Negative Consumption Externality
Smoking (second hand smoke) Singapore has a 71% tax on cigarettes
Subsidies
European agricultural subsidy (CAP- common agricultural policy, 30bn a year
Price floor (Minimum Price)
Scottish alcohol price floor 50p per unit
Price ceiling (maximum price)
New York (Bronx) price ceiling on rent for housing and apartments- rent control
Positive Consumption Externality
Eg. Vaccinations, educationSingapore training schemes, 95% subsidized for low wage workers
Positive Production Externality
Research and development- developing new technologies that benefit society or can be used by societyBee farming (pollination of multiple species)
Advertizing/Persuasion to limit Negative Externalities
Switching to public transport, less smoking, changing to greener companies, decreasing consumption of unhealthy foods (Singapore healthy eating campaign)
Cap & Trade Policy
EU emissions trading system
Limitation of Carbon Tax
Harms economic growth (US and China refuse)/ international competitiveness, Norway considering scaling back carbon tax due to failing oil sector investment
Limitation of switching to biofuel
Conflict with food (Brazil uses 25% ethanol in gasoline)
Low interest rates
UK 0.25% in 2016
Unemployment rate
2.3% in Singapore in 2017Swaziland: around 40%
Cyclical unemployment
(recent example) Eurozone crisis- 11.5%, due to inability to devalue euro and low ADSpanish youth unemployment rate 56.2% in 2013
Structural unemployment
The manufacturing industry, for example, has been in significant decline in Australia over the last few years. As Car manufacturers such as Ford, Toyota, Holden and Mitsubishi have stopped manufacturing in Australia, this means that manufacturing skills are less demanded whilst other jobs requiring different skills are more demanded. This means that structural unemployment increases for those previously in manufacturing jobs.
Perfect Competition
Night markets in Thailand/CambodiaHawker centres
Monopoly (competitive branding)
Apple - 40% of US smartphone market
Oligopoly
Singtel, Starhub, M1Singapore buses (they have identical fares and they haven't changed in decades)US Airline Industry: 5 airlines have over 70% market share of industry
Monopolistic competition
(perfect comp except there is room for diversification/branding) Barbers, hairdressers, beauty salons, restaurants
Common access goods
Fishing in international waters (South China Sea)
Formal collusion
OPEC (Organization of the Petroleum Exporting Countries)
Informal collusion
Virgin Airlines and British Airlines fixing fuel surcharges
Regulatory Barriers
French Government ordering all Japanese video imports to be inspected in Poitiers - took too long etc. + effectively reduced imports
VERs (Voluntary export restraint)
Following the end of the FMA, EU and US asked China to restrict its textile exports.
import substitution
Latin America: by the early 1960s, domestic industry supplied 95% of Mexico's and 98% of Brazil's consumer goods
Exchange rates
1 USD = 1.4 SGD
Current Account Deficit
The U.S. current account deficit was $469 billion in 2016.
Centrally Planned Economy
SOVIET RUSSIA
Privatizations (making government businesses private)
SMRT privatized, bought by Temasek Holdings
Nationalisations (making private businesses government owned)
Nationalization of airport security in the US post 9/11 to form the TSA
Mergers/acquisitions
Tiger Airways was bought by Singapore airlines in 2016
Stagflation (increase in inflation and increase in unemployment simultaneously)
1973- US oil crisis. The 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo (ban on trade). By the end of the embargo in March 1974, the price of oil had risen from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. However, this spike in oil prices meant that wages could not keep up, and people lost their jobs as there was very little supply and demand of oil because of the spike in price.Zimbabwe in 2004
Inflation rate
-0.5% in Japan 20160.7% in Singapore 2017
Supply side policies- Labour market reforms
Minimum wage- In December 2015, the state of Kentucky lowered the minimum wage from $10.10 to $7.25 USD in order to reduce unemployment.
Supply side policies- trade liberalization
Canada/EU CETA deal - lowering tariffs on EU agriculture
Supply-side Policies - Investments in Human and Physical Capital
2008 Financial Crisis, the Obama Administration increased its spending on public projects such as road building in an effort to boost aggregate spending
Expansionary fiscal policy
Japan's post 2014 (8% tax too high) recovery- 3 point stimulus package: monetary, fiscal, structural reform, $276bn fiscal spending in 2016
Failure of Expansionary Fiscal Policy
Failure of expansionary fiscal policy in Greece.However, it may not always achieve its intended effect. For example, consider the situation of Greece. Any reduction in tax would probably not lead to increased consumer spending, as people would be more inclined to save than spend in a recession. Investment would also be highly doubtful as it requires business confidence, and Greece simply doesn't have that from it's investors. Also, government spending requires the government to have substantial funds - or it would require borrowing money. This could exacerbate an already worsening situation. Etc.
Contractionary fiscal policy
Iceland in 2012 cutting spending and reduced their deficit
expansionary monetary policy
following the uncertainty of Brexit, the UK lowered its interest rates to a record low of 0.25%
Contractionary Monetary Policy
Austerity measures in the EU post 2008 recession
Marginal Propensity to Consume (MPC)
Some wealthy nations, such as Japan and Germany, have relatively low marginal propensities to consume. Likewise, many poor African and Asian countries have relatively high marginal propensities to consume.
Asymmetric Information
VW Diesels- VW cheated on emissions tests- Consumers believed that the VW diesel cars were more environmentally friendly than they actually were- Demand (MPB) with asymmetric information was greater than it would have been if buyers had correct information - More VW Diesels were bought and sold at a higher price than what was socially optimal
Cost push inflation
OPEC increasing prices of oil thus increasing costs of productionIncrease of minimum wages in Washington to $15
Demand pull inflation
increasing household income increases AD (China)
Automatic stabilizers
unemployment benefits, welfare payments (transfer payments)
Progressive taxation
French citizens whose income is over 1 million euros will be taxed at a rate of 75%.
example of tradable pollution permits
Northeastern US states have capped + reduced emissions by requiring companies to buy tradable pollution permit
pollution policies examples
In Britain, coal use plummeted after the introduction of a carbon tax in 2013
example of the over-use of common access resources
deforestation
example of falling prices of oil
recently (2019) price of crude oil has fallen by 50% = reduced transport + other business costs in Western Europe
example of improvements in technology increasing economic growth
factories are no longer predominantly workers but only run by machines
Infrastructure
The essential facilities that allow economic activities to take place. It is normally provided by the government.
Aggregate supply
This is the total amount of goods and services that will be produced in an economy at a given price level.
Short-run (MACRO)
The period of time in which the price of factors of production does not change. More specifically the price of labour (wages) is fixed.
Expansionary fiscal policy
This is where the government uses policies to increase the levels of aggregate demand in the economy.
Keynesian multiplier
This states that any injection onto the circular flow of income will lead to an increase in AD that is greater than the value of the injection.
Enterprise zone
Reduce tax for a very specific geographical area
Time lag
The difference between the period of time of you deciding to do something and actually doing it.
Base rate
The cost/interest rate that banks when they borrow money from the central bank.
Labour force
The total number of workers who are willing and able to work at every given wage rate.
Equilibrium unemployment
Where there is equilibrium in the labour market but there are still unemployed workers in the economy.
Aggregate supply of labour
The total number of workers who are willing and able to take available jobs within the economy at every given average wage rate.
Occupational immobility
Where workers do not possess the skills to take jobs that are currently available in the economy.
Geographic immobility
Where the available jobs are in a different geographical area to the unemployed workers and they are unwilling to move to take the job.
Disequilibrium unemployment
This is caused when there is something preventing the labour market from clearing i.e. there is a disequilibrium in the market.
Economic growth
An increase in a country's economic activity as measured by an increase in real GDP.
Recession
Two or more consecutive quarters (6 months) of negative economic growth/of contraction
Proportional tax
As somebody's income increase, the proportion of their income paid in tax stays the same.
Progressive tax
As somebody's income increase, the proportion of the income paid in tax increases.
Regressive tax
As somebody's income increases, the proportion of income paid in tax decreases.
Transfer payment
Where money is moved from one group in society to another without any increase in economic activity.
Poverty
Where somebody's income is below the level that is necessary to meet their basic consumption needs.
Absolute poverty
Where someone's income falls below a pre-determined amount, considered the minimum needs to meet a basic quality of life.
Relative poverty
Where someone's income is below a pre-determined % of the mean income in that country.
Extreme poverty
Living on less than $1.25 a day.
Moderate poverty
Living on less than $2 a day.
The income method (GDP)
This method totals the sum of all incomes earned within an economy during a period of time.
The output method (GDP)
This method totals the sum of all output produced by an economy during a period of time. This is our goods and services.
The expenditure method (GDP)
This method measures the total spending by all sectors of the economy in a given time period (C+G+I+(X-M)).
Consumption
This is the total spending by households on domestically produced goods and services during a period of time.
Government spending
This is the total spending by the government in a given period of time. This includes capital and current spending. The government supplies goods and services.
Investment
This is the total spending by firms in an economy on capital stock OR addition of capital stock to the economy.
Export revenue
This is total sum of money coming into the country (X-M).
Gross National Income (GNI)
The value of the output of goods and services produced in a country in a year, including money that leaves and enters the country
Opportunity cost
This measures the cost of obtaining a good or service in terms of the quantity of the next best alternative foregone.
Replacement investment
The spending on capital stock to maintain levels of productivity.
Induced investment
The spending on capital stock to increase levels of productivity.
Macroeconomics
The study of the economy as a whole
Circular flow ofincome*
A simplified model of the economythat shows the flow of moneythrough the economy.E.g: Shows income,expenditure, injections andwithdrawals (leakages.)
Gross Domestic Product (GDP)
The total money value of all finalgoods and services produced in aneconomy in one year.GDP = C + I + G + (X - M)orGDP = private consumption + gross investment + government investment + government spending + (exports - imports)
Gross National Product (GNP)
The total money value of all finalgoods and services produced in aneconomy in one year, plus netproperty income from abroad(interest, rent, dividends andprofit).(Profits from MNCs)E.g: GNP=GDP + net propertyincome(GNP=GDP + netinvestment earnings)GNP>GDP in SwitzerlandGDP>GNP in Brazilv
Net national product
GNP [the total money value of all final goods and services producedin an economy in one year, plus net property income from abroad (interest, rent, dividends and profit)] minus depreciation (capital consumption).GNP - depreciation =NNP
Nominal GDP
The total money value of all finalgoods and services produced in aneconomy in one year, not adjustedfor inflation.
Real GDP
the total money value of all finalgoods and services produced inan economy in one year, adjustedfor inflation.RGDP = NGDP/GDPdeflator
Per capita GDP
The total money value of all finalgoods and services produced in aneconomy in one year per head ofthe population.GDP/populationCountries with rapid popngrowth need to have morerapid increase in GDP(Kenya, Egypt)
Aggregate demand*
The total spending in an economyconsisting of consumption,investment, governmentexpenditure and net exports.AD = C+I+G+(X-M)orAD = consumer spending on g&s + Private investment and corporate spending on non-final capital goods (factories, equipment, etc.) + Government spending on public goods and social services (infrastructure, Medicare, etc.) + Net exports (exports - imports)Increased AD causesinflation if the economy isat full employment.
recessionary/deflationary gap (contractionary)
When total spending (aggregatedemand) is less than the fullemployment level of output, thuscausing unemployment.E.g: Unemployment over 25%in Spain and Greece after2008 GFC.
Demand-side policy
Government policy designed toinfluence the aggregate demand inthe economy, thus affecting theaverage price level and realnational output.E.g: Fiscal and /or monetarypolicies to boost AD afterGFC in 2008.
Fiscal policy
Demand-side policy using changesin government spending and/ordirect taxation to achieve economicobjectives relating to inflation andunemployment.E.g: GW Bush 2008 $600bntax rebates,Obama 2009 $1.2 trillion inincreased G spending("fiscal stimulus")Trump tax cuts despite$21 trillion national debt
Monetary policy
Demand-side policy using changesin the money supply or interestrates to achieve economicobjectives relating to inflation andunemployment.E.g: "QE" Quantitative Easing"by the US Fed, B of E,BoJ.Fed 2012 (Ben Bernanke)increased QE to $85bn permonth of asset buying.March 2016, ECB (MarioDraghi) increased itsmonthly bond purchasesto €80 billion
Short run aggregatesupply (SRAS)
a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
Long Run Aggregate Supply (LRAS)
The level of output to which an economy will always return in the long run. The LRAS curve intersects the horizontal axis at the full employment or potential level of output.
Supply-side policies
Government policies designed toshift the long run aggregate supplycurve to the right, thus increasingpotential output in the economy.
Market-based supply-side policies
Actions to increase LRAS which require LESS government involvement in the economy.E.g: fewer labor laws, no minimum wages, reduced unemployment benefits, privatizeion etc.
Interventionist supply-side policies
Government policies designed toimprove on the free market. Usedin Sweden, Denmark. Generallysupported by Keynesianeconomists.
Unemployment
People in the labour force without ajob, who are actively seeking work.Excludes : homemakers,disabled, prisoners, longterm discouraged,underemployed,
Unemployment Rate
the percentage of the labor force that is unemployed# unemployed/labour force X 100or#unemployed/employed +unemployed X 100
Full employment
Exists when the number of jobsavailable in an economy is equal toor greater than the number ofpeople actively seeking work.Sometimes called thenatural rate of U,equilibrium U or voluntaryU. (About 5% in USA)
Underemployment
When workers are carrying outjobs for which they are overqualified,not using their full skillsand abilities or when they areworking part-time but wishingmore hours.E.g: Qualified Spanisharchitects with part-timejobs as waiters.
Structuralunemployment
Unemployment caused by apermanent fall in the demand for aparticular type of labour. There isa mismatch between skills and thejobs available.E.g: Automation in car factoriesCoal mines run out of coalOutsourcing call centrejobs to IndiaItalian textile workers vBangladesh
Frictionalunemployment
Equilibrium unemployment thatexists when people have left a joband are in the process of searchingfor another job.E.g: Recent graduatesMothers returning toworkforceSwitching jobs
cyclicalunemployment
unemployment that rises during economic (AD) downturns and falls when the economy improves
Real wage/classical unemployment
Disequilibrium unemployment that exists when real wages in the economy get pushed up above the equilibrium wage rate, either by the government or by trade unions.
Inflation
A sustained increase in the general(or average) level of prices and afall in the value of money.
demand-pull inflation
increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand
Cost-push inflation
a sustained rise in the price level caused by a leftward shift of the aggregate supply curve
Deflation
A persistent fall in the averagelevel of prices in an economy.
Natural rate ofunemployment (HLonly)
The rate of unemployment that isconsistent with a stable rate ofinflation. It is the rate where thelong run Phillips curve touches thex-axis.E.g: Excludes cyclical U. Canbe altered by supply sidereforms like increasedflexibility of labour market.
Direct taxation
Taxation imposed on people's income or wealth, and on firms' profits.
Indirect taxation
Tax on expenditure. It is added tothe selling price of a good orservice. It is sometimes known assales tax.E.g: VAT
Progressive taxation
a policy that raises tax rates as income increases
Regressive taxation
Takes a greater proportion ofincome from the low-incometaxpayer than from the highincometaxpayer.E.g: Tax on cigarettes, VAT. (Aslow income people havehigher mpc and lowersavings rates.)
Proportional taxation
A system of taxation in whichtax is a constant % of incomefor example 15% of incomeE.g: Hong Kong, Singapore,Russia have « flat tax. »
Transfer payments
A payment received for whichno good or service isexchanged, e.g. a studentgrant or a pension.E.g: U benefits, old agepensions, family allowance.
Lorenz Curve
A curve showing distributionof the total income in theeconomy. It is calculated incumulative terms. The further the curve is from theline of absolute equality (45degree line), the moreunequal is the distribution ofincome.
Gini coefficient
A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.
appreciation (of a currency)
Refersto an increase in the value of a currencyin the context of a floating (or flexible)exchange rate system or managedexchange rate system
automatic stabilisers
Factors thatautomatically, without any action bygovernment authorities, work towardstabilising the economy by reducing theshort term fluctuations of the businesscycle. Two important automatic stabilisersare progressive income taxes andunemployment benefits.
business cycle
Fluctuations in thegrowth of real output, or real GDP,consisting of alternating periods ofexpansion (increasing real output) andcontraction (decreasing real output); alsoknown as trade cycles.
Free trade
international tradethat takes placewithout any barriers,such as tariffs,quotas, or subsidies.E.g: Trade within the EU.FTA between China andSwitzerland.
Tariff
A duty (tax) that is placedupon imports to protectdomestic industries fromforeign competition and toraise revenue for thegovernment.
Quota
Import barriers that set limitson the quantity or value ofimports that may be importedinto a country.
Subsidy
An amount of money paid bythe government to a firm, perunit of output, to encourageoutput and to give the firm anadvantage over foreigncompetition.
Voluntary export restraint(VER)
an agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other countryE.g: 1980s Japan agreed toreduce car exports to USA.
Infant industry argument
The argument that newindustries should beprotected from foreigncompetition until they arelarge enough to achieveeconomies of scale that willallow them to be competitive.
Dumping
the sale of an exported product at a price lower than that charged for the same or a like product in the "home" market of the exporter
Anti-dumping
Legislation to protect an economy against the importing of a good at a price below its unit cost of production.
Free trade area (FTA)
An agreement madebetween countries, where thecountries agree to tradefreely among themselves,but are able to trade withcountries outside the freetrade area in whatever waythey wish.E.g: NAFTA (USA, Canada,Mexico) increased tradebetween them.
Customs union
A group of countries committed to (1) removing all barriers to the free flow of goods and services between each other and (2) the pursuit of a common external trade policy.E.g: When UK joined the EECtariffs were imposed ondairy produce from NZ.
Common market
A customs union withcommon policies on productregulation, and freemovement of goods,services, capital, and labour.
World Trade Organisation
An international body thatsets the rules for globaltrading and resolves disputesbetween its membercountries. It also hostsnegotiations concerning thereduction of trade barriersbetween its member nations.
Balance of payments
A record of the value of all thetransactions between theresidents of a country withthe residents of all othercountries over a given timeperiod.E.g: the difference between the amount of money that comes into a country and the amount that goes out of it
Balance of trade
A measure of the revenuereceived from the exports oftangible goods minus theexpenditure on the importsof tangible goods over agiven period of timeE.g: the difference between a country's total exports and total imports
Invisible balance
A measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.
Expenditure-switchingpolicies
Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.E.g: Protectionism: 35% tariffson imported steel to help USSteel (GW Bush 2001)Depreciation: "currencymanipulation" by China andJapan.
Expenditure-reducingpolicies
Policies implemented by the government that attempt to reduce overall expenditure in the economy, in order to reduce expenditure on imports.Causes recession byreducing AD!
Marshall-Lerner condition(HL only)
States that a depreciation, ordevaluation, of a currency willonly lead to an improvementin the current accountbalance if the elasticity ofdemand for exports plus the elasticity of demand forimports is greater than one.
J-Curve (HL only)
Suggests that in the shortterm, even if the Marshall-Lerner condition is fulfilled, afall in the value of thecurrency will lead to aworsening of the currentaccount deficit, before thingsimprove in the long term.
Terms of trade
An index that shows thevalue of a country's averageexport prices relative to theiraverage import prices.Index of export prices/indexof import prices X 100 =ToTindex.
Deteriorating terms oftrade/adverse terms oftrade
Where the average price ofexports falls relative to theaverage price of imports.Also called "unfavourablemovement.
Elasticity of demand forexports
The responsiveness of thequantity demanded ofexports when there is achange in the price ofexports.E.g: Demand for Japanese carsis relatively elastic(substitutes) so depreciationof Yen will increase exportrevenue.
Elasticity of demand forimports
The responsiveness of thequantity demanded ofexports when there is achange in the price ofexports.E.g: Demand for oil in Europe isinelastic so a fall in oil priceswill improve CAB.
Current Account Balance (CAB)
The sum of net exports (NX) and net foreign income (NFI): CAB = NX + NFI
Current account deficit
when a country imports more goods and services and pays more abroad than it exports and receives from abroad
current account surplus
when a country exports more goods and services and receives more income from abroad than it imports and pays abroad
Economic development
the sustainable increase in living standards for a country, typically characterized by increase in life span, education level, and income
Economic growth
an increase in real GDP over the previous years
Production Possibilities Frontier (PPF)
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.Growth of actual production: shift of AD (GDP) Growth of potential production: shift of the LRAS
Source of economic growth (5)
1. The natural resource base 2. physical capital 3. appropriate technologies 4. Human capital 5. Institutional factors -------------------------Natural resource base - what to do about each natural resource Physical capital - buildings, equipments - Capital widening: extension of capital good to larger segment of workers (more farmers using simple tools) - Capital deepening: increase in the quality of the capital and ratio of capital per worker (all farmers using better farm tools) Appropriate technology Human capital - increase healthcare- encourage immigration to increase labor force - education Institutional factors - Political stability - stable banking system - orderly legal system
Components of Growth without Development (3)
What to produce? When comparative advantage of a country does not benefit themselves - Resource extraction by multinational corporations (MNCs) - Agricultural commodities reliance How to produce? Deterioration of environment and society as produced (negative externalities) - deforestation - land degradation - water pollution - over-fising - air pollution - climate change For whom do you produce? When there are some that do not benefit - income equality
Development with/without growth?
Development with growth- high correlation - high income with high developmentDevelopment without growth- low GDP per capita - low income but high education - wise investment in prenatal care and education
Common characteristics of economically less developed countries (LDCs) (5)
[IB GAP]1. High birth rates/large dependency ratios 2. Low capita GDP 3. High agricultural dependence (50-80%) 4. Large urban informal sector 5. Poverty cycle
Crude Birth Rate (CBR)
- Global average 20 births per 1000 women of childbearing age per year - LDCs, 40-55 births per 1000 women of childbearing age per year (2-3 times more)
Dependency ratio
the percentage of old age adults and below-working aged children relative to number of working-age adults - LDCs high dependency ratio
Measurement of poverty
Extreme poverty: less than $1.25 in purchasing power parity (ppp) adjusted Moderate poverty: earning $2.00 per day, ppp-adjusted
Informal sector
sector that is unorganized, unregistered, and unsupported by state and its institution - black market
Poverty cycle
low income --> low saving --> low capital investment --> low productivity
Diversity among LDCs (5)
[PS RCH]1. Resource endowments 2. Climate 3. History 4. Political system 5. Degree of political stability
Single indicators (def. and 3)
indicators of economic development through a specific area 1. Income indicators 2. Health indicators 3. Education indicators
Income indicators (3)
- single indicator 1. Per capita GDP v. per capita GNI - GNI: Gross national income (all production from factors of production owed by a country) (GNI = GDP - net income flows) - GDP: Gross national production (all production from factors of production in the boundaries of a specific region/country) => LDCs: per capita GDP> capita GNI - more economic activity than amount labor is paid => MDCs (more developed country): per capita GDP < Capita GNI - less economic activity than amount labor is paid -------------2. Purchasing power parity (PPP) - law of one price: an identical good in one country should cost the same in another country ------------3. Gini Coefficient - distribution of income across a nation - 0= completely equal in income distribution - 100= completely unequal income distribution
Health indicators
1. fertility rate - LDCs: high 2. mortality rate - LDCs: high 3. Life span - Low
Education indicators
Student per teacher ratio adult literary rate
Composite indicator
a group of indicators and put them together in an attempt to get a broad picture of a country's level of development usually expressed an an index
Human Development Index (HDI)
- created by United Nations - Evaluates 1. Health: Life expectancy 2. Education: Adult literary and enrollments ratio 3. Income: GDP per Capita (PPP-adjusted) 0 to 1 - 0 is low - 1 is high
Domestic obstacles to economic (5)
1. poverty trap 2. natural resource trap 3. Geography trap 4. Education/poor governance trap 5. Conflict trap
Natural resource trap
2 reasons 1. no natural resources 2. cannot export resources to earn foreign exchange Curse of natural resource - breed domestic conflict over control of one resource resource poor country --> no exportable commodities --> limited foreign income --> inability to import capital good --> low productivity and low income --> poverty
Geography trap
- land-locked and surrounded by poor countries - Key access to sea ports Country is landlocked with hostile neighbors --> no access to global market --> no foreign income from export --> low domestic employment --> low income --> poverty
Education/poor governance trap
- corrupt government does not help education poor education makes a country -less attractive to FDI - limit amount of capital available to workers - low skill workforce - lower income - less tax revenue Poor education system --> low quality human capital --> low productivity --> low income --> low revenue/corrupt gov --> minimal spending on public goods
Conflict trap
- worse poverty trap civil unrest and violence --> political and economic uncertainty --> reduced investment from abroad --> intense resource scarcity
Institutional and political obstacle to economic development (6)
1. ineffective taxation structure 2. lack of property rights 3. political instability 4. inequality in distribution of income 5. lack of infrastructure6. lack of access to credit (banking and loans)
Social and cultural obstacles to economic development (2)
1. religion 2. tradition
Domestic factors that contribute to economic development (4)
1. education 2. Health 3. banking, credit, micro-credit 4. empowerment of women
International obstacles to economic development
1. Narrow range of exports 2. Over dependence on primary products
Narrow range of exports
LDCs have currency that is non-convertible on foreign exchange markets need to gain "hard currency" through exports and use those capital to acquire needed physical capital to increase productivity
Over-dependence on primary products
consequence - influence greatly by global commodity market fluctuation - little pricing power A highly inelastic supply means - small change in quantity demanded, big change in price
International factors that contribute to economic development (5)
1. import substitution policies 2. export promotion policies 3. trade liberalization 4. acquire help from organization (WTO) 5. Diversification of national output
Import substitution policies
protectionist policies aiming to reduce domestic consumers' dependence on imported goods - promote domestic industries with high import tariffs BAD: - could lead to tariff wars - inefficient production at home (more expensive)
Export promotion policies
Protectionist measures aimed to increase competitiveness of domestic producers in foreign market - subsidies for domestic producers of exportable goods - intentional devaluation of national currency BAD: - export-led growth may be too dependent on foreign consumers - government reduce revenue - domestic producers' lack of incentive to increase quality or productivity due to government aid - devaluation makes import less attractive to domestic country
Foreign direct investment
a long-term investment by foreign firms into domestic markets of other countries - Add into the low capital/productivity area in poverty cycle Greenfield investment: MNC construct new facilities from scratch Brownfield investment: MNC purchase or lease existing facilities
Multinational corporation (MNCs)
large company with trading, manufacturing or service operations across several countries
Why MNCs are attracted to developing countries (6)
1. low-cost labor 2. natural resources 3. political stability 4. large domestic market 5. relaxed regulatory environment 6. liberalized free market conditions
Advantages of FDI (3)
1. Capital improvements 2. income, employment, training 3. Market efficiency and choice
Disadvantages of FDI (3)
1. muted effects on employment 2. limited income benefits 3. limited capital injections
MNC Power (5)
1. influence over regulatory environment 2. reduced tax burden 3. minimal environmental regulation 4. local worker right limited 5. overwhelming competition with local industry (enjoy economies of scale)
Aid
long or short term loans, grants, and/or technical assistance
Official development assistance (ODA) or bilateral aid
Aid given by a foreign government; when a country's government gives directly to another country
Non-governmental Organizations (NGO)
aid by non-governmental organisation
Type of aids (5)
1. debt relief grants 2. technical assistance 3. development assistance 4. humanitarian aid 5. Commodity assistance
Donor motivation for giving aid (3)
1. political and strategic 2. Economic 3. Humanitarian
Arguments for foreign aid (2)
1. It is only the delivery of aid that is problem, not the aid itself 2. aid addresses areas where growth alone will not cover
Arguments against foreign aid (5)
1. Aid is inefficient 2. Corruption squanders aid 3. Aid rarely gets to those who are in need 4. Aid displaces local investments and market 5. Aid fosters dependency 6. cost lead to international debt
Arguments for Trade to cope with development (4)
1. Rich countries eliminate subsidies and expand market for LDC 2. allow diversification 3. more efficiency 4. reduce dependency on foreign aid
Arguments against trade to cope with development (2)
1. cut in subsidies would cause rise in food prices (LDS import a lot from aboard)2. Aid will go where trade don't go (poor villages)
International debt
comprises short and long term loan obligation owed to foreign government, NGOs, and private sources
Origins of international debt
1. inelastic demand of certain product (oil) 2. LDCs engaging in a rush lending and borrowing from banks 3. high interest rates that cannot be paid back 4. funds poorly used
Consequence of indebtedness
Debt trap 1. big non-concessional (market interest rate) loans 2. Large debt service payments 3. poor credit rating 4. fewer loans, high interest rate 5. public and private investment crowded out 6a. reduced business growth/lower employment/lower income6b. decreased government spending on health, education, infrastructure 7a. slow reduced economic growth, less income for debt repayment 7b. lack of development
Market oriented growth and development policies
any policy that requires little or no role for government in promoting economic development through the unregulated activities of free market
Positives of market oriented policies (4)
1. privatizations and deregulation 2. improved efficiency in the provision of public good (problem with subsidizing natural monopoly) 3. price mechanism work (price controls (ceilings/floors) don't work) 4. improved efficiency in the international flow of goods, services and capital (bad export/import promotion, bad trade barriers)
Weaknesses of market oriented policies
- assume once merit goods are privatized efficiency will be achieved (neglect externalities)
Where Complementary approach (government intervention) is needed the most (3)
1. education (under allocated) 2. social safety nets 3. Infrastructures (under allocated)
Poverty cycle
A circular chain of eventsstarting and ending inpoverty, such as low incomemeans low savings meanslow investment means lowgrowth means low incomes.
Infrastructure
The large scale publicsystems, services, andfacilities of a country that arenecessary for economicactivity. They areaccumulated throughinvestment, usually by thegovernment.E.g: Roads, railways, sanitation,ports, electricity supply
Indebtedness
Relates to the high levels ofdebt that developingcountries owe to developedcountries. The repaymentson this debt act as asignificant barrier to growthfor developing countries.E.g: HIPCs (highly indebted poorcountries) have been givenConditional Debt Relief.
Capital flight
When money and otherassets flow out of a country toseek a "safe haven" inanother country.E.g: Nigeria has more than$100bn of flight capital.
Bilateral aid
Aid that is given directly fromone country to another.E.g: China building a dam inZimbabwe.
Multilateral aid
aid delivered through international organizations such as the UN and the World BankE.g: World Bank loan to Ethiopia
Unofficial aid
Aid that is organised by anon-governmentorganisation, such as Oxfam.
Official aid
Aid that is provided to acountry by anothergovernment or an officialgovernment agency. It maybe multilateral or bilateral innature.E.g: German government toTanzanian government.
Export-led growth (outward-oriented strategies)
strategies based on openness and increased international trade. Growth is achieved by concentrating on increasing exports, and export revenue, as a leading factor in the AD of the economy. Growth in the international market should be translated into growth in the domestic market, over time.E.g: Hong Kong, Singapore, SKorea, Malaysia
Import substitution(inward-orientedstrategies / protectionism)
Strategies to encourage thedomestic production ofgoods, rather than importingthem. It should mean thatindustries producing thegoods domestically shouldgrow, as will the economy,and then should becompetitive on world marketsin the future. The strategiesencourage protectionism.
Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.E.g: Reforestation, sustainablelogging, increased use ofsolar power.
Fairtrade
a scheme where productsfrom producers in developingcountries can be certified todisplay the registeredFairtrade mark encouragingconsumers to buy thembecause they know that theproducers of the productshave been paid a fair priceand the products have beenproduced under approvedconditions.
Micro-credit/micro loans
Small loans usually given toenable poor people to startup very small-scalebusinesses in developingcountries.E.g: Grameen Banks inBangladesh. Lend mainly towomen.
Foreign Direct Investment(FDI)
Long term investment bymultinational corporations inanother country.E.g: Honda factory in SouthAfrica.
The World Bank
A specialized agency of the United Nations that makes loans to countries for economic development, trade promotion, and debt consolidation. Its formal name is the International Bank for Reconstruction and Development.
International Monetary Fund (IMF)
An organisation working tofoster global monetarycooperation, secure financialstability, facilitateinternational trade, andreduce poverty.
Factors of Production
land, labor, capital, entrepreneurship
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
production possibilities curve
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.
long run
the time period in which all inputs can be varied
short run
the period of time during which at least one of a firm's inputs is fixed
marginal product
extra output due to the addition of one more unit of input
diminishing returns to an input
when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
total product curve
shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
inferior good
a good for which, other things being equal, an increase in income leads to a decrease in demand
complementary good
...
Positive economics
Economic statements that can beproven to be right or wrong bylooking at the facts.E.G: Unemployment in Franceis 10.2%
Normative economics
Economic statements that arebased upon opinion and so are notcapable of being proved to be rightor wrong.E.G: It's not fair that Bill Gateshas more money than me!
Potential Growth
Increase in potential output,shown by shifting PPF. (Or LRASright)Actual growth can be within PPF.(AD right)E.g: Improvement in FoP(education in Singapore,Green Revolution,infrastructure in China)
Economic Growth
The growth of real output in aneconomy over time. Usuallymeasured as growth in real GDP.E.g: 2016 % Growth rates:China 6.4USA 2.0India 7.5Greece 1.7Brazil - 3.2Venezuela -7.0
Economicdevelopment
Improvement in standards of living,reduction in poverty, improvedhealth and education. (May addincreased freedom and economicchoice.)HDI: GNI/pop at PPP, lifeexpectancy, years of schooling.Very High >0.8 Canada (#9)High > 0.7 Russia (#50)Medium>0.55 Philippines (#115)Low < 0.55 Nigeria (#152)
Maximum price*
A "ceiling price" imposed by anauthority. Prices cannot rise abovethis price. If set below theequilibrium price it will cause ashortage and a parallel market.E.g: Maximum rent onapartments in NY, "socialhousing" in Geneva.Max bread price in ZambiaMax price croissants inFrance (Raymond Barre)
Minimum price*
A "floor price" imposed by anauthority. Prices cannot fall belowthis price. If set above the marketprice it will cause a surplus.E.g: Bread in France, to protectboulangeries.Book prices in France, toprotect bookstores fromsupermarkets.Minimum wage laws: USA$7.25 per hour, $10 or $15proposed.SMIC €1450 per month.
Price Elastic demand
Where a change in the price of agood or service leads to a greaterthan proportional change in the quantity demanded of the good orservice. (PED > one.)E.g: Peugeot or Fiat cars.Demand for one farmer'sproduce. PED infinite (undefined) in perfectcompetition.
Price Inelastic demand
Where a change in the price of agood or service leads to a less thanproportional change in the quantitydemanded of the good or service.(PED would be less than one.)E.g TobaccoAbout - 0.3 PED for adults, -0.8 for kids.
Subsidy
The amount of money given to producers of a product by the government. It increases the supply of the good by effectively lowering the firms' costs of production.E.g: Paris metro, one third ofrevenue from fares (meritgood.)
Indirect tax
Tax on expenditure. It is added tothe selling price of a good orservice. Excise duty is for aspecific good.E.g: VAT rates :France 20%Greece 23%UK 20%Switzerland 8%
Fixed costs
Costs that do not vary with the quantity of output producedE.g: Rent, depreciation,(parking, internetbusinesses etc. many havebasically only fixed costs)
Variable costs
costs that vary with the quantity of output producedE.g: Raw materials, wages,meat in a burger.
Total costs
fixed costs + variable costs
Marginal costs
the cost of producing one more unit of a goodE.g: Many products havealmost zero marginal cost:online things, like itunesand stuff
Economies of scale
A fall in long run unit costs thatcome from a firm increasing scaleof production.E.g: Bulk buying (Walmart),lower transport costs(Migros), branding (CocaCola) easier credit(Nestlés)
Diseconomies of scale
When LR average costs increasefrom a firm increasing scale ofproduction. (Rising LRAC)E.g: Management problems ofcommunication: Generalmotors, Daimler Chrysler,UBS
Oligopoly
A market structure in which a few large firms dominate a marketE.g Soft drinks, sports shoes
Monopoly
A market structure in which one firm dominates the marketE.g Google
Monopolisticcompetition
a market structure in which many companies sell products that are similar but not identicalE.g: Restaurants, hairdressers,live music
perfect competition
a market structure in which a large number of firms all produce the same product. no barriers to entry or exitE.g: Wheat farmers in Canada
Law of DiminishingReturns
the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to declineE.g: Employing more wheat farm harvesters (Labour) with the same amount of harvesting machines (Tool -> Capital)
Cross price elasticityXED
A measure of the responsiveness of the demand for one good to a change in the price of another good.E.g: Complements: Gillettesells razors at low price tosell more expensiveblades, HP with printersand ink. XED<0Substitutes: Swiss airlinesresponds to lower pricesoffered by easyJet. XED>0
Income elasticity ofdemand YED
A measure of the responsiveness of demand to changes in income.E.g: Normal goods havepositive YED: increasedincome means more QD.Cars, chocolate.Inferior goods havenegative YED: budgetbrands
allocative efficiency
The level of output where marginalcost is equal to average revenue.(MC = AR) The firm sells the lastunit it produces at the amount thatit cost to make it. Maximizescommunity surplus and so is bestfor society. If externalities areincluded it is where MSB = MSC.E.g: Perfect competition in LRand SR equilibrium
productive efficiency
When production is achieved atlowest cost per unit of output.MC=AC at bottom of ATC.E.g: Perfect competition in LRequilibrium.
Contestable market
Low barriers to entry and exitmean that new firms could enter ifprofit margins were very high.E.g: Toy dinosaurs afterJurassic Park movie, newairline routes.
Market failure
The failure of free markets toproduce at the point wherecommunity surplus (consumersurplus + producer surplus) ismaximised. If externalities areincluded it means MSB is not equalto MSC.E.g: Overconsumption oftobacco, junk food orpetrol.Pollution, environmentaldestruction, climatechange, overfishing
Government failure
When government interventionresults in a welfare loss.E.g: Max prices causeshortage, min prices causesurplus. Taxes, protectionism or subsidiescreate a net welfare loss(deadweight loss)
Merit goods
Goods or services considered tobe beneficial for people that wouldbe under-provided by the market orunder-consumed.(Often have positive externalities.)E.g: Education, health care(vaccinations), condoms
Demerit goods
Considered socially undesirable,overprovided by free market.(Often have negativeexternalities.)E.g: Cigarettes, junk food,alcohol.
Positive externalities*
Beneficial effects that are enjoyedby a third party (or society) when agood or service is produced orconsumed.E.g: Condoms, education,public transport
Negative externalities
Harmful, "bad" effects that aresuffered by a third party when agood or service is produced orconsumed.E.g: Passive smoking, drunkdriving, loss of biodiversity
Collusion/ collusiveoligopoly
Where a few firms act together toavoid competition by resorting toagreements to fix prices or outputin an oligopoly.E.g: OPEC (though this is forcountries), Paris 5* hotels,Sotheby's and Christies,European vitamin pillmakers, banks fixingLIBOR interest rates.
Non-collusiveoligopoly
Where firms in an oligopoly do notresort to agreements to fix prices oroutput. Competition tends to benon-price. Prices tend to be stable.(May have "kinked demandcurve.")E.g: Tobacco firms that matchprices without making anagreement to do so.Car firms like Renault, Fiatand Citroen.
Price war
When firms compete by loweringprices to increase market share.E.g: Aldi and Lidl in UK"supermarket wars."Ryanair and easyJetagainst "traditionalairlines.
Cartel
A group of firms in an industry thatjoin together to fix prices or outputlevels. These are usually illegal inmost countries.E.g: Central SellingOrganisation of De Beersdiamonds.
Barriers to entry
Obstacles in the way of potentialnewcomers to a market, such as economies of scale, productdifferentiation, and legal protectionlike patents.E.g: 20 year patents onpharmaceuticals, which then become "generic"thus "saving $158 billion inUSA health costs in 2010alone.
Natural monopoly
A situation where there are onlyenough economies of scaleavailable in a market to supportone firm. Thus it is more efficient tohave only one firm.E.g: Public utilities like gas andelectricity are often"natural monopolies" andare sometimesnationalized.
Price discrimination
This occurs when a producercharges a different price todifferent customers for an identicalgood or service.E.g: "Home fees", "girls enterfree", reduced price for oldage pensioners, orstudents.
Tradable permits
Permits that can be issued to firms by a government or international body, and that can be traded (bought and sold) in a market, the objective being to limit the total amount of pollutants emitted by the firms.E.g: Carbon trading as part ofKyoto protocol on climatechange.
Absolute advantage (HL only)
A country has an absolute advantage in the production of a good when it is able to produce more output than other countries using the same input of factors of production.
Capital
One of the factors of production,which itself has been produced (it doesnot occur naturally), also known as'physical capital',Includes: machinery,tools, equipment, buildings, 'human capital` (skills, abilities, knowledge and levels ofgood health acquired by people;), 'financial capital' (purchases of financial instruments suchas stocks and bonds.)
Comparative Advantage (HL only)
Arises whena country has a lower relative cost, oropportunity cost, in the production ofa good than another country.
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market pricei.e: no market power
Consumer surplus
Refers to the differencebetween the highest prices consumers arewilling to pay for a good and the priceactually paid. In a diagram, it is shownby the area under the demand curve andabove the price paid by consumers.
demand
Indicates the various quantitiesof a good that consumers (or a consumer)are willing and able to buy at differentpossible prices during a particular timeperiod, ceteris paribus (all other thingsbeing equal).
disposable income
The income ofconsumers that is left over after thepayment of income taxes.
economics
The study of choices leadingto the best possible use of scarce resourcesin order to best satisfy unlimited humanneeds and wants.
Entrepreneurship
One of the factorsof production, involving a specialhuman skill that includes the ability toinnovate by developing new ways of doingthings, to take business risks and to seeknew opportunities for opening and runninga business. Entrepreneurship organises theother three factors of production (land,labour and capital) and takes on the risks ofsuccess or failure of a business.
excludable (private goods)
A characteristic of goodsaccording to which it is possible to excludepeople from using the good by charginga price for it; if someone is unwilling orunable to pay the price they will be excludedfrom using it. Most goods are excludable.
rivalrous (private goods)
characteristic of a goodaccording to which its consumption byone person reduces its availability forsomeone else; most goods are rivalrous.
Marginal private cost (MPC)
the amount that a consumer pays to consume an additional unit of a particular good
Marginal social cost (MSC)
the cost to society of producing an extra unit of a good
Marginal private benefits (MPB)
The extra benefit received by consumers when they consume one more unit of a good.
Marginal social benefits (MSB)
The extra benefits to society of consuming one more unit of a good; are equal to marginal private benefits (MPB) when there are no consumption externalities.
public good
a commodity or service that is provided without profit to all members of a society. Has to characteristics: 1) non rivalrous2) non excludable
Non-excludable
it is not possible to exclude someone from using the good
Non-rivalrous
its consumption by one person does not reduce consumption by some else
ad valorem tax
An indirect tax where a given percentage is added to the price of a good or service.
Break-even price
The price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.
law of supply
As the price of a product increases, the quantity supplied increases, ceteris paribus.
law of demand
As the price of a product increases, the quantity demanded decreases, ceteris paribus.
revenue
The income received by a firm from selling its product.
profit maximization
setting prices so that total revenue is as large as possible relative to total costs
revenue maximisation
An alternative goal of firms (as opposed to profit maximization). This occurs when marginal revenue is equal to zero (MR = 0).
satisficing
An "good enough" alternative goal of firms (as opposed to profit maximisation) . This occurs when entrepreneurs endeavour to cover their opportunity costs, but do not push themselves significantly further, even though they might be able to earn higher profits.