomes and be as underemployed as marginal workers in the countryside
=> encouraging rural depopulation will simply lead to urban poverty, not increased affluence.
+/- of primary industry development
+ can be advantageous as it leads to rapid economic growth with lots of exports and the exploitation of comparative advantage, particularly if this is followed by sufficient diversification of the economy
- is very risky due to the potential collapse of prices
- can lead to appreciation of the currency, which may price out domestic industries/consumers dependent on imports. Therefore, Norway has a sovereign wealth fund for instance <==== (preventing ‘Dutch Disease’)
+/- of tourism
+ tourism (high YED) is an export, resulting in a net inflow of money into a country. *tourism was the first/second most important source of X earnings in 20 out of the world’s 48 least developed countries
+ uses natural/existing assets
+ labour intensive, creating lots of employment which does not necessarily require much training
+ can create a significant multiplier effect
- local inhabitants feel more economically inferior
- can degrade local culture and environment
- too much focus can lead to a lack of diversification in the economy
+/- of fair trade
+ producers receive a fair + certain price -> community may be aided also in the process
+ communities do benefit according to studies
+ it is growing rapidly *2013, over 1.5 million farmers and workers were in fair trade certified producer organisations = a fraction of the total
- retailers simply want to appear ethical, whilst there is a limited real impact
- those not part of the schemes worse off
- raising the price of fair trade commodities may encourage producers to grow more, leading to falls in the price of non-fair trade products
Reasons for foreign aid
> because citizens of developing countries have a very high MPC and a very low MPS, savings are below the level of investment needed to generate high economic growth, with high capital inflows helping to fill this savings gap
FOREX may be very scarce, therefore insufficient to cover imports of machinery etc., meaning that the foreign aid can be used to cover the trade gap
can be used for countries that find it difficult to attract private capital funding
4 forms of aid
1) Grants - sum of money for a development project for instance
2) Loans - can be at either commercial rates of interest or a soft loan
3) Tied aid - only available if the recipient country is prepared to purchase goods and services from the donor country (now illegal)
4) Bilateral and multilater aid
Criticisms of aid
> < benefits from aid are often spread unequally
< aid agencies often lack sufficient knowledge to identify areas most in need of aid
< results in over dependence
< tied foreign aid is likely to give the recipient countries bad deals
< loan repayment issues usually arise
What happens with debt relief
Forces countries to adopt fiscal austerity policies and could not borrow much more because they were already so indebted and had to export more than they import in order to earn the foreign currency to make repayments on debt
What happens with debt relief
Forces countries to adopt fiscal austerity policies in return for total or partial clearing of debt
+/- of debt relief
+ works if debts were relatively small
+ debt may be limiting growth
+ in the case of world debt crises, IR payments had already exceeded the value of original debt
+ people were paying for past mistakes
- moral hazard
- debt relief eased pressure on weak governments to adopt more stern policies
- cost of tied economic reform is huge
Impact of globalisation on consumers
Increased choice
Prices have increased in some areas, with increased demand due to higher incomes putting upwards pressure on prices
Incomes have generally increased due to greater productivity although some areas have lost out due to outsourcing
Reasons for international trade
- Differences in factor endowments: e.g. Saudi oil
- Price + comp. advantage: some countries can produce goods at a lower price/with a lower opportunity cost
- Product differentiation: preference similarity theory, demanding a wide range of goods
- Political reasons
Reasons for changes in the pattern of international trade
- Impact of emerging economies: will increase both inflow and outflow of trade from that country
- Growth of trading blocs and bilateral trading agreements: trade creation and trade diversion
- Changes in relative ERs *(chain of reasoning): will affect relative prices of goods between countries
Eval of comparative advantage
- It assumes no transport costs, which, although becoming more accurate with improved communications, is still not a realistic image of global trade
- Assumes that traded goods are homogeneous - only the case for commodities perhaps, very few other goods
- Assumes no tariffs or trade barriers - only the case in very well integrated economic areas e.g. monetary union
Index of terms of trade
((index of export prices)/(index of import prices)) x 100
