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IB Economics (HL)
The global economy
Trade Strategies to Promote Economic Growth and Development Part 1
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Economics
IB Economics (HL)
The global economy
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26 Terms
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1
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Import Substitution Industrialization (ISI)
aims to produce goods domestically instead of importing
allows domestic industries to grow
eventually, the developing country should be able to compete on the international market
2
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What does ISI need to work?
government needs to organize the goods they intend to grow domestic production of
subsidies need to be provided to those industries
government would need protectionist policies (ex. Tariffs) to reduce foreign imports
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Advantages of ISI
protects domestic jobs
protects local culture and social habits
protects the economy from multinational countries taking over
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Disadvantages of ISI
could lead to fewer jobs in the LR if economic growth does not occur
Lack of specialization from comparative advantage decreases output and loses efficiency
inefficient production due to lack of competition
could lead to increased inflation levels
could lead to retaliatory trade measures from other countries
5
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Export Promotion
export led growth
open trade barriers and increased international trade
increasing exports and export revenue
Increased exports will increase GDP, jobs, and income
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Policies for Successful Export Promotion
liberalized trade - open domestic markets, reduce trade barriers
liberalized capital flows - reduce restrictions of foreign direct investment
Floating exchange rate
Investment in infrastructure that enables trade
Deregulation/limited government interference
7
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Problems with Export Promotion
increases protectionism in developed countries on manufactured products from developing countries
the suggested policies may not all be necessary and could hinder export led growth
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Advantages of Export Promotion
could lead to increased income equality
economic growth could occur with out increased economic development
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Economic Integration
preferential and free trade agreements
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Advantages of economic Integration
larger export markets
encourages regional cooperation, improving accès to infrastructure, transport methods, etc
Provides job opportunities in member countries
leads to increased efficiency levels
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Disadvantages of Economic Integration
trade can become more complicated, especially if there are multiple trading bloc agreements
some companies may go out of business due to the increased competition, increasing unemployment
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Diversification of economic Activity (Export diversification)
move from proaction of primary commodities to manufactured products
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Diversification of economic activity should lead to:
protection from primary products increasing
stabilized/increased export revenue
stabilized/increased employment
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Barriers to Diversification of Economic Activity
tarif escalation
more highly skilled workers are necessary (poverty traps)
15
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Supply Side Policies (Trade liberalization)
removal or reduction of trade barriers
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Advantages of Trade Liberalization
increases world trade
allows developing countries to focus on production of goods they have the comparative advantage in
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Disadvantages of Trade Liberalization
many developing countries lack the infrastructure to successfully benefit from this
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Privatization
the sale of public government owned businesses to the private sector
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Goal of Privatization
profit maximizing private companies should be more efficient than the government which will increase output
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Problems with Privatization
impact of poverty and income inequality
21
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Deregulation
regulation increase the cost of production for businesses, so deregulation should increase aggregate supply and real GDP
22
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Problems with Deregulation
depends whether laws are reduced or eliminated
could include the removal of labor law, environmental laws, safety, and health regulations all of which could negatively impact society
23
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Foreign Direct Investment
long term investment by private multinational enterprises/corporations (MNCs)
MNCs will build new plants or expand existing plants in foreign countries
MNCs will emerge or buy existing businesses in foreign countries
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Social Enterprise
organization s that have specific social objectives as their primary goal
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Goal of Social Enterprises
aim for the creation of wealth, a viable business model, and environmentally responsible operation
goal is to reduce/eliminate a social issue (poverty, lack of education, lack of healthcare, etc)
26
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