Key Concepts:

• Sectors: different categories the economy can be divided into

  • One common way to group economic activity and employment is by its stage in the production process, from primary production onward

  • Another way is to categorize sectors by the types of products or services they create, such as mining or communications

• Primary production includes agriculture, mining, energy, forestry, and fisheries

• Secondary production includes the processing of the raw materials drawn from the primary sector

  • Reflects all forms of manufacturing

• Tertiary production includes the transportation, wholesaling, and retailing of finished goods to consumers

  • Can include other types of services that could be categorized as quaternary, such as finance, or quinary, such as government

• Quaternary production includes wholesaling, finance, banking, insurance, real estate, advertising, and marketing (business services)

• Quinary production includes retailing, tourism, entertainment, and communications, government, or semi-public services such as health, education, and utilities (consumer services)

Sector Categories by Product or Service Type

• Important to consider the cash value of what is produced in one sector compared to other sectors

• Helps explain why certain products and services are emphasized in an economy and why others might decline or be abandoned

Agriculture

• Economically, what is measured is the combined cash value of what is produced, not the volume in bushels or weight in tons

• Agriculture is the least valuable, despite the fact that a majority of the world’s population still lives in rural agricultural regions

• Subsistence farming is very common in less-developed parts of the world as agriculture supporting the farm family and local people

• Farmers in the Third World who farm plantations or work in cash-cropping generally send crops around in search of buyers

• Farming is most commonly done on a commercial basis in more-developed countries with processed products sold and distributed globally

Commodity Chain

• Commodity chain: exist from the small-scale, family-based producers selling directly from the farm or through local farmers’ markets to transnational supply networks selling to an international customer base

• Tea production employs millions of people worldwide, most of them living in remote poverty-stricken rural communities

  • Most of the profits are made at the retail end of tea’s commodity chain and the oversupply of tea (combined with the poverty of the producers) is a matter of great concern to international aid groups

Natural Resources

• Natural resource production can be divided into two pairs of linked sectors based on their renewability and prices:

  • Mining and energy extraction can be valuable depending on the global commodity prices

    • Oil (petroleum) became highly valuable in 2008 and was traded for over $120 per barrel in mid-summer, only to fall below $50 per barrel by the year’s end

  • Fisheries and timber markets are not as volatile, but have increased in price and value over the years due to reduced supply

    • In these heavily regulated and increasingly protected natural resources, companies must use more technology and larger processing facilities to remain profitable and meet growing consumer demand

Renewability

• Minerals and fossil fuel energy are nonrenewable products

• Some mineral products like metals and glass can be recycled

• Energy sources that do not run on fossil fuels are generally renewable if managed properly

• Alternative energy sources such as solar, wind, nuclear, tidal, and geothermal power tend to be more expensive to harness than fossil fuels and are thus less common

Sustainability

• Products drawn from living resources like fisheries and forestry are renewable

• How trees are cut and how fish are caught makes a difference in terms of overall ecosystem survival and sustainability

  • (EX: a two-mile-long microfilament gill nets to catch fish is considered an unsustainable practice that harms the ocean ecosystem)

Manufacturing

• Hallmark of economic development, and factory-made products far out-value those of agricultural and natural resource–based economies.

• Manufactured goods are farm products and natural resources that have been taken through value-added processing

• Durable goods and non-durable goods, divides production based on the amount of time the product is going to be used

  • Resource processing: oil refineries, metals, plastics, chemicals, lumber, paper, food and beverage, concrete and cement, glass

  • Textiles: clothing, shoes and leather products, artificial fibers and thread

  • Furniture: home, office, bedding

  • Appliances: home appliances, commercial equipment, power tools, lighting

  • Transport: automotive, rail, aerospace, shipbuilding, recreational vehicles

  • Health: pharmaceuticals, medical devices, personal care products

  • Technology: home computers, business computing and servers, industrial control devices, phones, television and audio entertainment

Services

• Services are intangible products, as opposed to manufactured goods, which are physically tangible or touchable

• Low-benefit services: sectors in which the labor force tends to be hourly employees who receive few if any additional benefits, like paid vacation or health insurance

• High-benefit services: sectors in which pay tends to be salaried and includes considerable fringe benefits like health, dental, and vision insurance; vacation; sick days; and retirement reimbursements

• Service firms are typically classified by the type of activity performed as part of the service

Deindustrialization

• The United States and Canadian services produce the majority of the countries’ economic value and employment

  • Roughly 80 percent of these economies’ value is drawn from services, only 19 percent from manufacturing and resources, and a mere 1 percent from agriculture

• Deindustrialization: shifting away from manufacturing as the main source of economic production

  • Downside is that millions of factory workers lost jobs and many old industrial cities suffered from the economic downturn

  • Manufacturing businesses had to focus on highly priced manufactured goods like vehicles, heavy equipment, and computing devices to keep profits and investment up amid foreign competition and keep the remaining First-World manufacturing labor force paid and employed

Understanding Why Services Are Important in America

• Cheaper off-shore locations overseas to build factories

• Deindustrialization has to do with the investment value of each sector

• Investors in new businesses are looking to maximize their returns on investment, and services are the most valuable investments out there

• Moving from natural resources to manufactured products adds a massive amount of value

The Importance of High Technology for Services

• To better understand services is to think historically about how technology has affected economies:

  • In agricultural history, the development of the plow is the technical advancement that revolutionized farming and radically increased the amount of land that could be cultivated.

  • During the industrial era, the product that made all manufacturing possible was steel (railroad locomotives to skyscrapers and automobiles are made possible by steel alloys).

  • In the service economy era, the computer makes all sectors of the service economy more efficient and capable of handling large numbers of consumers and data.

  • The microchip–miniature processor circuits, has made desktop computers possible as well as smaller handheld and wireless devices

Levels of Development

• Used categorize countries in terms of their levels of economic development

• Compare development level verbally and to acknowledge the patterns of uneven development in the world economy

• First World: industrialized and service-based economies that have free markets, a high level of productivity value per person and a high quality of life

• (EX: Norway, Switzerland, Iceland, Israel, Australia, New Zealand, Japan, South Korea, United States, Canada)

• Second World: describes the communist countries of which only two communist states remain today: Cuba and North Korea

• Centrally planned economies

• Still restructuring their economy to free-market systems like the former Soviet Union and Eastern European states

• Newly industrialized countries are still controlled by communist parties but that have adapted free-market reforms to their economies

• Third World: countries with mainly agricultural and resource-based economies that have low levels of per-person productivity and a low quality of life

  • Underdeveloped states are found across Latin America, the Caribbean, Africa, and the Asian countries

  • Some made a distinct economic shift toward industrialization and urbanization

  • Others remain firmly in a rural, agricultural category

• More developed countries (MDCs) and less developed countries (LDCs) are terms used to describe the relative economic differences between states

  • First- and Second-World countries generally tend to fit in the MDC category, while Third, Fourth, and Fifth Worlds are LDCs

  • Rule: $10,000 GNP per capita, above it are MDCs, below it, LDCs

• Newly industrialized countries (NICs): Third-World states with economies that have made a distinct shift away from agriculture and toward manufacturing as the focus of economic development and production

  • In a constant process of building infrastructure (roads, ports, power plants, water systems, railways), which facilitate the construction and operation of factories

  • Have rapid population growth and are usually on the border of stage two and stage three of the demographic transition model

  • Experience rapid rural-to-urban migration as their economies industrialize and, as a result, urbanize

  • Funds to develop infrastructure and factories can come from internal sources, from foreign aid, or from foreign direct investment (FDI)

    • Technology transfer: where technical knowledge, training, and industrial equipment is provided to NIC governments to increase business efficiency and capacity

    • FDI is money from international private investors or investment firms in other countries who are looking to earn a profit

  • Development loans sought by NICs to help pay for new large-scale infrastructure projects

    • To help develop the necessary infrastructure to attract FDI, some NICs seek international development loans from organizations like the World Bank

    • (EX: electric power systems, dams, water purification and waste treatment centers, pipelines, highways, and national rail systems)

  • Foreign development aid is money provided by donor state governments in the First World that is not expected to be given back

  • When women are given an education, they contribute to forming capital, which lifts their communities, and their nations experience economic growth

India’s Jump to Services

• High-tech markets in software development and computing services began to open up in India due to certain comparative advantages it has over other NICs

• The English-language heritage of India’s colonial past with Britain has two distinctly positive effects:

1. Access to the American technology markets via language

2. A large number of educated workers who speak the language

China’s Demand for Energy

• Industrial development in China and the newly earned wealth of the Chinese people have combined to create a large demand for energy in industry and transportation

• Coal has been the primary source for electrical production and is plentiful

• Oil demand is high, as industry and Chinese citizens have more use for trucks and personal cars

Asian Tigers: Old and New

• Asian Tigers: a term used to describe the industrial economies of Asia that have been aggressive in terms of economic growth rates and their ability to compete for consumers

• The building of a large manufacturing capacity in the Old Asian Tigers was the result of Cold War realities in the region

  • These states were seen as free-market bastions against the spread of Communism

  • Highly efficient factories and a focus on product quality in both Japan and Korea had created significant market share in the American automobile and electronics markets by the 1980s

  • Foreign competition along with the oil shocks of the 1970s triggered deindustrialization in the United States, Canada, and Western Europe

  • (EX: Japan, South Korea, Taiwan, Hong Kong, Singapore)

• Manufacturing development in the New Asian Tigers was mainly funded through FDI that came from firms in New York, London, and Tokyo, as well as from companies in South Korea and Taiwan that constructed and operated the factories in the New Tigers

  • The New Asian Tigers offered cheap labor and low-cost land and resources, as well as few labor and environmental regulations that had become costly for businesses in the First World.

  • (EX: China, India, Malaysia, Thailand, Indonesia, Vietnam)

The Asian Economic Crisis

• Growth in all of Asia came to an abrupt halt in 1997

• A banking crash in South Korea rippled through the region and resulted in a credit crisis

• Money to develop new factories and infrastructure projects in the New Asian Tigers dried up as a result

• Credit crunch: results from banks and investors holding back on industrial loans and investments

• The 1997 Asian economic crisis also was the trigger for deindustrialization in the Old Asian Tigers

• Large firms, like Japan’s Toyota and the Korean Hyundai conglomerate, had employed extra workers and their adult children under a traditional benefits system of guaranteed family employment

THE INDUSTRIAL REVOLUTION

• Industrialization rapidly transformed the global economic landscape and the way that people lived

Great Britain

• The process of industrialization began in the second half of the 18th century in Great Britain

• Two driving forces that undoubtedly contributed to Britain’s shift to an industrialized society: a significant shift in the size and distribution of the population.

• The availability of coal and iron ore allowed British industry to rapidly mechanize

  • These two essential resources were ultimately the key combination behind one of the Industrial Revolution’s most important inventions: the railroad

Effects of Industrialization

• Saw major shifts in the size and distribution of their populations in surrounding European nations and to the United States by the mid-19th century

• Technological advancements in manufacturing enabled concurrent innovations in agriculture, spawning the Second Agricultural Revolution

• The use of new mechanical devices in agriculture also reduced the need for farm labor, just as the proliferation of factories in centralized areas called for a much larger workforce in cities

• Caused major shifts in family and class structures

• Industrialization did not meant an end to child labor—it meant that children were sent to work in factories rather than alongside their parents on the family farm

• Workers began to organize into cooperative societies and trade unions, which provided benefits and services to their members and began to advocate for higher wages and better working conditions

• The latter part of the 19th century also saw a burgeoning middle class of professionals such as merchants, engineers, factory owners, doctors, and lawyers

• Women were increasingly discouraged from joining the workforce and instead were expected to focus on raising children and maintaining a comfortable home

Global Impact

• Productivity increased exponentially due to mechanization, helping turn these countries into economic powerhouses

• Periods of explosive growth are followed by periods of economic crises

• The productivity boom in industrialized

• European countries left them hungry for both raw materials and new markets for their finished goods

• European nations had been colonizing other parts of the world for centuries, the speed and scope of this “new imperialism” was unprecedented

  • Were able to easily colonize vast areas of Africa and Asia due to technological advancements

KNOW THE MATH

Measures of Development

• Economic indicators are used to help understand the variable levels of development and measure the degrees of uneven development between states

Gross Domestic Product

• Gross domestic product (GDP): the dollar value of all goods and services produced in a country in one year

  • Measures the total volume of a country’s economy and is done without adjusting for international trade; therefore, it measures only the domestic economy: GDP = GOODS + SERVICES

  • GDP for the most-recent three-month quarter of the year grew by 3.5 percent over the previous three months

Gross National Income

• Gross national income (GNI): the dollar value of all goods and services produced in a country, plus the dollar value of exports minus imports in the same year

  • Measures economic value

  • GNI includes wealth gained when money comes from other countries for exports: GNI = GOODS + SERVICES + (EXPORTS – IMPORTS)

  • Trade Surplus: (EXPORTS > IMPORTS)

  • This is a positive number, and adds value to the economy.

  • Trade Deficit: (EXPORTS < IMPORTS)

  • This is a negative number, and removes value from the economy.

Per Capita Calculations

• Per capita: “for every head” in Latin, meaning for each person

• Gross national income (GNI) per capita: the estimated income of a person converted to U.S. dollars at currency exchange rates

  • A modified form of GDP per capita

  • Level of development comparisons are done by dividing the volume of the economy by the population, like so:

  • GDP per capita = (GOODS + SERVICES) ÷ POPULATION

  • GNI per capita = [(GOODS + SERVICES) + (EXPORTS – IMPORTS)] ÷ POPULATION

• A relative standard of living measured by the services that such productivity provides for the population

• Gross national income purchasing power parity (GNI PPP): an estimate that takes into account differences in prices between countries

• Human Development Index (HDI): designed by the United Nations to measure the level of development of states based on a number of social indicators in addition to economic production

  • An indexed score from 0.00 to 1.00 is calculated for countries by combining GDP per capita, the adult literacy rate, average level of education, and total life expectancy

  • Intent is to provide a more balanced measure of development and indicate some of the factors that illustrate the negative impact of poverty on economic potential in Third-World countries

• Gini coefficient: measures the level of income disparity between the country’s richest and poorest population groups on a scale of 0 to 100

• Gender-Related Development Index (GDI): takes the same indicators used to calculate HDI but replaces GDP per capita with income

• The sectoral structure can be considered in the evaluation of an economy

• Other ways to measure an economy include measuring the size of the black market, income distribution, use of fossil fuels, and even “soft” indicators such as infant mortality rates and literacy rates

KNOW THE THEORIES

The Demographic Transition Link

• Each of the stages represents a type of economic context, and that the economy directly impacts the patterns of birth rates, death rates, and population

Rostow’s Stages of Growth

• Developed in the 1950s by theorist Walt Rostow

• Proposed that countries went through five stages of growth between agricultural and service-based economies

• Each country had at least some form of comparative advantage that could be utilized in international trade and thus fund the country’s economic development over time

1. Traditional society:

• Economy is focused on primary production such as agriculture and fishing

• Country’s limited wealth is spent internally on things that do not promote economic development

• Technical knowledge is low

2. Preconditions for takeoff:

• The country’s leadership begins to invest the country’s wealth in infrastructure such as roads, ports, electrification, and school systems that promote economic development and trade relations with other nations

• More technical knowledge is learned that stimulates the economy

3. Takeoff:

• Economy begins to shift focus onto a limited number of industrial exports

• Participates in traditional agriculture, but the labor force begins to shift to factory work

• Technical experience is gained in industrial production and business management

4. Drive to maturity:

• Technical (or technological) advancements diffuse throughout the country

• Workers become increasingly skilled and educated, and fewer people are engaged in traditional activities like agriculture

5. Age of mass consumption:

• An industrial trade economy develops in which highly specialized production such as vehicles, energy, and consumer products dominate the economy

• Technical knowledge and education levels are high

• Agriculture is mechanized (no longer traditional) and employs a small labor force

  Negatives:

• The colonial legacy and other barriers to development such as government corruption or capital flight are not accounted for in Rostow’s theory

• He assumed that all countries could progress smoothly through the stages if their investment focused on trade and technology development

Dependency Theory

• Dependency theory: holds that most LDCs (including all NICs) are highly dependent on foreign-owned factories, foreign direct investment, and technology from MDCs to provide employment opportunities and infrastructure

• Third-World countries get stuck in a continuous cycle of dependency on First-World loans to pay for additional economic development needs

• Prebisch thesis: detailed the dependency of Third-World economies on First-World loans and investments to pay for the building of new industries and infrastructure

• At the heart stands a claim about the dominant role of First World–based transnational corporations (TNCs) and investors in a postcolonial exploitation of the Third World in which MDCs have economically and politically subordinated LDC populations

• Some describe this as economic imperialism in a modern reference to the European empires of the colonial era

• Creates additional economic risks, as Third- World economies are also subject to the level of demand for LDC-made products and the overall global economic climate

• Market stagnation in an LDC product can be catastrophic to its economy and harm the quality of life of its citizens

Breaking the Cycle of Dependency

• LDC policies and programs that attempted to increase capital accumulation within Third-World national economies:

  • Internalization of economic capital: requires companies to deposit profits from factories in LDC banks and reinvest locally, preventing capital flight, which occurs when factory earnings are sent to banks back in the First World where they cannot be used to further local development in the LDC

  • Import substitution: Instead of buying simple First World–made consumer products like laundry soap, this approach calls for building laundry soap factories and producing it within the LDC. The manufacturing profits can then be sent to LDC banks and reinvested locally.

  • Nationalization of natural resource-based industries**:** foreign corporate ownership of oil fields and mines robs the national government and local companies of potential earnings

  • Profit-sharing agreements: In China, Vietnam, and a few local cases elsewhere, foreign companies are given permission to build new factories on land leased to them by the government.

  • Technology development programs: Some countries have used their limited public funds to invest in high-technology equipment and worker training for locally owned manufacturers.

Tourism

• By attracting international tourists, countries can gain large inputs of cash from foreign countries without having to export manufactured goods

• Beach resorts, golf, skiing, wine regions, historical districts, and cultural attractions like festivals and archaeological sites can all create tourist draw

• Ecotourism: tourism directed toward exotic, often threatened, natural environments, intended to support conservation efforts and observe wildlife

Free-Trade Agreements

• Regional free-trade agreements between states have become a common way to improve international trade

• Supranational free-trade zones like the European Union (EU) and North American Free Trade Agreement (NAFTA) have made regional economies of multiple states much stronger and have opened the doors of development for less-developed neighbors

  • Mexico has benefited significantly from its free-trade relationship with the United States and Canada. The NAFTA treaty, signed in 1991, went into full effect in 2001 with the full removal of all tariffs (taxes on goods that cross international borders) between the three members.

Free-Market Reforms

• Communist states like China and Vietnam began to reform the old Soviet-style command economy in which all economic production was managed and planned by the central government

• The most significant reform is allowing foreign companies to open factories and retail services in these countries

  • China established the first special economic zones (SEZs) in 1980, in which foreign firms were allowed to build facilities in coastal port cities

    • SEZs: a type of export processing zone, defined as port locations where foreign firms are given special tax privileges to incentivize trade

• Economic productivity has more than tripled in China and Vietnam since the introduction of the reforms

Wallerstein’s World Systems Theory

• Immanuel Wallerstein developed a world systems theory that also sought to explain uneven development around the world in the 1970s

• Believed the modern nation-state was birthed in Europe as a way of protecting capitalist interests, which were based on the same highly unequal division of labor as feudalism

1. Core nations are the most developed and economically influential in the world.

• Hold significant cultural, military, and especially economic dominance over the rest of the world

• Import goods from periphery nations, taking advantage of those countries’ cheap labor, raw materials, and agriculture

2. Periphery nations are the least developed.

• Weak governments, high social inequality, dependent economies

• Heavily influenced and exploited by core countries

3. Semi-periphery nations fall in between the core and periphery in terms of development and influence.

• Can play both peripheral and core-like roles

• Able to assert some dominance over the periphery, but they can also be influenced and to some extent exploited by the core

Industrial Location Theory

• From Alfred Weber’s work, whose 1909 Theory of Industrial Location is still influential, the selection of optimal factory locations has much to do with the minimization of land, labor, resource, and transportation costs

• Weber states that, in terms of location, manufactured goods can be classified into two categories based on the amount of input in relation to product output:

1. Weight-losing, or bulk-reducing, manufacturing involves a large amount of input that is reduced to a final product that weighs less or has less volume or bulk than the input

2. Weight-gaining, or bulk-gaining, manufacturing involves a number of inputs that are combined to make a final product that gains bulk, volume, or weight in the production process

Weight-Losing Industries

• In weight-losing processing in which there is only one major input, such as seafood packaging, lumber mills, and metal ore-processing or smelting, the industrial location is in very close proximity to the resource location.

  • (EX: The industrial location of steel factories is dependent on four major inputs: iron ore, coal, limestone, and water. Iron ore is most distance elastic, meaning it can be transported over short or long distances to the steel plant, whereas coal, limestone, and water need to be in close proximity.)

Weight-Gaining Industries

• Weight-gaining manufacturing generally involves the assembly of several inputs into a finished product

• The finished product is more bulky and thus more costly to transport, the factory location should be relatively close to consumers to minimize delivery costs

  • (EX: An issue for food products like bread is the limited shelf life that also affects industrial location. Bread, milk, and other perishable products tend to be manufactured in many individual plants that serve the local regions. This decentralized network approach keeps fresh products in stores longer by reducing transportation time. Bread production is so decentralized that bakeries are found in all cities and are an example of ubiquitous industries.)

The Geography of Supply Chains

• A supply chain exists when parts are assembled into  components that are then joined together to create larger finished products

  • EX: Automobiles are an example of heavy industry that requires a large supply chain network to support the assembly of a final product.

• Fordist production (Fordism): relied on a single company owning all aspects of production, from steel manufacture to advertising.

• In the Post-Fordist era, car companies changed and became dependent on large networks of regional supply chains.

• Just-in-time production: methods in which suppliers send parts to assembly plants on an as-needed basis

Retail Location Theory

• The precise location of retail services is spatially dependent on the relationship between variable cost and revenue surfaces based on local geography

• Spatial margin of profitability: the area where local demand for a service creates revenue higher than the local costs of doing business

  • Used to define these areas of maximization

Service Location Theory

• The location of businesses in the service economy era (since the 1990s) has become a new area of research in economic geography

• Recent work has focused on the location of high-benefit services

• Footloose industry: businesses whose locations are not tied to resources, transportation, or consumer locations

• Often corporate executives are interested in a location for a number of particular qualities that compose a “best fit” for their corporate culture

• Economist Richard Florida has proposed that there is a creative class of high-benefit service-industry firms and workers

• Local economic development programs have become focused on the attraction of “creative” firms and laborers

Agglomeration

• Refers to the concentration of human activities in a cluster or around a central place

• Agglomeration economies: exist where firms with related or similar products locate together in clusters or regions

  • Together, the firms enjoy the advantages of a shared skilled-labor pool, specialized suppliers, and service providers and can share (or steal) technical knowledge on production or marketing

• Deglomeration: occurs when a location is overloaded with similar firms and services

  • If local resources or the labor pool are fully utilized or over-utilized, some firms may seek alternate locations to expand to or may move all operations completely

The Foreign Auto Firms Move South

• As Japanese firms looked into American production sites, they found further reduced-cost advantages as they moved south from Michigan and Ohio.

• These northern unionized-labor states had higher payroll and benefit costs which were ingrained into state workforce regulations.

• Southern locations were right-to-work states where regulation does not favor unions and did not impact pay benefit costs.

KNOW THE MAPS

Industrial Regions

• North America:

  • American Industrial Belt or “Rust Belt” following deindustrialization

  • Canadian Industrial Heartland or Canada’s “Main Street”

  • Piedmont Industrial Region

• Europe

  • British Midlands

  • Ruhr Valley

  • Northern Italy or the “Third Italy”

• Asia

  • Japan

  • Korea

  • Taiwan

  • China

Economies of Scale

• Economies of scale: achieved when producers expand their operations but incur lower per-unit costs in the process

  • When a company increases output of a single product, it can save money by purchasing supplies in bulk, managing more workers, financing large sums of credit at lower interest rates, and negotiating discounts for per-mile transportation costs in larger bulk amounts

• Economies of scope: in which companies benefit from the increase in the number of different products under a larger brand name

  • Larger economies of scope are especially useful when one product at the end of its useful life, or product cycle, is replaced by a new model or alternative device

Women in Development

• Women work more hours per day (in paid and unpaid labor) than men in every country in the world except in Anglo America and Australia

• Women in the paid workforce are also growing in numbers across the world in both developed and developing countries and regions

• Their role in society is changing and improving as opportunities for education, childcare, and maternity benefits open up

• In 2000, the United Nations developed a mandate called the Millennium Development Goals (MDGs), which was designed with the intention of eradicating poverty by the year 2015.