Question 1: Evaluate the effects of schemes aimed at stabilizing the prices of primary commodity on producers and consumers.
Question 1: Distinguish between ‘internal’ and ‘external’ debt.
Internal debt is part of the total debt in a country that is owed to lenders within the country, while external debt is part of the total debt in a country that is owed to creditors outside the country. Internal debt poses less burden the country because people simply owe it to themselves. On the other hand, external debt involves a net subtraction from the resources available to people in the debtor nation.
Question 2: Using examples from the article and from your own knowledge, examine the problems associated with a developing country having a significant amount of external debt.
Several problems are associated with a developing country having a significant amount of debt. According to the article, the “debts have pushed domestic interest rates to a higher end and the cost of debt servicing is going up by the day, leaving insufficient funds for basic services provision including for education, healthcare, safe drinking water and infrastructural and energy projects.” In other words, because resources and money are allocated to repaying their debt, it is not used to meet the needs of the people. Having a large debt “render[s] the country beyond debt servicing and debt retirement capacities… [it has] extremely damaging impacts on growth, income equality, income generation, production, poverty reduction and the debt burden.”
Furthermore, corruption a concern; “borrowed money is fertile ground for tightened abuse and corruption”, says Finance minister Oduman Okello. People may also take away large sums of money from the nation and store it somewhere else that is more safe– capital flight occurs when firms or individuals speculate on the prospect of earning a higher return abroad.
Other problems include:
Question 3: Explain how inflation affects the external debt of a country such as Uganda.
Inflation can affect the external debt of the country in that because the value of money has fallen, it is harder to repapy the debt; as inflation increases the relative amount you have to pay in terms of economic value is less because you will be paying off the debt with future inflated dollars that are worth less. Therefore they must pay more money back if the debt is adjusted for the inflation. This may lead to further borrowing of money.
Question 4: Evaluate the policies that a developing country, such as Zambia, can use to counter the effects of inflation.
There are several policies that developing countries can use to counter the effects of inflation by increasing AS or decreasing AD. For a developing country, decreasing AD will not be the best course of action, and increasing AS will counter the effects of inflation as well as an increase in output. For instance, they can obtain new technology to increase AS which may have a trickle down effect– from private investors. This will result in an outflow of capital, and other foreign firms may gain control of the domestic market to some extent.
Data Response
Question 1: Distinguish between foreign aid and foreign direct investment
Aid (also known as international aid, overseas aid, or foreign aid, especially in the United States) is a voluntary transfer of resources from one country to another, given at least partly with the objective of benefiting the recipient country. FDI is an investment abroad, usually where the company being invested in is controlled by the foreign corporation.
Question 2: Explain why the earthquake and tsunami in Japan is likely to affect Japan’s capacity to donate foreign aid.
The earthquake and tsunami in Japan will affect Japan’s capacity to donate foreign aid “because they will be using their own money for reconstruction.” Japan will focus on its immediate concern, of rebuidllng itself after the crisis.
Question 3: Explain how reductions in Japanese foreign aid might affect the economic development of the recipient nations.
Reductions in Japanese foreign aid can negatively affect the economic development of the reciepient nations because they can expect to see projects or investments cancelled or decreased. What they were planning to have is now on hold; economic progress will halt.
Evaluate the arguments for and against foreign aid.
The arguments against foreign aid is that aid can fall in to the wrong hands and be used in ways not intended by the donor.
Question 1: Explain how improving infrastructure, like establishing mobile phone networks, can help to improve the rate of economic growth.
Improving infrastrucutre can help improve the rate of economic growth because of several reasons:
Question 3: Discuss the advantages and disadvantages of foreign direct investment for developing countries.
There are several benefits of foreign direct investments:
However, foreign direct investment also has the possibility of destroying domestic firms; there may be a loss of culture as a result of increased foreign companies and technology; furthermore, there is the possibility that host countries may become over dependent on FDI, that it leaves them vulnerable.
Question 1: Explain what is meant by a free trade area, such as EFTA?
A FTA is A free trade agreement is a treaty between two or more countries to establish a free trade area where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances but capital or labor may not move freely. In particular, FTA states include Iceland, Liechtenstein and Norway, besides Switzerland. It is an inter-governmental organization that promotes free trade and economic integration between the four nations.
Question 2: Analyse the benefits and costs of establishing a regional free trade area.
The benefits of establishing a regional FTA is that it fosters free trade– and thereby free flow of people, capital, and goods and services. Free trade can also create employment, and FTA will increase employment opportunities. Furthermore, the establishment of an FTA transfers knowledge and technology between the nations, increasing innovation.” An FTA is an efficient use of factors of production as well. According to the article, “Swiss exports to India include machines, pharmaceutical and chemical products as well as precision instruments, while imports from India include textiles, agricultural products and components for the airline industry”, which is beneficial for both.
However, there are some disadvantages, including risks of exploitation, structural job losses, and the destruction of local culture and communities. The article mentions that there are about 170 Swiss companies in India; while this may may increase FDI, this may destroy
In light of this situation, though,
Question 3
Drawing upon real world examples, explain why bilateral trade agreements, such as that between EFTA and India, are becoming more popular.
For instance, in the Australia-US FTA Australia lowered tariffs on most US agicultural and manufactured goods, while the United States lowered tariffs on Australian beef, dairy and other items. (source). Bilateral trade agreements are becoming more popular because it allows for more negotiating; instead of multilateral agreements, not every party must agree on trading terms. With a bilateral trade agreement though, nations can negotiate with other nations as they like without having to break the trade agreements. (will update later)
Question 1: Explain how a microcredit system works.
Microcredit is lending of small amounts of money to those in poverty designed to spur entrepreneurship. It allows for people who are deemed “high risk”– that is, no credit history or no credit, to take on loans. It is also designed to increase incomes and alleviate poverty, and also to empower women– by allowing them to start new businesses.
Question 2: Examine the benefits of using microcredit systems in developing countries to promote economic development.
One benefit of microcredit is that it empowers women. Women can start their own businesses and bring money to their families; they have their “own” money and not their husbands’. This can help promote gender equality, which is important in tapping into the workforce and improving its quality. Furthermore, it can help alleviate poverty because using loans, people can (for instance) buy seeds or fertilizers to plant their field. This will allow them to obtain money for their family and since it is a relatively small amount of money, they are able to pay it back; the man who planted seeds and fertilizers needed 80 dollars.
Question 3: Examine the problems associated with operating microcredit systems and whether these could contribute to a worsening in the levels of poverty.
Some problems associated with operating microcredit is that bigger banks are taking advantage of microcredit and encourage new loan sharks. Some microcredit companies charge an incredibly high interest rate, which doesn’t allow clients to pay back efficiently. Microcredit interest rates are usually around 25%~40. However, in Mexico, there is less competition and less efficiency– making it 90%. Since the microcredit system is often used in developing countries, there are less regulation; however, because of the risk involved in lending money to people without collateral, the high interest rate may be reasonable. As the article mentions, Mr. Yunus’ (the man who founded microcredit) approach “overly simplistic and too low”. In some countries, microcredit has worked tremendously well, but in others, it has been a failure. In conclusion, microcredit whether or not microcredit can help reduce poverty depends on each country.
Question 1: Identify the indicators of development the article identifies as priorities for the Cuban government.
In the article, the priorities of the Cuban government is health care; more specifically, the life expectancy can be expected to be high, due to the large amount of money that the Cuban government spends on it. In addition, infant mortality rate may be low as well.
Question 2: Examine the evidence in the article that suggests the inhabitants of Cuba experience low livings standards.
Evidence to support that inhabitants of Cuba experience low living standards is of poverty. They are “jammed in lines at stores to exchange food stamps for groceries”. They also do not have meat for lunch everywhere, and “no gasoline… to fill the car up before heading off to work in the morning”. However, the evidence to support that inhabitants of Cuba are not experience low living standards is the health care system; at least half of the money earned in the country goes towards hospitals clinics and rehabilitation facilities. The people can live in health, despite living in poverty.
Question 3: Analyse the advantages and disadvantages to the Cuban economy as a result of allocating resources to the health sector.
The advantages of the Cuban economy as a result of allocating resources to the health sector are one, increased longevity, and higher infant mortality rates. By having healthier people, more people can work; and more people are happier, in terms of their health. A healthy workforce is favorable than an unhealthy one.
However, there are some disadvantages. For instance, because resources are allocated to the health sector, other sectors must be sacrificed– such as poverty prevention. Cuba has the risk of falling in the poverty cycle. The poverty cycle states that:
“To develop economically, countries need to invest in new and improved capital. However, investment needs funding and this requires savings. Countries with low income and low savings levels have a lack of funds for investment, which in turn leads to lower incomes. This is, in essence, a downward spiral of cumulative causation. Low incomes lead to low investment levels, which mean even lower incomes”
This can lead to inefficiency in the economy; and growth is not achieved. Poverty will be a barrier to the Cuban economy, although that is the cost for allocating its resources to prioritize health for their people.
There may be external factors that had contributed to Cuba’s failure in terms of poverty. For instance, the collapse of the Soviet Union in the 1990s eliminated the $4~6 billion subsidy they had received from the Soviet Union. Furthermore, since public sector employment is 76% and private sector employment is 23%, many of the employment is offered by the government. People who would have been hired by private sectors are not hired, and this could be a factor in poverty.
Cuba’s allocation of resources to the health sector is, in conclusion, not beneficial; it should prioritize reducing poverty and increasing the standard of living over health care. While health care is very important, people should be having a higher standard of living– which would in turn motivate them to increase technology and perhaps then health care can be improved.
Question 1: Explain the importance of human capital in contributing to economic development.
The quality of the working population, the human capital, is the result of knowledge, skills, education and training. The benefits of enhancing human resources (investment in human resources) go far beyond economic growth. A short list of positive effects resulting from investment in human capital would have both economic and social benefits:
Free trade is international trade free from any restrictions like tariffs, quotas or other protection. Usually better for more developed countries that can trade well. In economic theory, as countries develop they should move toward free trade to remain competitive and increase efficiency. Might cause distress for sunset industries.
Protectionism happens when countries adopt policies to protect their domestic industries from foreign competition. Usually good for developing countries with many sunrise industries. Can lead to inefficiency however.
Subsidy is a payment made to firms or consumers designed to encourage an increase in output.
Tariffs are taxes on goods imported into a country.
Exchange Rates
Appreciation: The increase in price of a currency in terms of another currency through, either, an increase in demand or a decrease in supply.
Depreciation:
The decrease in price of a currency in terms of another currency through, either, a decrease in demand or an increase in supply.
Dirty Floating:
A floating exchange rate system in which the government tries to manipulate the exchange rate to gain some economic advantage, like a depreciation to enourage exports
Exchange Rate:
The rate at which a currency is traded for another, ie the price of a currency in terms of another currency.
Fixed Exchange Rate:
An exchange rate system where the currency is pegged to a specific value in terms of another currency. The price of the currency in terms of that currency doesn’t change.
Floating Exchange Rate:
An exchange rate system in which the forces of supply and demand determine the price of a currency in terms of another currency without government intervention.
Managed Exchange Rate:
An exchange rate system in which the government tries to influence the value of the currency through open market operations in a floating exchange rate.
Balance of Payments
Balance of payments is a record of the income and expenditure transactions between a country and overseas.
Balance of trade in goods is the difference between the value of exports of goods and imports of goods.
Balance of trade in services is the difference between the value of exports of services and imports of services.
Capital account of the balance of payments is the part of the accounts that records capital transactions.
Current account is usually taken to refer to the current accoutn of balance of payment which measures the exports and imports of goods and services between a country and overseas.
Current account deficit is the balance of a country’s earnings from the export of goods and services less its expenditure on imports of goods and services.
Current account surplus is the balance of a country’s earnings from the export of goods and services less its expenditure on imports of goods and services.
Current transfers part of the current account records transactions relating to the transfer of goods, services or cash between residents of a country and non-residents.
Direct investment is the purchase of overseas physical assets.
Investment income records dividends and interest payments that residents of a country earn on assets held overseas, and also payments to foreign residents on assets held in the country.
J curve effect is where a fall in the value of the currency initially worsens the balance of trade before it later improves.
Marshall Lerner condition states that a devaluation will improve the current accoutn balance of the balance of payments if the combined price elasticities of demand for exports and improts are greater than 1.
Portfolio investment is the purchase of overseas financial seets.
Reserve asset is any foreign currency asset held by a country as part of its foreign exchange reserves.
Special drawing rights are allocated by the International Monetary Fund.
Economic Integration:
Bilateral trade agreement: A bilateral trade agreement is an agreement between any two countries in relation to the terms they trade with each other on. THey key element of the agreement are likely to be in relation to tariffs and quotas on teh trade of goods and serves. The agreement will usually specify either lower or no tariffs on certain products and services to encourage trade between the two countries.
Common Market: A common market is a customs union which allows the free movement of capital, labour and other factors of production between member states.
Free Trade: Free trade is international trade free from any restrictions like tariffs, quotas or other protection.
Free Trade Area: A free trade area is a group of countries which removes tariff barriers between member countries but allows each member to decide on its own tariff policty towards non-members.
Monetary Union: a monetary or currency union is an agreement between countries to share the same currency.
Multilateral trade agreements: a multilateral trade agreement is an agreement between multiple countries about the terms on which they will trade with each other. Most multilateral trade negotiations will take place under the auspices of the World Trade Organization (WTO). The aim of multilateral trade agreements is to reduce protectionism between countries and encourage freer trade and fewer restrictions on the movement of people and goods between countries.
Trade Creation:
increased trade that occurs between member nations of a trade bloc or union, usually through economies of scale due to a larger market.
Trade Diversion:
decrease in trade that occurs when cheaper non-bloc countries’ products are replaced by intra-bloc more expensive products.
Terms of Trade:
Deterioation of ToT: if the terms of trade has deteriorated, then this means that the import prices have increased more than export prices. A deterioration in the terms of trade may indicate an improvement incompetetiveness. Ths is because improt prices have risen more than export prices, perhaps showing that exports are more competivie. In the medium term demand for exports may rise and lead to an improvement in the current account.
Improvement in ToT: if the term of trade has improved, then this means that export prices have increased more than import prices. This may indicate a deterioratin in competitiveness and in the medium term may lead to a fall in export demand. How much export demand falls will depend on the price elasticity of demand for exports. This may adversely affect the balance of payments.
Terms of Trade: The terms of trade is the relationship between the price of exports and imports, expressed as an index. It is calculated as export prices divided by import prices. An increasing terms of trade means that an economy is able to buy more imports with the same volume of exports.
pg 309-310
Psychoactive Drugs:
