Untitled Flashcards Set

International Economics

• MNC: Nike has benefited from globalisation by outsourcing production to countries with lower labour costs like China and Vietnam, allowing them to reduce manufacturing expenses and increase profit margins. They have also been able to expand their market worldwide, tapping into emerging economies and creating a global brand, helping the company grow rapidly and maintain a strong presence in the global sportswear market. 

• Comparative Advantage: Brazil has a comparative advantage in producing coffee due to its favourable climate and large-scale production capabilities. The USA has a comparative advantage in producing tech and machinery due to its advanced infrastructure and expertise. Therefore, Brazil exports coffee to the US and the US exports tech and machinery to Brazil. Both countries benefit by specialising in the goods they produce most efficiently and trading with each other. 

• Overdependence on primary exports: An example is Chile's dependence on copper exports. The country's economy relies heavily on copper, and when global prices dropped in the 2015-2016 commodities downturn, Chile faced slower growth, job losses in mining, and fiscal deficits. This highlighted the risks of over-specializing in one commodity.

• Overdependence on imports: An example is Japan's reliance on imported oil. Japan specializes in manufacturing/tech but lacks natural resources, making it heavily dependent on oil imports. The 1973 oil crisis and subsequent oil price shocks exposed this vulnerability, as rising oil prices hurt its economy and manufacturing sector, leading to stagflation.

• Emerging economies on UK pattern of trade: As China has developed, it has become a major manufacturer of affordable goods like electronics and textiles. The UK has shifted its imports to China, leading to a decline in domestic manufacturing and a rise in consumer goods imports. This has also boosted the UK's trade deficit. Imports $59,602 in 2016 compared to $15,831 in 2000

• Exchange rates on UK pattern of trade: 2016 depreciation of the British pound following the Brexit referendum. After the pound fell by around 10-15% against the US dollar and the euro, British exports became more competitive. UK-based car manufacturers like Jaguar Land Rover saw an increase in demand for their cars in foreign markets, particularly in the EU and the US, as their products became cheaper for overseas buyers. Depreciation also made imports more expensive, leading to a reduction in the UK's imports of goods like electronics and luxury items (e.g. Rolex Watches and Apple phones), which rely heavily on foreign manufacturing.

• Impact on Deterioration of Terms of Trade / primary product dependency limiting growth: An example of terms of trade affecting an economy is Sub-Saharan Africa in the 1980s. Many countries in the region relied on exporting primary commodities (low YED) like coffee, cocoa, and oil. When global prices for these goods fell, their terms of trade worsened, meaning they had to export more to afford the same amount of imports. This led to reduced national income, increased poverty, slower growth, and higher debt, showing how unfavorable terms of trade can harm an economy.

• Managed Exchange Rate: Chinese yuan’s value is kept within a certain range by intervening in the FOREX market, by buying/selling yuan in exchange for foreign currencies to stabilise its value. Has helped them to maintain export competitiveness and control inflation, whilst allowing some flexibility for the currency to adjust in response to market forces. In August 2015, the PBOC let the yuan devalue by about 2% in one day to help boost Chinese exports.

• Fixed Exchange Rate: Since 1983, the Hong Kong Monetary Authority (HKMA) has maintained a fixed exchange rate by pegging the Hong Kong dollar at approximately 7.8 HKD to 1 USD. This means that the value of the Hong Kong dollar is kept stable relative to the US dollar, and the HKMA intervenes in the foreign exchange market to maintain this peg, buying or selling the Hong Kong dollar as needed. This fixed rate provides stability for trade and investment in Hong Kong.

• Marshall-Lerner Condition/J-Curve: UK after the 1992 Black Wednesday currency crisis. Following the pound's depreciation, the expected improvement in the current account didn’t happen because the Marshall-Lerner condition wasn't met. The demand for UK exports was inelastic, and imports remained costly, so the trade deficit didn't improve despite the weaker pound in the short term. Over time, there was an improvement suggesting the J-curve effect. 

• Productivity increasing competitiveness: An example of high productivity leading to international competitiveness is Germany's automotive industry. High productivity in manufacturing, along with a skilled workforce, allows companies like Volkswagen and BMW to produce high-quality cars efficiently, making them highly competitive in global markets.

• Benefit of trading bloc: Mexico joining USMCA helped Mexico gain preferential access to the US and Canadian markets, boosting its exports, especially in automotive, agricultural and electronic industries. Also attracted foreign investment, leading to job creation and economic growth in Mexico.

Poverty and Inequality

• Getting out of absolute poverty:  Over the past 40 years, the number of people in China with incomes below US$1.90 per day has fallen by close to 800 million, accounting for close to three-quarters of global poverty reduction since 1980. Mainly through economic reforms, rapid industrialisation, and rural development programs. Helped to increase living standards, access to education, healthcare and employment opportunities. 

• Globalisation leading to inequality: An example of how globalization has led to inequality is sub-Saharan Africa. While globalization boosted trade, many African countries rely on exporting raw materials, capturing little value-added profit. In contrast, wealthier countries with more industrialization have benefited more, widening the economic gap.

• History causing inequality: An example is colonialism in Africa. European powers exploited resources and disrupted local economies. After independence, many African countries inherited weak institutions, poor infrastructure, and unequal land distribution, which have contributed to persistent inequality within these nations.

• Corruption causing inequality: While Nigeria is rich in oil, the wealth generated from it has not been evenly distributed. Corruption, mismanagement, and a lack of investment in infrastructure have led to significant inequality, with many Nigerians living in poverty despite the country's vast oil reserves. Oil wealth has primarily benefited a small elite, while the majority of the population remains underdeveloped. Contrastingly, the UAE, with its vast oil reserves, has used its natural resources to fuel rapid economic growth, developing advanced infrastructure, a high standard of living, and significant wealth.

• Kuznets hypothesis: As South Korea rapidly industrialized from the 1960s onwards, income inequality initially increased, with rural areas lagging behind urban centers in terms of economic development. However, as the country continued to develop, invest in education, and implement redistributive policies, inequality began to decrease. This follows the Kuznets Hypothesis, which suggests that during early stages of development, inequality rises, but eventually falls as a country becomes more developed and wealth is more evenly distributed. 

Emerging and Developing Economies

• Problem with HDI: An example is Chile. HDI of 0.86 (44th in the world) and gini coefficient of 0.449

• Problem with volatile commodity prices: Venezuela's economy has been heavily reliant on oil exports, and fluctuations in global oil prices have had a major impact on its development. When oil prices were high, Venezuela enjoyed economic growth, increased government revenues, and improved social welfare programs. However, when oil prices dropped sharply in the mid-2010s, the country faced a severe economic crisis. The government, dependent on oil revenues, struggled with hyperinflation, a shrinking economy, and social unrest. This volatility in commodity prices severely affected Venezuela's development, leading to high poverty rates and a collapse in public services.

• Problem with savings gap: Ethiopia faced a significant savings gap, where low domestic savings levels limited the funds available for investment in infrastructure, education, and industry. This lack of capital for investment slowed economic growth and development, making it difficult for the country to break out of poverty. Despite foreign aid, the savings gap continued to hinder long-term sustainable development and the ability to finance necessary projects internally. Savings rate is around 15% in Ethiopia. 

• Problem with foreign currency gap: Zimbabwe in the late 2000s. During this period, Zimbabwe faced a severe foreign currency gap, as the country struggled to earn enough foreign exchange through exports and foreign investment. This gap made it difficult to import essential goods, such as food, fuel, and medicines, and led to hyperinflation. The scarcity of foreign currency contributed to a severe economic crisis, stalling development and increasing poverty, as the country was unable to maintain basic services or invest in infrastructure.

• Problem with capital flight: Nigeria in the 2000s. Nigeria experienced significant capital flight, with large sums of money leaving the country due to factors like corruption, political instability, and weak governance. As a result, the country faced reduced domestic investment, slower economic growth, and less capacity for development in key sectors like infrastructure and healthcare. The capital outflows prevented Nigeria from using its resources to drive long-term development, contributing to persistent poverty and inequality.

• Problem with demographic factors: India has a large and young population, which, if properly harnessed, could provide a significant labor force for economic growth. However, rapid population growth has strained resources like education, healthcare, and employment. The country struggles to provide sufficient infrastructure and social services for its growing population, which has slowed down the potential benefits of its demographic dividend. High population growth has led to challenges in poverty reduction and increased inequality, affecting long-term development.

• Problem with debt: In early 2000s Argentina faced a severe debt crisis, with the country accumulating massive external debt. When it became unable to repay, Argentina defaulted on its debt in 2001. This led to a sharp economic downturn, high inflation, and increased poverty. The country's development was severely hindered as funds that could have been used for infrastructure, education, and healthcare were instead allocated to servicing debt, undermining long-term growth and stability.

• Problem with access to credit and banking: In many rural areas of Nigeria, there is limited access to banking services and credit, particularly for small farmers and entrepreneurs. Without access to loans or financial services, these individuals struggle to invest in their businesses, improve productivity, or expand operations. This lack of access has hindered economic growth and development, particularly in sectors like agriculture, where small-scale farmers are unable to purchase necessary equipment, improve yields, or access markets. As a result, Nigeria's development has been constrained, especially in rural regions.

• Problem with lack of infrastructure: An example of poor infrastructure affecting development is Haiti. The country’s inadequate transportation, electricity, and water systems slowed recovery after the 2010 earthquake and continue to hinder economic growth, limiting access to basic services (e.g. healthcare and education) and investment.

• Problem with absence of property rights: Zimbabwe in the early 2000s, the government’s land reform program led to the seizure of white-owned commercial farms without compensation, disrupting agricultural production. The lack of secure property rights discouraged investment, both domestic and foreign, and led to a collapse in agricultural output, which was a key driver of Zimbabwe’s economy. This contributed to a severe economic crisis, including hyperinflation and high unemployment, significantly hindering development.

• Lack of education/skills: Sub-saharan africa → slowed progress in key sectors like healthcare, tech, manufacturing as population is under qualified for skilled jobs

• FDI to help development: In the 90s, Vietnam opened its economy to FDI, attracting it from companies like Intel and Samsung who set up factories, creating jobs, transferring tech, and boosting exports. Helped improve infrastructure, increase skills in the workforce, and increase economic growth → one of fastest growing in Asia.

• Microfinance scheme to help development: In the 1980s, Grameen Bank in Bangladesh began offering small loans to impoverished individuals, particularly women, who had no access to traditional banking services. This access to credit enabled many to start small businesses, improve their livelihoods, and contribute to local economies. It has significantly boosted economic development by empowering individuals, especially in rural areas, and helped reduce poverty in Bangladesh.

• Privatisation for development: privatisation of BA in the 80s, leading to increased efficiency, better management, and improved customer service. The company became more internationally competitive, increasing profits and helped develop the UK’s aviation sector. Overall benefitted the wider economy, not just by this but also increasing tourism to the UK.

• Development of human capital for development: Singapore invested heavily in education, skills training, and healthcare, transforming its workforce into one of the most skilled and productive in the world. The government focused on improving access to high-quality education at all levels and providing vocational training programs to equip workers with relevant skills. This human capital development fueled Singapore’s rapid economic growth, enabling it to transition from a low-income country to a high-tech, highly competitive global economy.

• Protectionism for development: In the 60s/70s South Korea implemented protectionist policies to nurture its domestic industries, particularly in sectors like manufacturing and agriculture. The government imposed tariffs, subsidies, and import restrictions to protect local businesses from foreign competition while focusing on industrialisation.

• Infrastructure development for development: Rwanda has invested heavily in infrastructure, including expanding its road network and improving access to electricity. These improvements have facilitated trade, attracted foreign investment, and enhanced overall economic growth, helping Rwanda transition from a post-conflict nation to one of Africa's fastest-growing economies.

• Joint ventures for development: An example of a joint venture is Toyota and PSA Peugeot Citroën forming TPCA in the Czech Republic. This partnership allowed both companies to share production costs, expand market reach, and increase competitiveness in Europe.

• Buffer stock scheme: EU's Common Agricultural Policy (CAP), which bought surplus agricultural products to stabilize prices when production exceeded demand, and released reserves during shortages to prevent price hikes.

• Lewis model: As China transitioned from an agrarian (in 80s) to an industrial economy, labor moved from the rural agricultural sector to the urban industrial sector. This shift allowed for higher productivity and wages in cities, while the surplus labor from rural areas kept wages low in agriculture. The growth of the industrial sector drove economic development.

• Tourism: The Maldives has developed its economy by focusing on tourism, particularly luxury resorts. The tourism sector has created jobs, boosted foreign exchange earnings, and supported infrastructure development. This has significantly contributed to the country's economic growth, while also helping to improve living standards and fund social programs, making tourism a key driver of development.

• Aid: Ethiopia has received significant international aid, particularly from organizations like the World Bank and the U.S. Agency for International Development (USAID). This aid has been used to improve infrastructure, support agricultural development, and combat poverty. For example, aid has funded projects to build schools, hospitals, and roads, contributing to the country's economic growth and development, despite ongoing challenges.

The Financial Sector

• Forward market: A UK-based company that exports goods to the U.S. might enter into a forward contract to sell U.S. dollars and buy British pounds at a fixed exchange rate for a future date. This helps the company hedge against potential fluctuations in exchange rates, providing certainty about the value of their future revenue in pounds.

• Moral hazard: During the 2008 crisis, many banks took excessive risks by offering subprime mortgages, knowing they could sell these risky loans to other financial institutions. Because they believed the government would bail them out if their investments failed, they were less cautious about the potential consequences. This behavior led to widespread financial instability, as banks did not fully bear the consequences of their actions, creating a classic case of moral hazard.

• Market bubble/speculation: dot com bubble of late 90s where investors heavily speculated on internet-based companies, driving stock prices to unsustainable levels despite many companies not being profitable. When it burst in 2000, many companies collapsed, causing significant financial losses and a sharp market downturn. 

• Market rigging: Libor scandal of 2008 where financial institutions were accused of fixing the London Interbank Lending Rate (LIBOR) ⇒ one of the most important rates in the world

• FCA intervention: 2019 they banned sale of crypto derivatives and ETNs (exchange-traded notes) to retail consumers in the UK. Took this action due to concerns over the high risks of losses faced by investors in these highly volatile products, citing issues like misleading adverts, fraud, and consumer protection, aiming to safeguard retail investors from excessive risks in the emerging crypto market.

• FPC intervention: 2014 they introduced stricter mortgage lending rules, including cap on proportion of high loan-to-income ratio mortgages banks could offer to prevent a housing bubble and limit excessive borrowing to avoid a future market crash.

• PRA intervention: 2012 when they got the Co-operative Bank to raise additional capital. They were struggling with capital shortfall and deemed at risk of financial instability. Aimed to avoid endangering the broader financial system.

• Lender of last resort (BoE): 2008 financial crisis, when it provided emergency support to Northern Rock to prevent its collapse and maintain financial stability.

Role of the State in the Macroeconomy

• Crowding out: many argue it happened in the 1970s when the government increased borrowing to finance public spending, leading to higher interest rates, making it more expensive for private businesses to borrow money, reducing their investment.