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what are the effects of tariffs on different stakeholders
consumers: will lose consumer surplus. they have to pay a higher price than free trade price. in the long run some foreign producers may choose to stop trading with that country reducing the variety for domestic consumers. pay a higher price and have less choice
producers: they benefit in the short run as they can now compete more effectively (but artificially despite their lack of comparative advantage). increase in producer surplus (depending on the magnitude of the tariff and the PED for that product). in the long run they may experience retaliation.
foreign producers: will lose revenue. compete on quality or leave the market if they cant compete on price. increased advertising may be required.
governments: tax revenue from the tariff. they are protecting jobs in the long run (have to pay less unemployment benefits). burdened by costs of enforcement (administrative costs at each port). may also face action from the WTO (like fines or sanctions)
what are the positives of a tariff
makes domestically produced products more competitive
trade protection
higher government revenue
what are the negatives of a tariff
smaller social surplus (inefficiencies in the market)
Imported goods and services become more expensive
might start a trade war (retaliation)
what are the effects of quotas on different stakeholders
consumers: have to pay more because the product will be more scarce and domestic producers get to charge higher prices. reduces choice for consumers.
domestic producers: increase in their producer surplus. increased revenue for domestic producers. increased production of the product may lead to economies of scale = increase in profit.
foreign producers: reduction in export revenue (depends on PED). often the loss from fewer imports is greater than the gain from the higher price. may need to focus on other countries or their own domestic market to gain revenue.
government: will receive some revenue from the cheese quota (governments typically limit the supply of a good through the sale of import licences). gov has to pay enforcement costs e.g. smuggling operations and administration costs.
RWE: Indonesia has a quota on agricultural goods such as beef and soybeans. however, the amount that domestic farmers produce (617,000 tons) is not enough to meet the consumption of beef (766,000 tons)
what are the positives of a quota
Safeguards Domestic Industries
Facilitates Employment Growth
Balances Trade Deficits
what are the negatives of a quota
reduced product variety
lower quality
higher prices for consumers
effects of subsidies on stakeholders
consumers: total consumption of the product is not affected since the price remains at the world price. consumers buy more domestic goods. no change in consumer surplus. how much they consume depends on the quality of the goods
domestic producers: able to supply more. domestic producer revenue increases
foreign producers: the subsidy reduces the amount of imports so foreign producer revenue decreases
government: negative impact on the government budget. taxpayers are worse off as there is an opportunity cost of using this money for subsidizing firms
RWE: Hungary channels 4 billion euros in subsidies into its EV battery industry. The move is part of an aggressive strategy to position Hungary as a European hub for battery production.
what are the positives of subsidies
supporting domestic industries
Companies then will need to invest more money in infrastructure and hire more workers in order to increase the volume that is exported. This helps boost the local economy as a result of the increase in exports.
a chance to increase their proportion of the worldwide market
exports help to spur the development of new employment by encouraging businesses to enlarge their existing workforce
what are the negatives of subsidies
encourages inefficient output from domestic firms
opportunity cost
create dependency
explain and evaluate administrative barriers
standards and regulations (food safety, environmental standards, and product quality) that safeguard domestic firms by increasing the costs for foreign firms (through following the rules or the time it takes to get the good into the country)
e.g. Chinese governments protection of the domestic publishing industry. all textbooks are checked by customs control to make sure nothing offensive is said
advantages: protects Chinese publishers from foreign competition which could grow investment and employment
disadvantages: administrative costs, consumers will have less choice
explain and evaluate embargoes
bans on trade with a certain country, due to political or economic disputes
advantages: decrease the possible threats to peace around the world
disadvantages: lack of choice, higher prices (bcs of lack of supply), could trigger retaliation
e.g. china and US having a mutual trade embargo
explain and evaluate exchange controls
trade restriction on the quantity of foreign exchange e.g. limits on the amount of foreign currency that tourists can exchange
advantage: limits the amount of foreign exchange available to importers restricting the volume of foreign trade
RWE: in China Individuals are limited to $50,000 per year
free trade vs trade protection: evaluation of free trade
economists to believe that free trade will generally lead to improvements in the efficiency of global markets
lower government spending
increase in economic growth:the U.S. International Trade Commission estimated that NAFTA could increase U.S. economic growth by 0.1% to 0.5% per year.
technology transfer: Local companies also receive access to the latest technologies from their multinational partners.
free trade vs trade protection: evaluation of trade protection
benefits domestic producers (but consumers experience and increase in price and unable to max out their benefits and can experience a loss in their standard of living)
depends on what kind of protection if it will have that much of an impact on consumers
tariffs and quotas will reduce efficiency in the domestic market (which could be desirable if the good has negative externalities)
could benefit consumers in the long run as they may receive higher salaries (households own the FOP’s) or higher employment
no one can be certain that a domestic industry will grow into a highly efficient and internationally competitive one
advantages of trading blocs
access to larger markets and the potential for economies of scale
allows MNC’s to locate in overseas member state countries
easier access to larger markets operating on a larger scale
greater employment opportunities
economic integration facilitates economic growth and creates more job opportunities
freedom of labour can create greater employment opportunities
stronger bargaining power in multilateral negotiations
low-income countries can benefit form the expertise of larger nations during trade negotiations
e.g. Dominican republic-central America free trade agreement is an agreement between costa rice, El Salvador, Guatemala, Honduras, and Nicaragua giving these members greater power in negotiations with the USA
greater political stability and co-operation
the interdependence encourages countries to collaborate and co-operate in harmonious ways
RWE of trading blocs: EU, APEC (Asian countries), NAFTA (north America free trade agreement)(immediately lifted tariffs but not trump is going against that)
disadvantages of trading blocs
loss of sovereignty
lost opportunity to enjoy economic independence
e.g. the trading bloc might impose stricter environmental legislation and labour laws or in monetary union the central bank sets interest rates
this means governments lose the ability to make their own decisions which could affect the economic performance
challenges to multilateral trading negotiations
they are inflexible especially if there are many countries involved
difference in cultures, political systems and time zones can make negotiations complicated
consequences of changes in exchange rate on economic indicators: the inflation rate
changes in exchange rate can lead to both demand pull and cost push inflation
currency depreciation would increase the value of net exports increasing GPL and vice versa
a depreciation could also cause cost push inflation because firms may need to rely on the import of raw materials to produce so cost of prod goes up
this depends on the extent to which the country relies on imports for production
consequences of changes in exchange rate on economic indicators: economic growth
an appreciation of a currency could lead to an increase in the price of exports and a decrease in the price of imports = decrease in net exports.
higher value of import expenditure (if PED is elastic) causing leakages reducing AD
this could lead to economic decline or a recession
consequences of changes in exchange rate on economic indicators: unemployment
appreciation could lead to a reduction in the demand for exports
reduction in export revenue may result in firms reducing their demand for labour (could be classified as cyclical unemployment but also structural if it happens in the long run)
e.g. tourism: lot’s of people travel to Thailand because you get more for your money
consequences of changes in exchange rate on economic indicators: the current account balance
an appreciation of a currency will lower export revenue and increase import expenditure (assuming PED is more than one, elastic)
it is important to note that currency fluctuations can also be a result of current account imbalances
if a current account has a deficit then the value of imports is greater than the value of exports meaning that the supply of the eocnomy’s currency will exceed its demand, causing depreciation
consequences of changes in exchange rate on economic indicators: living standards
a strong currency will bring benefits to consumers of imported goods as they will need to exchange less of their own currency to purchase the imported items
a strong currency might reduce the competitiveness of the exports lowering export revenues and reducing the demand for labour eventually leading to an increase in unemployment
a weak currency could bring cost push inflation to the economy especially in ELDC’s where they don’t have much access to essential goods
or a weak currency could make an economy’s exports more competitive and increase export revenues having a positive impact on the demand for labour increasing incomes
for ELDC’s their overreliance on agriculture for export revenues means that the depreciation of their currency could lower export revenues bcs primary goods have inelastic PED
meaning that the percentage increase in QD for exports will be less than the reduction in price causing a reduction in export revenue
causes a drop in living standards
strengths of approaches to measuring economic development
the indicators change over time/ are adaptable e.g. the SDG’s added a lot more indicators
economic growth is measured using qualitative factors rather than just measuring it through a quantitative approach
having many indicators meaning they can interlink and complement each other
limitations of approaches to measuring eocnomic development
since development is so diverse, any measure of development will have its shortcomings
GDP fails to consider qualitative factors that influence quality of life and economic development
the best way to measure development could be very different for different members of society. e.g. Germany places high importance on environmental issues and gender equality while the US doesn’t
indicators don’t reveal the full picture e.g. Madagascar rated 2nd in female labour participation rates but 162nd in HDI
some indicators measure some of the same things making us question why we need so many
development cannot be delinked from the political, cultural, and social aspects of the country making development difficult to quantify e.g. America’s right to carry firearms
political and social conflicts, corruption and external shocks makes it challenging to access data in many countries to measure development (terrorism or diseases like AIDS)
possible relationship between economic growth and economic development
development is a much broader and deeper measure of economic well-being, as it includes qualitative indicators
it can be said that economic growth is a precondition to achieving economic development, although this is not always necessary
growth and dev usually have a positive relationship however sometimes growth can bring negative consequences such as pollution, climate change and environmental damage
also economic growth does not always lead to a higher standard of living (wealth/ income gaps e.g. Hong Kong has one of the largest wealth gaps)(or growth in terms of technology e.g. self checkout causing technological unemployment)
development is also possible without growth in the short run if policies are directed towards a more equitable distribution of income, wealth, and resources
what is the significance of different barriers to economic growth and/or economic development
depends on the country because countries will experience different degrees of these barriers e.g. poor infrastructure, over-dependencies on natural resources, indebts
RLE: Madagascar experiences poor infrastructure, a restrictive business environment and declining agricultural productivity and therefore has a lack of growth
there are differences in the degree of economic growth and development in ELDC’s for the following reasons:
resource endowment: diff qualities and quantities of natural resources
history: many ELDC’s were former colonies of Spain and Britain where wealthier countries extracted marketable resources
political systems: ELDC’s have diff political systems such as dictatorships e.g. Algeria and Venezuela and democracies such as Botswana and Peru
political stability: the extent to which political turmoil and corruption hinder economic development
climate: can impact agriculture or the productivity e.g. monsoons hinder production like severe hot weather in the middle east (esp EDC’s because they lack diversification in production)
population: some ELDC’s like Niger have large populations, Syria and Haiti do not. ELDC’s with fast growing populations face greater challenges in growth and development
strengths of strategies for promoting economic growth and economic development
strengths and limitations are dependent on different factors
e.g. context of the country, budgetary constraints, political and social influences, degree of good governance
RLE: Ethiopia’s export promotion didn’t work because the manufacturing sector couldn’t motivate the private sector to engage in an export driven growth strategy
RLE: the USA’s export promotion program (1993) has been hugely successful by providing grants, subsidies, tax breaks and info about the importing countries
empowerment of women can cause economic growth + dev by making them more inclined to work
RWE: the Philippines relies on the empowerment of women to work overseas allowing them to send remittances to the country which can then be used for consumption/ investment
education and training can lead to advantages in the global market
south Korea and Taiwan has highly skilled technical workers gaining an advantage in the production of technologically advanced products and services
Islamic banking (interest free banking) has funded projects related to economic development with success in countries such as the UAE
limitations of strategies for promoting economic growth and economic development
export strategies/ assistance for domestic firms of MEDC’s creates an unfair advantage and prevents firms from ELDC’s from being able to thrive or survive
the higher the population, the more challenging it is for a governments policies to have the desired impact on everyone in the country
RWE: the one child policy in China was empirically proven to aid economic development (however this is difficult for free-market and democratic countries to do)
bad governance of growth and development place have hindered Yemen and Venezuela from growth and development as they have squandered resources set aside for developmental initiatives.
the lack of transparency in government affairs and accountability have prevented these countries from achieving growth
strengths and limitations of government intervention versus market oriented approaches to achieving economic growth and economic development: strengths of government intervention
the provision of essential infrastructure
without gov there wont be road networks, railways, ports, sewage as it is difficult for private firms to profit off of this
investment in human capital
the private sector is unlikely to invest in human capital like education and training (especially in ELDC’s). So interventionist polices are required for provision of merit goods
establishment of a stable economy
government is needed to provide a safe and stable economic environment to protect the interests of all members of society
a stable macroeconomy attracts inward FDI to further improve growth and development
social safety nets
ensures all members of society have access to basic necessities (preventing absolute poverty in the economy)
can be used to tackle income and wealth inequalities
cultural and historical contexts in many countries mean that women are not given the same opportunities as men so intervention is needed to correct such disparities e.g. Yemen and Afghanistan
intervention is requires when a country faces major emergency or disaster e.g. civil war or pandemic
without intervention the productive capacity of the country in that time period would decline along with a fall in FDI, employment and the overall standards of living
strengths and limitations of government intervention versus market oriented approaches to achieving economic growth and economic development: limitations of government intervention
excessive bureaucracy
e.g. administrative systems, formal structures, rules and regulations that govern economic activities
the administrative procedures often leads to inefficiencies in ELDC’s
poor planning
instability and conflict can cause delays in production limiting the effect of policies
lack of incentives mean the government planning is often unrealistic limiting opportunities for growth
corruption
dishonest governments misuse sources of public sector finances limit the effectiveness of macroeconomic policies
reduces trust between individuals, firms, and governments deterring inward FDI
strengths and limitations of government intervention versus market oriented approaches to achieving economic growth and economic development: strengths of market oriented approaches
efficiency
resources are allocated more efficiently helping to increase the level of economic activity
competitiveness
labour market reforms create incentives to work and invest improving labour market flexibility and productivity resulting in a more internationally competitive labour force
economic growth
the profit motive encourages business owners to work hard and to take entrepreneurial risks e.g. expenditure on investment and innovation
benefits of free trade
can lead to consumer choice, lower prices and improved quality
also enables firms to sell to more customers
contributes to greater profits, employment, economic growth, and development
by contrast tariffs and quotas could cause trading partners to retaliate
investment opportunities
the liberalization of trade help reduce barriers to international trade
can attract inwards FDI which helps the economy develop over time
strengths and limitations of government intervention versus market oriented approaches to achieving economic growth and economic development: limitations of market oriented approaches
market failure
negative production and consumption externalities are not dealt with
ELDC’s do not have sufficient funds to provide merit goods like education and healthcare
the development of a dual economy
two distinct economic sectors within a country with different levels of development (common in ELDC’s)
sometimes there is an agricultural sector catering for local demand and another manufacturing sector for export-driven international markets creating growing disparities
income and wealth inequalities
growth and development does not always benefit the poor so government intervention is required to tackle the problems of income and wealth inequalities
things like poverty can limit the effectiveness of market-based strategies to achieve growth and development
note: evidence suggests neither extremes work in the real world
progress towards meeting selected sustainable development goals in the context of two or more countries (first 5 goals)
No poverty
the world is not on track to end poverty by 2030
55% of world population has no access to social protection
without shifts in policy extreme poverty will still be in double digits in sub-Saharan Africa by 2030
natural disasters costed 3 million making ELDC’s even poorer
Zero hunger
almost 820 million people were undernourished in 2017 and 2010 and the number of people not getting adequate food is rising
diseases affect the growth and cognitive development like AIDS and Ebola in Nigeria
ensure healthy lives and promote well-being for all at all ages
satisfactory progress in improving health, maternal and child mortality rates have been reduce, life expectancy continues to increase, and the fight against diseases has made steady progress
however outbreaks of measles in Zimbabwe have resulted in preventable deaths
ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
millions of children are still out of school and not all who do attend are learning
more than half of all children and adolescents worldwide are not meeting minimum proficiency standards in reading and math
disparities in educational opportunities are found across all regions esp sub-Saharan Africa
many students are not prepared to participate in an overly complex global economy
around 750 million adults cannot read and write (2/3 of those are women)
gender equality and empower women and girls
many women and girls continue to suffer from harmful practices including all forms of violence against females (e.g. Afghanistan)
fewer girls are forced into early marriage and more women in parliament positions (UAE and Norway)
women and girls perform unpaid care and domestic work and continue to be denied decision making power