HI

Arguments for High and low exchange rates
1. Pros of High
  1. Downward pressure on inflation - if ER = high then import price = cheap = lower cost of production = lower prices
  2. More imports can be bought - ↑ ER = purchasing power of own currency ↑
  3. Increased efficiency of domestic producers - High ER = ↑ Competition globally = ↑ efficiency = ↓ cost of production encouraged = ↓ prices * may lead to unemployment
2. Cons of High
  1. Damage to export countries - The export industry has higher ER = is expensive for countries importing = ↑ unemployment
  2. Damage to domestic industries - Imports are cheaper = ↑ competition among domestic producers (* free trade theory)
3. Pros of Low
  1. ↑ employment in export nations - Low ER = cheaper for foreign to import = export country has ↑ competition globally= ↑ employment
  2. ↑ employment in domestic industries - Imports are more expensive = encourages domestic production instead of import = ↑ employment
4. Cons of Low
  1. Inflation - Lower ER = ↑ P of imports = ↑ cost of production = AS ↑ = inflation
Reasons for the government to intervene in FOREX
1. Lower ER to increase employment
2. Raise ER to fight inflation
3. Maintain fixed ER
4. Avoid large flux in floating ER
5. Achieve relative ER stability to improve business confidence
6. Improve current account deficit
How governments intervene in the FOREX
1. Reserves of foreign currencies to buy, or sell foreign currency
  1. To ↑ ER = use foreign currencies to buy own currency = ↑ D = ↑ ER
  2. To ↓ ER = buy ↑ foreign currency with own currency = ↑ supply of own currency in forex = ↓ ER
2. Change in Interest rates
  1. To ↑ ER = ↑ IR = domestic IR is relatively higher than foreign = attract foreign investment = buy domestic currency to put in bank
  2. To ↓ ER = ↓ IR = domestic IR relatively lower than foreign = foreign investment attractive = buy foreign currency with domestic currency to put in bank = ↑ S in forex = ↓ ER
Parts of the Current Account
1. Balance of trade in goods - Revenue of X - M (e.g. from airplanes to chickens)
2. Balance of trade in services - AKA invisible balance; measure of revenue from X - M of services
3. Income - AKA net investment incomes; a measure of net monetary movements of profit, interest, and dividends, Domestic firms with foreign branches, interest received from investments, purchasing of foreign firm shares for a profit
4. Current transfers - A payment between 2 countries where exchange of goods and services is not present; at the government level = foreign aid and grant; at the personal level = Remittances or private gifts across countries
Parts of the Capital Account
1. Capital transfers - Measure of the net monetary movement gained or lost through transfers of goods and financial assets by migrants entering and leaving the country, debt forgiveness, transfer relating to sales of fixed assets (One's firms use and own in production), gifts, inheritance taxes, death duties
2. Transactions in non-produced, nonfinancial assets - Net sales of land or the rights to natural resources, patents, copyrights, brand names, etc
Parts of the Financial Account
1. Direct investment - Foreign direct investment (when there is a long-term investment by a multinational corporation with at least 10% ownership of the business)
2. Portfolio Investment - Foreign shares/stocks/bonds + foreigners purchase bonds from domestic country
3. Reserve Assets - Foreign currency held, itemized in the official reserve account

Development Economics

Sustainable Development - development that meets the needs of the present without compromising the ability of future generations to meet their own needs (kognity)
Economic Development -
Humanitarian Aid - aid given to save lives and alleviate suffering and response to emergencies
Development Aid - aid given by the government, multilateral organization and non-governmental organizations in order to alleviate systemic poverty and promote the economic, social, environmental, or political development
Characteristics of developing countries:
1. Low Standards of Living
  1. Low income
  2. Inequality
  3. Poor health
  4. Inadequate education
2. Low levels of productivity
  1. Poor health + inadequate education + lack of investment in physical capital
3. High rates of population growth and dependency burdens
  1. ↑ Birth rates
  2. Dependency Burdens - no. of old or infant population that requires taking care of = less people working
4. High and rising levels of unemployment and underemployment
  1. ↑ Urban informal economy
5. Large dependence on agriculture and primary product exports
  1. Non-diverse exports
6. Lack of (financial) infrastructure
  1. Banks, legal system, central back
7. Poor international relations
  1. E.g. Eu cocoa production with Africa

Development Measurements:

GDP per capita PPP - The rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country (basket).
1. E.g. Difference in milk cost between two countries

Single Indicators:

Income indicators
1. GDP per capita vs. GNI per capita
2. GDP per capita per PPP
Health indicators
1. Infant mortality rate
2. Life expectancy at birth
Education Indicators
1. Expected years of schooling
2. Mean years of schooling
Economic/social inequality indicators
1. Measures in areas such as income and health, income and wealth distribution, pay inequality, etc
Energy Indicators (energy poverty)
1. Ability to keep a home at an adequate temperature
Environmental indicators
1. Ocean temperature
2. Ocean acidification
3. Climate change
4. Pollution

Composite Indicators:

HDI - Human Development Index (3 pillars)
1. Life expectancy index
2. Education Index
3. GNI index
Gender inequality Index
1. Reproductive health - maternal mortality ratio and adolescent birth rates
2. Empowerment - Parliamentary female seats, Male:female education ratio
3. Economic Status - Women's participation in labor
IHDI: Inequality-adjusted HDI
1. HDI + each pillar is adjusted for level of inequality
2. Perfect equality: IHDI = HDI - * Does not exist
Happy Planet index
1. (Well being Life expectancy inequality of outcomes)/(Ecological footprint)

Barriers to Development:

Poverty Traps - The inability to invest in human or physical capital due to low savings, forming a self-perpetuating cycle
Economic Barriers:
1. Rising economic inequality
  1. Low saving = low investment = low growth
  2. Rich control government
  3. Capital Flight by Rich
2. Lack of access of infrastructure and appropriate technology
  1. Essential facilities lacking: roads, airports, sewage, etc
  2. Railways, phone lines
  3. Cooling appliances
  4. Equipment for workers
3. Low levels of human capital - lack of access to healthcare and education
  1. Education:
    1. Inefficient work-force
    2. Social change can occur with education
  2. Health
    1. Improve the role of women society
    2. Improve levels of health
    3. ↑ HDI
4. Dependance on Primary sector of production
  1. Inelastic demand
5. Lake of international markets
  1. Many developed countries are protectionist and against primary production in developing nations
    1. E.g. EU farmers overproduce and export sugar, cereal, etc, which lowers world prices
    2. E.g. US highly subsidized cotton = lower world prices
  2. Can’t export to some markets
    1. Landlocked nations lack infrastructure to transport
    2. Can’t meet cost to meet product standards
    3. Non-convertible currencies
      1. Can’t exchange on Forex; hence risk when exporting since can’t use currency anywhere else after
6. Informal economy
  1. More than 50% of a developing country will generally be an informal economy - majority of which are farmers
  2. As education ↑ = the informal economy decreases
    1. Workers miss out on social security
    2. Lack of rights at work
    3. Bad working conditions
    4. Lower productivity
    5. Lower education
    6. Lower health
    7. Also lower tax revenue for government
7. Indebtedness
  1. Developing countries get debt from other nations
    1. For both LR and SR growth and development
  2. Hard to pay back with the interest rates
8. Capital Flight - The movement of large sums of money out of a country as a reaction to e.g. political or economic instability
  1. Lots of risk in holding assets in developing countries
    1. Hyperinflation
    2. Currency devaluation
    3. Security of banking industry
9. Geographical factors
  1. Land Locked
    1. Slower growth rates
    2. Less trade = ↑ transport costs
    3. 16/31 developing countries are landlocked
  2. Tropical climates and endemic diseases
    1. Harder to produce technology especially for sectors like agriculture
Political and Social barriers to development
1. Legal system + property rights
  1. No way to create and enforce contracts
  2. No way to uphold property rights
2. Legal essentials:
  1. Right to own assets - Land or building
  2. Right to establish the use of our assets - e.g. building own sanitations system by owners
  3. Right to benefit from our assets. E.g rent
  4. Right to sell assets
  5. Right to exclude others from using or taking over our assets
3. Ineffective taxations structure
  1. Less than 3% of developing populations pay tax as opposed to 60-80% in developed countries
  2. Less corporate tax due to less corporate activity
  3. Lower trade = lower import tax
  4. Informal market
4. Banking system
  1. Savings needed to make funds available for investment = ↑ growth
    1. Lower savings due to untrustworthy institutions hence capital flight occurs
  2. Lack of collateral = difficult to get loan = lower entrepreneurial ship

Interventionist strategies that can promote economic growth and development:

Effective strategies need to focus on:
1. Sector of economy in which the poor work
  1. E.g agriculture and informal economy
2. Areas in chich poor live
  1. E.g. ghetto and rural regions
3. Factors of production which the poor possess
4. The products which the poor consume