Economic Growth April 6, 2011

a) Explain 3 institutional factors that may contribute to potential economic growth in developing countries?

Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP (i.e. the increase in GDP after inflation has been removed).

Banking system : With a strong banking system, the country can have a higher savings rate thus overcome the poverty cycle

Political stability: If there is political instability, then it is difficult for economies to grow and develop. If businesses are to expand or foreign investment is to come in, then they need predictability and a strong politcal structure.

Education: This is essential for there to be a productive work force. Training, and basic education can greatly contribute to economic growth as this would mean labor is being used at its most efficient.

Infrastructure: A good quality social infrastructure is vital for economic development, but in the developing world the infrastructure is often very poor. Developing infrastructure can also produce jobs for those who are unemployed.

Taxation structure: Sometimes the government is corrupt and doesn’t take money from the rich. It could also be a physical problem which means that it is hard to reach the communities in the rural area.

b) Evaluate the view that economic growth will lead to economic development.

Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP (i.e. the increase in GDP after inflation has been removed).

Development is an increase in the ability of a country to produce goods and services thereby offering the opportunity for a higher material standard of living. Development is not the same as economic growth as development is an increase in the potential for an economy to grow, not growth.

- Income distribution may not be equal as measured by Gini coefficient and the Lorenz curve. This means that though the country is getting richer, it is only represented in the small proportion of the population.

-Economic development indicates an increase in income per capita as this would mean that each person is benefiting from the improved economy.

-Economic development brings qualitative and quantitative changes in teh economy where as economic growth only increases the quantitative values of an economy.

-Economic development relates to using previously unused or underused capital in an economy where as economic growth relates to allocative efficiency.

-Economic growth does not take into the black market which may b ethe reason for a family’s welfare. Economic growth also doesn’t take into account sustainable development, diseases and birth/literacy rate.

-While economic growth may lead to eventual economic development the outcome is not guaranteed. This is because the wealth may be unequally distributed which means the majority of the citizens are not benefiting. However, normally economic growth leads to an increase in tax revenue.  Assuming that the government is not corrupt, the government could provide merit goods and public goods. This includes infrastructure and education which in the long run should pay off as better economic development and have a positive feedback loop for more economic growth.

Foreign Aid April 4, 2011

1.       Explain the various types of aid which a developing country might receive.

Receiving aid is a growth and development strategy. Countries may receive aid because they are not self-sufficient. There are different types of aid available to a country.

-Bilateral aid: This is when one country gives support to another country directly . It can be done through money support, shipments of machines and tools, emergency aid and sending experts to help.

- Multilateral aid:  This is when a country receives funding from organizations rather than countries . This can be an organization like UNICEF.

-Grant aid: These aids are of money, goods , capital or etc. for which there is no need to pay back. It is more like a gift. For example student grants for studying.

-Soft loans: Loans in which the money is lent to a country on favorable terms.

-Official aid: This is the sum of the bilateral and multilateral aid that a country receives.

-Tied aid: Reciprocal agreements between donor and recipient. It depends on what is asked in return and where the aid is granted.

-Humanitarian aid: This can be both by an individual country or via a major organization such as the UN agencies.

b) “Aid is an effective means of promoting the development of poor countries” Evaluate this statement.

In order for aid to be successful, it should be an attempt to:

Overcome the low savings rations: Most poor people consume the vast majority of what they earn. This leads to the poverty cycle as they cannot invest.

Help reduce foreign exchange outflows: This means that promoting less imports into the country. The domestic government can use the money to build the necessary infrastructure for development of the country which will help it in the long run .

Reduce dependency on private investment: The private investment may not be available or will be found at a cost to the country that requires so much funding. This means that the aid should help the country be self-sustainable.

Improve the living standards of the poorest people: Many times as a country develops the Gini coefficient increases suggesting a more unequal distribution of income even though the country is gaining more national income.  If this continues it can often lead to political unrest.

Moves with the times: What may be a good investment 20 years ago may not be now. Local opinions and knowledge need to increase when deciding what to invest in.

Not simply provide cheap food: The only exception is during an emergency. Providing cheap food hinders the country’s economy as it undermines the domestic agricultural sector. Instead, the aid should be directed at farming equipment or etc. so that the country can be self sufficient. “Don’t give the man a fish, teach him how to fish.”

Allow choice to be exercised by the receiving country: The country should still be able to decide what is going on within it. A problem with tied aid is that it reduces the choices the developing economy gets. It may be more harmful than beneficial in the long run.

Some may argue that aid is a hypocritical way to make the rich richer.

Others may argue that aid is always taken advantage of by corrupt officials : example – Zimbabwe. The inequality has increased significantly.

Loans and grants tied to purchase of Western goods distort economic development in poor counties and increase their dependence on the rich. This means that the country never becomes self-sufficient and is highly dependent on aid.

Furthermore aid goes largely to governments that like capitalism. It allows for private investment which means that some get rich but the bottom of the poorest do not.

However, aid that is tractable and transparent should be effective in helping a country. This means that trade for even the developed countries can increase if we help the poor nations. When the nation is richer and more developed, the people are more likely to buy imported goods thus this will improve the economy of the country that provided the aid. It can alleviate the developed country’s balance of payments. Furthermore, we have a moral obligation to help those in need.  In conclusion aid that is handled well, through transparent means could be very effective in helping a poor country  develop.

Mock Exam Reflection April 4, 2011

I scored fairly well on my mock exam. However, I think that this was because the focus of the mocks was on sections 2 &3, and the sections I find difficult are section 4 & 5. I think I can ensure I do just as well on my real exam by studying sections 4 & 5 thoroughly instead of reviewing the other sections that I understand again and again.

I was pleased with my score but as pointed out on the paper, some of my answers were not relevant to the question. For example, I drew the Theory of the Firm diagrams for a question about price and cross elasticity of demand and that wasn’t really needed. I can improve my answers by focusing in on the question . I also think my scored could have been better if I had remembered to make real world references. I will review by focusing and reading about sections 4 &5.

Liberia March 30, 2011

As of 2010, Liberia was 33rd on the World’s Failed States Index. The civil-war torn country has improved significantly after the current leader Ellen Johnson Sirlearf came to office in 2007. The largest problems in this nation include unemployment and a lack of education which in turn leads to war.

During the seminar today we discussed many possible solutions to reworking this war-torn state. However, for any of these solutions to work, the corruption in Liberia must be eliminated as the government should be the one overlooking the expenses.

One of the solutions suggested was investing in women. I think in a way this would also be investing in education as women are more prone to spend the money on their children and education. However the problem with investing in education first is the time lag and the mismanagement of money that could occur in the process. Liberia should start by developing their infrastructure so that the country is more stable . Development of infrastructure would also provide jobs for the unemployed. Because of the political instability, foreign investors are less likely to invest until they can see Liberia as a potential source of profit.

Cambodia March 8, 2011

From the group’s presentation, I learned that Cambodia is heavily reliant on its Tourism industry. Events such as outbreaks and riots, will affect the economy by affecting the tourism sector. Furthermore, just as Cambodia was becoming economically sound, the Global Financial Crisis hit and Cambodia’s efforts to better its economy were in vain. A lot of the problems have risen due to Cambodia’s history and the notorious dictator Pol Pot who tried to kill off all the elite and intelligent people out of society. Cambodia can improve their situation by receiving foreign aid, developing jobs and educating it’s youth.

Test Reflection Section 4 February 9, 2011

I am  pleased with my score for this test.  Section 4 was a struggle for me so I think I did very well on the final test. However, I still feel like I need to improve my organization because my paper was messy and at times hard to follow. I think I can avoid making this mistake in the future by using a few minutes in the beginning to plan the paper and write a short outline.

Thank you for the feedback and advice Ms. Q !

Statistical Analysis of Sudan February 3, 2011

In 2010, the GDP per capita for Sudan was estimated to be $2,200 and is ranked 187th in the world. 40% of the people live under the povery line.

Sudan has a growth rate of 2.497% and is ranked 31 out of 235 countries. The total population has a life expectancy of about 54.21 years. The literacy rate is 61%.

The unemployment rate for Sudan is 18.2% as of 2002. It is ranked 163rd.

Sudan’s export value is 9.7 billion due to its oil. Sudan exports oil and petroleum products; cotton, sesame, livestock, groundnuts, gum arabic, and sugar. The inflation rate is 11.8%.

Sudan faces major health problems due to AIDS in the region as well as the Darfur genocide. The living standards are filthy and penury is prevalent.

Evaluate a country’s decision to join a free trade area (FTA) January 19, 2011

This question expects the candidate to evaluate the advantages and disadvantages of joining a FTA and then come to a conclusion. This question cannot be answered by looking at only one side of the argument. This question should take about 35 minutes.

Definitions

FTA: Exists when an agreement is made between countries, where the countries agree to trade freely among the member of the group, but are able to trade with countries outside the FTA in whatever ways they wish.

Real Example: ASEAN which is a FTA consisting of Asian nations.

Bullets from 3A

• Free trade is trade that occurs between countries without any barriers or hindrances
• This means that firms are able to sell directly into a country as easily as the firms within that country are able to trade
• The firm exporting into the country should not face any additional barriers, taxes, regulations or any other obstacles that prevent them selling their goods/services
• Free trade at an international level means that this freedom is true for trade between all countries. In this way, countries gain the benefits from competition that exist where the national markets are free from barriers and restrictions
• Economic theory tells us clearly that this is likely to deliver significant benefits, but it is far from being universally true

• However, completely free trade may have a number of costs for some economies. These may include:

• Adjustment costs – changes in comparative advantage may require adjustments in the structure of industry and these may take some time. While they are taking place there may be employment costs from the changeover.
• Environmental costs – free trade may lead to firms relocating to where environmental and other regulations are most lax. This could cause long-term environmental problems.

To evaluate this question:

*Define free trade

*Give 2 or 3 of the strongest arguments FOR joining a FTA

*Give 2 strong arugments against it (protectionism)

*Define protectionism

*Come to a conclusion as to what the value of FTA is for a country

Evaluating China’s “Manipulation of its Currency” (via Kanika’s Economic Blog) January 12, 2011

I like the way you explained the background information of the issue. I also think the way you used the diagram and explained the reasons was very effective. Well done!

Relations between China and US have been unstable in the recent years. The US is particularly disappointed (according to the understanding of the US) in China’s manipulation of their currency. China moved its exchange rate system from a fixed to a managed currency exchange rate in 2005. A fixed exchange rate system is where one currency is fixed in the value against another. It involves the government working to keep the parity through invention … Read More

via Kanika’s Economic Blog

Definitions and Real-Life Examples for International Economics January 12, 2011

Word	Definition	Real Example
Factor of Endowments	Factors of production that a country has available to produce goods and services.	Japan has a strong labor force.
Specialization	Exists where a country specializes in the production of goods and services where they have a comparative advantage in production. They will then trade to get the goods and services in which they do not specialize.	Japan specializes in the production of electronic goods.
Absolute advantage	Exists where a country is able to produce more output than other countries using the same inputs of factors of production.	China has an absolute advantage over Sri Lanka in its production of rice.
Comparative advantage	Exists where a country is able to produce a good at a lower opportunity cost of resources than other country.	Hawaii has a comparative advantage in producing pineapples over France.
Free Trade	International trade that takes place without any barriers such as tariffs, quotas, or subsidies.	In the EU there are no barriers to imports.
Tariff	A duty tax that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.	U.S. put a tariff on France’s Roquefort Cheese.
Quota	An import barrier that set upper limits on the quantity or value of imports that may be imported into a country.	EU has a quota for fish.
Subsidy	An amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm and advantage over foreign competitors.	Japanese government subsidizes rice farmers.
Voluntary Export Restraint	A voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product.	In the 1980s Japan imposed a VER on their automobile imports to the U.S..
Infant Industry argument	Proposes that new industries should be protected from foreign competition until they are large enough to compete in international markets.	Brazil uses the Infant Industry argument to protect its automobile industries.
Dumping	Is selling of a good in another country at a price below its unit cost of production.	The U.S. claimed that Canada was dumping its wheat in the U.S.
Anti-dumping	Is a legislation to protect an economy against the import of a good at a price below its unit cost of production.	The EU put an anti-dumping legislation on shrimp.
Free Trade Area	Exists when an agreement is made between countries, where the countries agree to trade freely among the member of the group, but are able to trade with countries outside the FTA in whatever ways they wish.	ASEAN is a free trade area. Asian nations.
Customs union	An agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the union.	The EU is a customs union.
Common market	A customs union with common policies on product regulation, and the free movement of goods, services, capital and labor.	Southern Cone Common Market (MERCOSUR) of Argentina, Brazil, Paraguay and Uruguay is an example of a common market.  So is EU.
Trade creation	Occurs when the entry of a country into a trading bloc leads to the production of a good moving from a high-cost producer to a low-cost producer.	When a country would join the EU.
Trade diversion	Occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer to a high-cost producer.	When a country would leave the EU. War.
World Trade Organization	An international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.	Deals with the rules of trade for 153 countries.
Balance of Payments	A record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time.	All countries have balance of payments.
Balance of Trade	Measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods over a given period of time.	The U.S. has a negative balance of trade with China.
Invisible balance	Measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.	The U.S. outsources to India.
Current account	Measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants and remittances.)	Every country has a current account.
Capital account	Measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending.	Every country has a capital account.
Current account surplus	This exists when the revenues from the exports of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a given period of time.	China is in a current account surplus with the U.S.
Current account deficit	This exists when revenues from the export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given period of time.	U.S. is in a current account deficit with China
Expenditure-switching policies	Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.	The U.S. put tariffs on cheese from France.
Expenditure-reducing policies	Policies implemented by the government that attempt to reduce overall expenditure in an economy, including expenditure on imports.	Tariffs or such that would reduce the expenditure on imports. U.S. imposed a quota on cloth from China.
Marshall-Lerner condition	States that a deprecation, or devaluation of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports and imports is greater than one.	Raw materials do not have an elasticity of higher than 1 and therefore they would not affect the current account much.
J-Curve	The theory suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before thins improve in the long run.	No example.
Exchange rate	The value of one currency expressed in terms of another.	$1=1.20 yen
Fixed exchange rate	An exchange rate regime where the value of a currency is fixed, or pegged to the value of another currency or to the average value of a selection of currencies or another commodity like gold.	Hong Kong to the $ U.S.
Floating exchange rate	An exchange rate regime where the value of a currency is allowed to be determined solely by the demand for and supply of the currency on the foreign exchange market.	The U.S. $ is a floating exchange rate.
Depreciation	A fall in the value of one currency in terms of another in a floating exchange rate system.	If the yen depreciates to the $ then 1 yen is now wroth less in terms of $.
Appreciation	An increase in the value of a currency in a floating exchange rate system.	If the yen appreciates to the $ then 1 yen is now wroth less in terms of $.
Devaluation	A decrease in the value of a currency in a fixed exchange rate system.	If the Hong Kong $ decreases in value against the U.S. $.
Revaluation	An increase in the value of a currency in a fixed exchange rate system.	If the Hong Kong $ increases in value against the U.S. $.
Purchasing power parity theory	Theory states that under a floating exchange rate system, exchange rates adjust to offset differential rates of inflation between countries that are trading partners in order to restore balance of payments equilibrium.	The big mac in different countries costs different.
Terms of trade	An index that shows the value of a country’s average export prices relative to their average import prices.	Developing countries were considered to be at a disadvantage regarding terms of trade. This is because exports are more often raw goods or commodities with lower prices than the manufactured goods imported from more developed counties.
Deteriorating terms of trade/adverse terms of trade	Exists when the average price of exports fall relative to the average price of imports.	Since 2004 the US has annually spent over $600 billion MORE on imports than it earned from the sale of its exports.
Elasticity of demand for exports	It is a measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports.	Luxury goods have a higher elasticity for exports.
Elasticity of demand for imports	It is a measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports.	Capital goods/raw goods that are needed in production of other goods will have a lower price elasticity.