UK Economy and Globalisation Revision Notes if you do one thing..

Transcription

1 UK Economy and Globalisation Revision Notes if you do one thing.. Globalisation - A Cause for Celebration or Not? This unit is about globalisation and international trade. There are both benefits and drawbacks of international trade: Benefits Specialisation means countries can focus on the areas they are best at (where they have an absolute advantage) which should lead to increased global output. Allows individuals and firms to obtain goods that are not available in their country. Increases choice for consumers. Enables goods and services to be obtained at lower prices (raises living standards and may reduce inflation) Increases competition helping to prevent monopolies. Bigger market enabling firms to gain from economies of scale and increase sales and profits. Reduces firms reliance on domestic markets (risk bearing economies of scale). How trade reduces poverty trade can help people to earn more money and therefore buy more goods and services. For example, as China has developed, many people are now paid more for working in factories than they used to get from working on farms etc in rural areas. Drawbacks Increased competition from foreign firms may lead to domestic firms closing and jobs being lost. Global Interdependence rises as a result of trade. When economies are doing well this will lead to higher growth and employment but when a global shock hits, such as the credit crunch, the resulting recession spread to other countries. eg if the USA has a recession they will buy less products from China causing problems for Chinese business. Environment International trade can bring with it a variety of negative externalities such as pollution, increased CO2 emissions etc. Increased trade means increasing these costs, eg environmental costs associated with transporting goods. How trade leads to income inequality Often the benefits of trade are not shared out equally. Some countries tend to benefit more from trade than other countries. Also within countries the benefits may not be shared out equally. Entrepreneurs and business people may see more of the benefits than the workers, particularly in developing countries where wages are often low. Trade may also lead to income inequality if people are made unemployed due to foreign competition.

2 Does trade benefit all? Developing countries and their people sometimes face problems gaining the benefits from trade. Factors such as those below can limit the benefits to be had from trade: Poor infrastructure Poor education and training Health and population problems Debt Weak government and corruption Low inward investment Lack of foreign currency In addition, sometimes trade can pose problems for people in/and for developed countries. Jobs may be lost and people unemployed due to competition from cheap goods produced overseas. Countries may experience balance of payments problems if they are not competitive.

3 Increasing Globalisation Globalisation an expansion of world trade in goods and services leading to greater international interdependence Benefits of globalisation to the UK Low Inflation due to greater competition and ability to produce in low-cost countries Wider Choice of Products and Services Larger Market for UK Products Rising Productivity caused by foreign companies setting up in the UK and bringing with them new methods and ideas (skills and technology transfer) High Levels of FDI Costs of globalisation to the UK Increased Competition Loss of Jobs due to above FDI may leave to move to low-cost countries Increased Vulnerability to External Shocks due to international interdependence Environmental Problems negative externalities associated with trade and economic development Factors Contributing to Globalisation Improvements in Transportation The costs of moving goods between countries have been reduced due to new technologies and competition. Containerisation means that goods can quickly move from ship to lorry so handling and hence costs can be reduced. With lower transport costs, goods can be traded competitively around the world. Improvements in ICT ICT has made sending and communicating information very quick and very cheap. Contracts, orders, information and payments can be sent between countries immediately and at low cost. The promotion of products via the internet to a worldwide market has greatly encouraged world trade. Rising Living Standards As countries have become richer, their citizens have demanded not only more goods but a wider variety. This growth in consumer demand has stimulated world trade. Decline in Protectionism More countries now encourage trade. There are fewer barriers to trade with fewer tariffs on imports. Organisations such as the WTO promote world trade. Economies of Scale Technological improvements often mean that companies have to mass produce and sell to large markets. This means that domestic markets are not enough, and large businesses have to look overseas. Not only this but they often open up factories overseas to take advantage of cheaper production costs.

4 Page 2. Challenges for the World Economy Is Economic Growth Sustainable? Sustainable means Meeting the needs of the present without compromising the ability of future generations to meet their own needs The intro suggests the focus of the case study is: Protectionism the arguments for and against this and the link between protectionism and slower economic growth What countries can do to tackle current account deficits on their balance of payments Poverty and sustainable economic development What countries can do to support economic growth in their own countries What we can do to support growth in less developed countries Sustainablity The evidence sets the scene for the case study and also provides us with some possible clues for the last question. Could it be something like? Using the information in the case study and your own knowledge of economics, evaluate the extent to which the benefits of international trade outweigh the costs for less developed countries Using the information in the case study and your own knowledge of economics, evaluate the extent to which the benefits of international trade outweigh the costs for the UK economy To what extent does globalisation benefit the UK / less developed countries? To what extent has increased trade benefited all countries? Use the evidence from the data to give reasons for your answer Using the information in the case study and your own knowledge of economics, evaluate why some countries benefit more from trade/globalisation than others Using the information in the case study and your own knowledge of economics, evaluate strategies to increase the growth of less developed countries Using information in the stimulus material and your own knowledge of economics, evaluate the effectiveness of international trade as a method of supporting economic growth in developing countries

5 Page 3 Figure 1 UK Current Account Balance The current account of the balance of payments is the balance of trade in goods and services plus net investment incomes from overseas assets. Overall Balance of Payments Deficit The evidence shows that overall in the UK we have a balance of payments deficit on current account. This deficit has increased over time

6 Potential Reasons for the Deficit Loss of advantage in many industries eg decline of traditional manufacturing industries due to cheaper imports Globalisation cheaper to produce goods where labour costs are low eg China Growth in people s real income Pre 2008 the UK had a long period of uninterrupted economic growth. As incomes rose people bought more imports BUT then the recession hit. We can see an improvement in our balance of payments after 2008 when UK consumers purchased less imports due to the recession. As the economy started to grow again following this, the deficit grew further. This increased deficit has come at a time when for many people their incomes have stagnated so this is probably not the reason. Exchange rate A strong exchange rate can affect competitiveness. In 2008 and 2009 the fell and this did help the balance of payments BUT the deficit has increased at a time when the has remained fairly low Low levels of productivity and Investment Our productivity has been lower than many of our competitors due to a lack of capital investment. This may be a key reason for our BofP deficit Relatively weak product innovation this can be linked to low spending by UK business on R&D Dealing with the current account deficit May be demand side in short term BUT mostly supply side Manipulate the Exchange Rate low interest rates should encourage the exchange rate to fall increasing competitiveness Keep Inflation Under Control Encourage More Spending on R&D tax incentives Improve Productivity - tax incentives, training, education Tariffs No, No, No Current Government Policy. A lower rate of corporation tax should encourage investment and attract more business to the UK. Will it work???

7 Page 3 Figure 2 The value of the sterling in US dollars The evidence shows the value of the against the dollar from 2006 to 2017 What has happened to the value of the pound between January 2006 and Jan 2017? At the start of the period the rose from about 1.75 dollars to the to over 2$ to the in Jan 2008 The then depreciated sharply before recovering. This was probably due to the recession in 2008/2009. The recession meant the UK financial assets and shares were less attractive to international investors The then hovered around the 1.5 to 1.56 mark for many years before a further depreciation in 2015 through to The most recent depreciation has been partly caused by uncertainty as a result of the vote to leave the EU Over the whole period the depreciated from 1 = 1.75 dollars to 1 = 1.25 dollars Does the data suggest changes in the exchange rate to be a large influence on the current account of the balance of payments? At the start of the period a relationship can be seen. The increased deficit from 2006 to 2008 correlates with a rise in the value of the. This suggests that the stronger pound may be partly responsible for this. There is also an improvement in the current account in 2009 which corresponds with a fall in the value of the For the rest of the period the relationship is somewhat different. The pound remains at a similar level but the current account deficit worsens. At the end of the period the is depreciating markedly but this has not led to an improvement in the balance of payments. In fact, if anything, the current account deficit has got worse. REMEMBER it could be the current account deficit that is causing the to depreciate

8 The potential impact of a fall in the value of the on the UK economy Remember SPICED strong, imports cheap, exports dear Well here the is depreciating so WPIDEC is the mnemonic you need Weak Imports Dear so people in the UK should buy less imports and more British goods. (UK goods more competitive in the UK) Exports Cheap so people abroad should buy more UK exports (UK exports more competitive abroad)

9 Page 4 Figure 3 The ten countries with the biggest current account surpluses in 2015 The data shows the ten countries with the biggest current account surpluses. Remember if some countries have deficits there has to be other countries with surpluses What is meant by a current account surplus? The current account is the balance of trade in goods and services plus net investment income from overseas assets. A surplus means the value of exports is greater than the value of imports One possible reason for China s large current account surplus Low wage costs. This means its costs of production are low and as a result it is very competitive. This means it sells a large amount of exports to other countries leading to a surplus One possible reason for Germany s large current account surplus High productivity. Germany is a very efficient country with highly skilled workers. As a result its productivity is high. As a result it is competitive and exports lots of high value goods (eg BMW and Mercedes cars). This leads to a large trade surplus Potential Impact of CHINA on the UK The evidence shows China has the biggest current account surplus in the world. Is China and its growth good or bad for the UK? Impact of China on the UK (see table on next page as well) Larger Market for Products As countries such as China have developed they are buying more products from the developed economies. China is highly populated and as incomes rise they are buying more products. Car manufacturers for example have seen this as a huge opportunity. HOWEVER they have also purchased more raw materials which has seen the price of scarce resources such as metals etc soar (may add to cost push inflationary pressures in the future) Source of Cheap Products many manufactured goods are now being made in countries such as India and China where there is a large supply of labour and wages are low. This has meant products can be produced at low cost. This has helped keep our inflation rate low.

10 Bad Risk of some developed economies (UK) falling behind and becoming the low wage economies of the future if they are not competitive As developing countries such as China develop they may move into higher value-added goods and services leading to more competition in developed economies. This could cost jobs and lead to lower growth rates Stronger competition from cheap imports may see a further deterioration of the balance of payments in countries like the UK Fast Growth of developing countries like China can increase the demand for scarce resources such as metal and oil which can in turn push the price up and increase inflationary pressures. (This hasn t been a problem in the last few years) Rapid development may lead to negative externalities such as pollution and may increase climate change Interdependence Countries like China are now much more important players in the global economy. If growth in these countries slows it can have negative repercussions for economies around the world. Good Increased output from developing economies like China has led to higher living standards in the developed economies as we have benefitted from cheaper manufactured goods As goods have been produced more cheaply in China this has helped to keep inflationary pressures low in developed economies Large potential market - As China grows, incomes rise and consumers from these countries may purchase more goods and services (exports) from developed economies. This represents an opportunity for businesses in developed countries Technology / Skills Transfer developed countries may benefit from technology, skills, ideas and products that are developed in emerging economies like China.

11 Page 4 Figure 4 WTO Report on Trade Measures The evidence points to a rise in protectionism Protectionism where an action is taken that reduces international trade. With disappointing growth some countries may look to reduce competition for domestic firms through protectionist policies. The aim is to reduce imports and so increase demand for domestic products boosting growth. Whilst this may reduce imports in the short term, in the long term the benefits of free trade will be lost. The WTO The World Trade Organisation is responsible for trying to increase free trade. It provides a set of rules so members know what they are and are not supposed to do. It also settles disputes over trade between member countries. It does this as it believes free trade is good for the following reasons More choice at lower prices Increased competition encourages firms to innovate Exports of goods and services will boost economic growth Encourages efficiency Increases world output and wealth If TRADE IS FREE countries should benefit because: They will be able to specialise in producing the goods in which they have an absolute advantage. By exporting these goods to a global market of 7 billion people this will add to economic growth and create employment in these export industries. Exporters are likely to pay higher wages and boost living standards as a result. Countries can use tax revenue gained from the above to improve infrastructure and education to fuel further development and growth. This can also be used to support people on low incomes. Trade will allow countries to purchase resources they do not have in their own countries or at a lower cost than they would be able to produce themselves. This helps keep inflation low and may help increase competitiveness by enabling firms to reduce costs of production. Trade will allow countries to access capital, new technology, skilled labour and ideas. This will likely boost productivity and competitiveness adding to economic growth.

12 Why Protectionism? Infant Industry Argument develop and protect industry so it can grow and gain the economies of scale which will enable it to compete Dumping protect domestic industry against unfair foreign competition Protect Jobs by making imported products less competitive Prevent negative externalities Political usually linked to the jobs argument Evaluation of Protectionism we have discussed the benefits of trade loads of times. A major problem with protectionism is it leads to retaliation. This is likely to lead to higher prices, lower quality and less choice. The benefits of free trade are lost!!!

13 Page 5 Figure 5 Examples of Protectionism Protectionist Methods Tariffs A tariff is a tax imposed on a good or service from another country to raise its price and reduce the quantity demanded. This makes foreign imports more expensive. A Subsidy Is a payment made by the government to producers of a good or service so as to increase quantity or reduce price. It gives domestic businesses advantages over foreign producers. A Quota This is a physical limit on the number of goods of a certain type that are allowed into a country. It can be in the form of a stated number or a percentage of the total market. An Embargo This is a ban on the import of a good or service. Regulations Many countries try to limit imports through a variety of rules. You may have noticed that Volvo cars (from Sweden) always have their lights on. This is because the law in Sweden demands this. All cars exported to Sweden have to change their wiring so that they obey this law, thus increasing costs. A subsidy will make Indian sugar cheaper abroad and therefore more competitive as the supply curve shifts to the right (increase in supply). As a result there should be more Indian sugar sold overseas. It will cost more for Brazilian and Argentinian farmers to meet these higher standards. This will reduce the supply of beef from these countries (see diagram) meaning that there is likely to be a higher demand for EU beef A tariff will make Canadian wood more expensive in the USA as the supply curve shifts to the left (decrease in supply). As a result less Canadian wood will be sold at a higher price. With Canadian firms less competitive there should be more demand for US softwood.

14 A subsidy will make Chinese firms more competitive as the supply curve shifts to the right (increase in supply) and they can sell their products at a lower price. As a result there should be more Chinese glass and paper sold in China and other countries. A cut in sales tax will lead to an increase in supply of cars produced with domestic components. As a result, the price of these cars should be lower and more of them sold. With more sold the demand for Brazilian components should increase benefiting Brazilian firms. This should lead to a increase in demand for Argentinian oil/petrol. The impact of this may be limited depending upon how many official cars there are. A quota limits the amount of a good that is allowed into a country. This restricts the supply and raises the price.

15 Page 6 Figure 6 Percentage of world population living on less than $1.90 a day The data shows the percentage of people living on less than $1.90 a day. $1.90 is the threshold for absolute poverty as defined by the world bank. Absolute Poverty is where someone has insufficient income to live on. They cannot afford the basic essentials such as food, clothing, shelter/housing. According to the World Bank absolute poverty is having less than $1.90 to live on. Relative Poverty - Is poverty defined relative to standards of income in society at a time. (poverty relative to the situation). In the EU and the UK, we define relative poverty as being where you earn less than 60% of median income. The Data The data shows a large fall in absolute poverty. Global poverty is forecast to fall from 45% of the world being poor to under 5% of the world being poor. Why has poverty fallen? One big reason is economic growth. In particular China has grown rapidly over the past 30 years. As China used to be very poor and accounts for 20% of the world population this has had a massive impact. The link between economic growth and poverty Economic growth leads to a reduction in poverty. Economic growth creates employment which increases people s income reducing poverty. Growth also gives countries more tax revenue to spend on improving education and infrastructure. This boosts productivity and enables workers to gain better-quality jobs. As a result they earn more and poverty falls. Growth gives countries more tax revenue to spend on benefits to boost the incomes of poor people. Economic growth enables countries to develop. As a result they can move into higher value sectors such as manufacturing rather than subsistence agriculture.

16 Page 7 Figure 7 Percentage of the population living in absolute poverty in regions of the world The evidence shows a fall in poverty across the world BUT in some areas such as Sub Saharan Africa poverty remains high Why do some countries remain poor? Barriers that prevent countries achieving the benefits of trade Developing countries and their populations often face problems when it comes to accessing the benefits of globalisation. A country may lack sufficient infrastructure or investment, or may suffer from a corrupt and/or inefficient government. Poor Infastructure Infrastructure is the basic facilities, services etc needed for the functioning of a community or society, such as transportation and communications systems, water and power lines. If infrastructure is poor a country will be less attractive to FDI and costs will be higher making it less competitive. Poor Education and Training Education and training are vital in a world that depends more and more on advanced technology and knowledge. A poorly educated work force is only going to be able to do poorly paid low skilled jobs. The competitiveness of countries is often determined by how educated their workers are (also affects productivity). Health and Population Problems can lead to lower life expectancy and affect growth. Look at the impact of Ebola on a number of African economies. Debt High debt levels can mean countries have to use any revenue they gain to service and pay debt back rather than investing in infrastructure and education. Weak Government Weak corrupt government can mean the benefits of globalisation go to a small proportion of people in a country rather than being used to benefit the general population. Low FDI developing economies can benefit greatly from FDI. This brings jobs, a multiplier effect and also skills and technology transfer. However many of the issues above may make a country less attractive to FDI. Location can also have a big impact. Some countries have advantages because of where they are situated. Others struggle because of natural disadvantages such as being landlocked which makes it difficult, costly and slow for firms to get products to the countries of trade partners.

17 Poverty and Economic Growth A successful strategy of poverty reduction must have at its core measures to promote rapid and sustained economic growth. If GDP rises, income can more easily be shared and more jobs are created. In addition the Government has more tax revenue to invest in infrastructure. This helps to diversify the economy away from dependency on the primary sector towards higher value manufacturing. In addition the government can invest more in improving education which helps workers earn more money. Around two-thirds of poverty reduction within a country comes from growth BUT according to the United Nations Economic growth will not produce jobs and cut poverty unless it is inclusive and equitable, and unless the needs of the poor and marginalized are at the centre of development priorities. When men and women have equal opportunities and freedoms, economic growth accelerates and poverty declines more rapidly. In many developing countries large groups are socially excluded and poverty is perpetuated through inequalities of power. For example: Political where the better off dominate positions of power and ensure the economy works in their interest Economic in some countries workers are bonded to their employers in a kind of slavery Social and Cultural Practices that discriminate against groups. Any attempts to reduce poverty need to tackle the above. Policies to Reduce Absolute Poverty - to reduce poverty in developing economies, the focus may be on different policies. 1. Education greater spending on education and training can enable higher skilled workforce who are able to earn higher wages. 2. Aid aid from developed countries can be used to invest in better health care, education and infrastructure. However, some argue aid can encourage dependency. 3. Diversification of economy away from low value primary (eg agriculture) to higher value manufacturing. A constraint developing economies may face is that their current absolute advantage is in the production of primary products. However, these limit economic development due to volatile prices, low income elasticity of demand and finite nature. Therefore, economic development may require government encouragement of new industries in different sectors, such as manufacturing. This enables greater economic development, and jobs in these areas tend to pay higher wages, but this may be difficult to do without the right skills and infrastructure. However - Attempts to diversify away from agriculture can have mixed results. Sometimes, countries with a poor basic level of infrastructure struggle to make effective use of capital investment in manufacturing. In addition land-locked countries can find it harder to export products at a competitive price than those with access to ports. Policies to Reduce Relative Poverty - May focus on redistributing income and wealth through, taxation, government spending (transfer payments) and the use of policies such as the minimum wage.

18 Investment and Poverty The evidence suggests that there is insufficient investment in some countries and that this is meaning that poverty remains high. Investment can fall into three main types: 1.) Capital Investment this is spending on capital goods such as machinery and equipment This can lead to an increase in a country s productive capacity and make firms in a country more competitive. As a result the country is likely to see higher economic growth. Rising GDP should see increased living standards and lower unemployment which should reduce poverty. 2.) Investment in Human Capital this is about improving the skills of workers through education and training Investment in education and training means a country is able to make the best use of its factor of production labour. This is so important for a developing country. This boosts productivity, enables a country to produce higher value goods and makes it more attractive to FDI. These should reduce poverty directly and also boost growth which also should reduce poverty. 3.) Foreign Direct Investment (FDI) The investment by foreign companies in the production of goods and services in another country. This can reduce poverty in a developing country in number of ways: Create jobs for local people raising their incomes Create jobs indirectly through the multiplier effect Boost skills and raise productivity in a country through a skills and technology transfer

19 Page 8 Figure 8 An introduction to non-governmental organisations NGOs Non-governmental organisations (NGOs) are non-profit organisations that operate independently from nation-states and other international agencies of development. Some, but not all, are charities and are focused on providing humanitarian aid, particularly in the fields of healthcare, disaster relief and education in the developing world. One contribution of NGOs to global development has been humanitarian aid. One of the key roles of NGOs is to raise awareness of issues that are happening in the developing world such as famine, civil war, natural disasters and the impact that these have on the people of the developing world. A further contribution of NGOs in the development process is their ability to work across borders and over longer periods of time. NGOs, unlike governments are not politically affiliated to any one political viewpoint and therefore can maintain a level of funding over a longer period, unlike nation-states, whose priorities often change from one election to the next. NGOs have the advantage of being politically neutral, which enables them to work with governments in the developing world whose ideology may not fit with that of Western nation-states. A further advantage of NGOS is that they can react to global crises a lot quicker than nation-states or International government agencies. As they are independent of government, they do not have to adhere to the bureaucracy and red tape that surrounds governments (voting, passing legislation, etc). Indeed, NGOs often form the basis of the Disaster Emergency Committee to co-ordinate fundraising efforts for natural disasters overseas, such as the Tsunami in Sri Lanka in NGOs can utilise their local knowledge of areas to target aid to those who need it the most. They are able and willing to take risks that governments can t do. Criticisms There has been a number of criticisms levelled at NGOs recently. These include: Corruption amongst some people who work for NGOs. Spending too much money raising the profile of their charity or cause rather than directing the money to where it is needed.

20 Some ways NGOs can help Poverty Reduction NGOs can provide aid In order to tackle poverty. If poverty is reduced economic, growth is likely to be higher as people have higher spending power. In addition families will be more willing to send children to school as they do not need their children to supplement their family income. This improves skills in the country, boosting productivity, making it more attractive to FDI and improving growth in the future Providing Microfinance - Poor people often do not have access to cost effective money-lending facilities and may have to take on often unaffordable fees and interest rates on loans available in their local community. This limits growth and development, puts additional financial pressure on low income families and serves to perpetuate the cycle of poverty. Micro Finance - is small scale loans to individuals and businesses in poor communities. Micro-finance tries to break this cycle. It is based on the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. For example, individuals may be able to get a loan to start a small business. They are then able to earn income rather than relying on handouts. Micro-finance helps very poor households meet basic needs. The use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth. By supporting women s economic participation, micro-finance helps to empower women, thus promoting gender-equity and improving household well-being. However. Some people argue that microfinance usually ends up making poverty worse. The reasons for this are fairly simple. Most microfinance loans are used to fund consumption to help people buy the basic necessities they need to survive. As a result, borrowers don t generate any new income that they can use to repay their loans so they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt. When micro-loans are used to fund new businesses, budding entrepreneurs tend to encounter a lack of consumer demand. After all, their potential customers are poor and low on cash, and what little money they do have gets spent on basic goods that tend already to be available. In this context, new businesses end up displacing already-existing ones, yielding no net increase in employment and incomes. Providing Education, HealthCare and Sanitation Projects that improve education and skills levels can be useful as they boost productivity and make a country more attractive to FDI. Improvements in healthcare have the same impact. Other ways to support growth in LDCs can be seen in the table on the following pages:

21 Factor Explanation What is it? How does it work? How is it supposed to work? Aid Aid can be given in terms of money and in the form of goods (such as machinery, or people with specialist skills). Money can be given as a grant, or as a loan Can be important for solving economic, environmental and food crises. Without aid the developing country would struggle to rebuild. e.g. after tsunami disaster. Provides foreign capital which can be used for investment and to increase the productive capacity of the economy. This can help the country to produce a higher value of goods and services Evaluation Why might it not work? Disadvantages / losers If aid is in the form of loans it can lead to countries getting into lots of debt. Servicing the interest on this debt can mean countries getting poorer and not having the money to spend on things such as infrastructure and education. A large % of aid is tied aid. This means it is fixed for certain investment projects which benefits the donor countries. In a sense this is not really aid, but it is classed as Aid. (e.g. building of dams in Argentina) There is a concern aid can lead to dependency. Developing countries come to rely on aid and lose incentives to improve productivity. This depends on the type of aid given. E.g. some aid can be just to improve infrastructure, this is more beneficial than handouts. Aid may not be used in an effective way by the governments in LDCs. It may be used for prestige projects that provide little benefit or may not be used for the purpose given at all Trade Aid for Trade Economic theory says that international trade is the most efficient way to encourage growth, because each country specialises in producing the goods and services in which it has an absolute advantage. Aid for Trade is about helping developing countries, in particular the least developed, to build the trade capacity and infrastructure they need to benefit from trade. It includes grants and loans targeted at trade-related programmes and projects If trade is free countries should benefit because: They will be able to specialise in producing the goods in which they have an absolute advantage. By exporting these goods to a global market of 7 billion people this will add to economic growth and create employment and boost living standards Developing countries can use tax revenue gained from the above to improve infrastructure and education to fuel further development Trade will allow developing countries to purchase resources they do not have in their own countries or at a lower cost than they would be able to produce themselves Trade will allow countries to access capital and skilled labour Aid could be used for education and training to increase labour productivity. This enables the country to become more competitive in the long run. Aid could be targeted to improve infrastructure enabling LDCs to send exports to market in a competitive way. Without this they will struggle to gain from trade Aid may include technical assistance helping countries to produce goods and services more effectively Aid may focus on productive capacity investing in industries and sectors so countries can diversify exports and build on absolute advantages Foreign aid has its limitations in increasing productive capacity. Arguably long term growth requires building up trade and new industries Trade rules favour richer countries. Countries dependent on commodities (coffee, tea, cocoa, food crops) or raw materials are at the mercy of international markets, because the prices of these products are lower than other goods, and tend to - fluctuate dramatically. If they can produce more and increase supply the price will often fall! Some countries are unable to benefit fully from trade due to barriers such as: Being landlocked Poor infrastructure Education Levels An additional problem is that free trade is not equally free. Agricultural subsidies and other trade barriers in the US and the EU prevent poor countries from gaining access to the most important markets. Trade isn t always fair (see above) Aid for trade may not always be effectively targeted. A Traidcraft report states that many Aid for Trade programmes have only an indirect effect on poor and excluded groups and poverty reduction. In other words, some critics claim it has not been very effective in reducing poverty due to inequalities of power (In many developing countries large groups are socially excluded and poverty is perpetuated through inequalities of power. see earlier in revision guide)

22 Debt Relief/Cancella tion Investment (including help with investment in human capital) Fair Trade Schemes The foreign debt of many developing countries has hindered progress This may take the form of: Investment in a country s resources or FDI Fairtrade is about better prices, decent working conditions and fair terms of trade for farmers and workers. Interest payments and debt repayments can use up much of a developing countries export revenue limiting economic development A number of countries have had debt cancelled and a number are working towards this. If debt is cancelled governments have more revenue to spend on improving infrastructure and investing in education enabling them to increase productive capacity, attract FDI and develop further. This is a virtuous circle as they should then generate even more revenue. Investment in a Country s Resources for example investment in human capital through education and training can equip people with the knowledge and skills to take advantage of opportunities associated with international trade. Increases productivity making the country more competitive. It may also attract FDI FDI - Foreign Direct Investment Can create employment and lead to a local multiplier effect boosting growth Can lead to a skills and technology transfer where local citizens and firms learn from the MNC and as a result are able to produce their own higher value goods and services. This boosts both growth and economic development The key aims of Fair Trade are to: Guarantee a higher price to certified producers Achieve greater price stability for growers Improve production standards. A grower will be able to receive a Fair Trade licence if it can improve working conditions, better pay and guarantees of environmental sustainability This should help boost economic output and hence development. It should also reduce poverty and enable families to educate children. Not all poor countries have yet been able to benefit from debt cancellation. Some countries were excluded from the original deal because they had done a relatively good job in managing their debts. Many countries where debt has been cancelled are already getting back into debt. No incentive to manage debt if you know you will be bailed out. Debt cancellation doesn t always benefit the people of the country; it just benefits those in power. FDI can mean investment falls as countries become reliant on inflows of capital FDI often sees profits repatriated to host countries and the benefits in terms of employment may be less than expected. MNCs have been accused of exploiting countries and their work forces The Fair Trade movement has critics 1. Impact on non-participating farmers: Some claim that by encouraging consumers to buy their products from Fairtrade sources, this cuts demand for farmers in poorer nations not covered by the Fairtrade label 2. Who captures the gains from Fair-Trade coffee? There is some evidence that a large part of the premium price goes to processors not the farmers 3. Others argue that the fundamental causes of poverty are not really addressed by Fairtrade. Greater investment needs to be made in raising farm productivity Non Government Organisations A non-governmental organization (NGO) is an organization that is neither a part of a government nor a conventional for-profit business. They include charities such as Oxfam Charities and other NGOs may help developing countries with aid, help, advice, support and technology. In many cases they have a better knowledge of the country or situation than the government of a developed country 4. Some economists believe that the fair trade movement has resulted for example in excess production of coffee, which has driven down world coffee prices. Effectiveness is very much dependent on the project or work being done

23 Page 8 Figure 9 Examples of new technology The evidence provided 8 examples of new technology. These need to be applied to trade and economic growth. Example Explanation Growth of the Has enabled companies in countries to access a global market of 7bn people. Internet Companies can sell products to customers on the other side of the world through e commerce. Communications See above Helps LDCs that may not have the expensive infrastructure needed for landlines etc. "Leapfrogging is the notion that areas which have poorly-developed technology or economic bases can move themselves forward rapidly through the adoption of modern systems without going through intermediary steps." eg mobile phones rather than landlines. This helps economic development. Satellites GPS helps with navigation which aids trade. Also boost growth for those countries that sell it services. Weather warnings allow countries to prepare for potential natural disasters that may damage their economies. Transport Economies of scale due to large number of things being transported. Enable products to be transported at a lower AC. This means that transport costs are much lower and products can be produced cheaply in different parts of the world and exported competitively to other countries. For example we can import products cheaply from China. This helps China grow. Energy Solar and wave power enables countries to access energy cheaply. Without these some countries would not have sufficient energy to power businesses, to enable citizens to charge phones, use the internet etc. For example solar panels can be a cheap way to supply homes in rural communities with power in places like Africa. Energy infrastructure is important for firms to develop. Energy infrastructure is important to be attractive to FDI. Manufacturing Automated production and robotics have helped to boost productivity and increase competitiveness in both developed countries like the UK and developing countries like China Productivity is increased which increases the economies productive potential. Products can be produced at a lower average cost. This makes firms more competitive. Financial Services Money transfers and internet banking mean that capital can flow quickly and freely around the world. This makes e commerce even more attractive, meaning that companies can sell products to a global market and receive payment at the touch of a button. As a result trade and growth grows. Medical Care Improvements in medical care boost growth in developing countries as they improve the health of the general population. This boosts productivity and can makes countries more attractive to FDI. Countries that specialise in producing these technologies will see higher economic growth as they export more.

24 Page 9 Figure 10 An introduction to sustainability Globalisation has led to faster economic growth. This has increased the rate of economic development in many poorer countries. But, is this growth sustainable? Reasons why growth may not be sustainable Inflation if growth is too fast it may lead to inflationary pressures building. This can damage competitiveness and may require government intervention through higher interest rates. Rising Inequality if economic growth leads to too much inequality it may not be sustainable. If there are too many low-income earners there won t be enough demand in the economy. High earners tend to save more and spend a lower proportion of their incomes. Inequality may also be destabilising and lead to protests and riots. Resource Depletion economic growth can lead to a depletion of resources. This can raise the price of these resources leading to inflation. If these resources run out it may not be possible to produce as much. This means growth may fall or even become negative. A good example of this is that there is now a global shortage of sand as so much is needed to make concrete. Environmental Problems - Economic growth can lead to negative externalities such as the impact of climate change as a consequence of higher CO2 emissions. These come from producing and transporting goods. Environmental problems may mean that growth cannot be sustained and can cause many problems such as drought and flooding which have huge economic costs.

25 The Big Question worth 12 marks Here are all the previous 12 mark questions we have had 2015 Question - Using information in the stimulus material and your own knowledge of economics, evaluate the effectiveness of international trade as a method of supporting economic growth in developing countries - 12 marks 2016 Question - Using information in the stimulus material and your own knowledge of economics, evaluate the case for the UK joining the Eurozone - 12 marks 2017 Question - Using information in the stimulus material and your own knowledge of economics, evaluate the extent to which a fall in China s rate of economic growth will affect the economies of other countries - 12 marks

26 Possible Big Mark Questions Using the information in the case study and your own knowledge of economics, evaluate the extent to which the benefits of international trade outweigh the costs for less developed countries. Using the information in the case study and your own knowledge of economics, evaluate the extent to which the benefits of international trade outweigh the costs for the UK economy. To what extent does globalisation benefit the UK / less developed countries? To what extent has increased trade benefited all countries? Use the evidence from the data to give reasons for your answer. Using the information in the case study and your own knowledge of economics, evaluate why some countries benefit more from trade/globalisation than others. Using the information in the case study and your own knowledge of economics, evaluate strategies to increase the growth of less developed countries. Using information in the stimulus material and your own knowledge of economics, evaluate the effectiveness of international trade as a method of supporting economic growth in developing countries. Using information in the stimulus material and your own knowledge of economics, evaluate the effectiveness of NGOs as a method of supporting economic growth in developing countries.

27 Examiner s Report - feedback from previous year. Read this and take note: Data don t just trawl through. Pick out key trends and use the data to illustrate points. Answer the Specific Question! & be specific. Evaluation prioritise, discuss which might have a larger influence. Look for counter arguments to points you have made. Conclusion prioritise or offer something new. Don t just repeat points.

28 Feedback on Last Question What can we learn from this? Responses must be specific with direct reference to the country in the question or the data from the stimulus material. Develop points fully. Use the stimulus material to support arguments / evaluation. Support though - don t just repeat chunks of case study as an answer to the question. Develop analysis using economic concepts you need to demonstrate a strong command of economics and use economic terminology. You need a justified conclusion.