Unit 4: AO3's

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32 Terms

1
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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)

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what are the positives of a tariff

  • makes domestically produced products more competitive

  • trade protection

  • higher government revenue

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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)

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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)

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what are the positives of a quota

  • Safeguards Domestic Industries

  • Facilitates Employment Growth

  • Balances Trade Deficits

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what are the negatives of a quota

  • reduced product variety

  • lower quality

  • higher prices for consumers

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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.

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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

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what are the negatives of subsidies

  • encourages inefficient output from domestic firms

  • opportunity cost

  • create dependency

10
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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

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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

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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

13
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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.

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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)

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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

25
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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

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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

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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

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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

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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

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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

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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

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progress towards meeting selected sustainable development goals in the context of two or more countries (first 5 goals)

  1. 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

  1. 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

  1. 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

  1. 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)

  1. 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