Paper 1 -Development Economics

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

Developing countries are countries with low levels of real GDP per head and relatively large primary sectors producing predominantly basic commodities. Assistance given to an individual, firm, region or government. Usually used in the context of overseas where governments give assistance to other countries.  Aid can be given in three main ways, including humanitarian, bilateral, and multilateral.

Humanitarian aid can be both by individual country to country or via a major organisation such as one of the UN agencies. This is not a loan and is normally sent to help against a specific problem, such as a flood, drought or earthquake. Bilateral aid is aid which is given by one country to another. It is a loan, though may be subject to a long period prior to re-payment commencing, and granted as soft or below market terms. Multilateral aid is when separate countries pay money into one central organisation, say the IMF, and it then determines who receives money and for what. So, multilateral aid is given via one of the large international agencies.

In addition, aid may be official or unofficial. If it is official it is administered by government or government agencies. It may be multilateral or bilateral in nature. If aid is unofficial, it is administered by a non-government body, such as a charity.

Grant aid is short term aid provided as a gift that does not have to be repaid such as food aid, medical aid, and emergency aid. It might be directed at technical services, or scholarships for some students to study in a particular country. Soft loans are loans given to developing countries that have a rate of interest significantly below the usual market rate. Aid might also be trade related, such as tied aid. This consists of grants or loans that are given to a country, but only on the condition that the funds are used to buy goods and services from the donor country.

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

Development is an increase in the ability of a country to produce goods and services thereby offering the opportunity for a higher material standard of living. Development is not the same as economic growth as development is an increase in the potential for an economy to grow, not growth. The statement on whether aid is an effective means of promoting the development of poorer countries or not can be evaluated by agreeing and disagreeing with the statement.

Aid can be an effective means of promoting development of poorer countries. Countries select aid because it allows for supplementing the lack of domestic resources such as foreign exchange, it enables infrastructure changes to be made to the economy, such as dams and roads, and it contributes to the take-off phase in sustained economic growth. The cycle of poverty can be broken by bridging the savings gap and providing funds for investment. In some cases, foreign aid is seen as being necessary in order to maintain power.  Aid can also promote development by overcoming the low savings ratios recorded in developing economies.  Aid can help reduce foreign exchange outflows, allowing the domestic government to build the necessary infrastructure for development. Aid can also reduce the dependency on private investment, which may not arrive or will only be found at a high price to the country seeking such funding.

However, there are also several reasons that can be argued to go against this statement. Foreign aid crowds out private investment. Foreign development assistance may provide funding for production that the private sector might have invested in for commercial reasons. Foreign aid can also distort markets. Transfers of low interest  grants fill the foreign exchange gaps and interfere in the market determination of interest rates and exchange rates. In addition, foreign aid funds are inefficient infrastructure projects because in the long run when development assistance is withdrawn, the project may fail to stand on its own and require additional funding. In addition, developing countries may rely too much on developed countries rather than building and developing their own capabilities.

Paper 1 – Development Economics

a) Explain three institutional factors that may contribute to potential economic growth in developing countries.

Three institutional factors that may contribute to potential economic growth in developing countries include a banking system, an educational system, and political stability. Institutional factors are factors that lead to a good quality infrastructure through suitable financial, legal and social institutional framework, all which are necessary for developing countries. Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP. Developing countries are countries with low levels of real GDP per head and relatively large primary sectors producing predominantly basic commodities.

A good banking system provides the financial infrastructure that enables businesses to flourish and grow because it provides them with funds, thus enabling investment.

A good educational system is also helpful because  growth requires a high quality, well educated workforce. This in turn needs a good educational system to provide for as many people as possible. A good educational system will thus increase the quality of labour.

Finally, political stability is necessary because without it there will not be certainty and businesses require certainty to enable them to plan for the future. It can determine whether or not businesses and foreign investors are prepared and comfortable to undertake major investment projects. In addition, political instability may lead to low levels of foreign direct investment, which will in turn lead to low growth and taxation revenue, which would then lead to poverty and social conflict.

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

Economic growth is a necessary but not sufficient condition of economic development. Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP while economic development s an increase in the ability of a country to produce goods and services thereby offering the opportunity for a higher material standard of living. Development is not the same as economic development as development is an increase in the potential for an economy to grow, not growth. The view that economic growth will lead to economic development can be evaluated through looking at the pros and cons.

There are several pros that come from growth which impacts development in a positive way. The first is government investment in education will improve the literacy rate. Another pro is increased levels of income which can lead to an increase in consumption of goods and services, especially if the good is a normal good. This increase in aggregate demand can help out the economy greatly. Finally, another aspect of growth which impacts development in a positive way is government investment in health care because it will decrease the mortality rate of the country. In addition, all three aspects will lead to positive externalaties for the society.

On the other hand, there are cons in growth which impacts development in a negative way. One con is income distribution, which can be a negative consequence because economic growth can result in uneven distributions of income. That is, changes or improvement in production which may make it more efficient by using less people means that some citizens will be driven out of jobs since they are no longer needed. Another con is damage to the environment from pollution of factories and carbon emissions. This increase also causes negative externalities to the society. Lastly, there will be a loss of resources since growth often requires nations to use up several natural resources, and thus  use up the supply of non-renewable resources.

Blog Reflection

This blog post is dedicated to Ms. Q for all the hard work she did grading our papers. After looking at the comments, I realized that I got points off for missing small details, or not elaborating on ideas. Also, I realized that I did not define all the economic terms I used. I guess while I am in the middle of a paragraph, I often forget  that I have to define everything.

Preliminary Search For Developing Country

GDP Per Capita: $1,000 [2010 Est.]

Population Growth Rate: 2.993% (Country Comparison to the World – 13) [2010 Est.]

Unemployment Rate: 5.9%

GDP by Sector:

Agriculture – 26.5%

Industry – 16.7%

Service – 56.8%

Madagascar, with a GDP per capita of $1000, is clearly not a wealthy country, and does not seem to be anywhere near transition from undeveloped to developed. With an unemployment rate of almost 6%,  Madagascar’s productivity is low. Madagascar relies on her agriculture sector and service sectors.Without switching more to tertiary sectors, Madagascar will not be able to develop any time soon.

New Triple A Economic Glossary

The new Triple A Economic Glossary is definitely a step up from the previous one.  I think one large contributor that makes thenew Triple A better than the old one are the games. Games help students learn in an enjoyable way. Using games such as crossword puzzles or tic tac toe allowed me to learn about economics without just sitting and reading about points. Getting a question wrong in a game personally helps me remember the answer the next time around because I wouldn’t want to lose points again. Another large contributor is definitely the IB Assessment section. Many students who read triple A take the IB and so knowledge on the way IB questions are formatted is vital to know, so you can structure your answer accordingly.

1. Demands of the Question:

The demands of the question is that I write for 20 minutes without evaluating, because it is a paper 2 question. The question clearly states that you need to state 2 reasons for an improvement in the country’s terms of trade. You should include definitions, diagrams, and real world examples for each reason. “Explain” requires a student to take the concept and make it clear to someone else, stating the steps involved in reaching this understanding.

2. Definitions:

Terms of Trade: An index that shows the value of a country’s average export prices relative to their average import prices.

3. Triple A

• The terms of trade is expressed as the price relationship between a country’s imports and exports.
• The terms of trade is a measure of prices and so how it changes will be determined by demand and supply for the goods and services that are traded. If demand for exports grows significantly, then this is likely to boost export prices and lead to an improvement in the terms of trade.

• Many developing countries are very dependent on exports of primary commodities – minerals, agricultural commodities like coffee etc. If prices of these commodities on world markets fall then they face a deterioration in their terms of trade.
• An improvement in the terms of trade may improve the standard of living in a country – the same volume of exports will buy more imports.

• If the terms of trade has improved, then this means that export prices have increased more than import prices.
• This may indicate a deterioration in competitiveness and in the medium term may lead to a fall in export demand.
• How much export demand falls will depend on the price elasticity of demand for exports. This may adversely affect the balance of payments.

• For developing countries that are very dependent on a narrow range of primary exports, the terms of trade will be crucial to their ability to grow and to fund essential imports

4. Power Point Slides

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. Diagrams

 

 

 

 

 

 

6. Answer:

Two reasons for an improvement in a country’s terms of trade can be seen in exports and imports. If demand for exports grows significantly, then this is likely to boost export prices and lead to an improvement in the terms of trade. Also, the ability to grow and to fund essential imports will improve the terms of trade.

historical decline in commodity prices

JAL Blog Post (via Kanako’s Blog)

Kanako, this is a really great post! You organized you paragraphs so that it was easy and clear to follow and understand the topic you were discussing. A point to realize, however, is that JAL actually became bankrupt last year, so remember to look at the date of the article you are given! Also, since you are learning about elasticity, how do you think the different types of elasticity played a role in what happened to JAL? For example, regarding income elasticity of demand, JAL thought that even though peoples’ incomes were going down, demand would be inelastic so they didnt lower the price of tickets, but they were wrong. The fall in income led to the fall in demand, and fewer people were flying with JAL.

The famous Japan Airlines, JAL, has recently been reported to be heading towards bankruptcy, and many customers who have been a frequent user of JAL are starting to use other airlines that are cheaper. After facing this trouble, JAL has set a number of considerations to save themselves. One thing JAL plans to do is to operate more regional jets on domestic routes with higher profitability. For International passengers, JAL plans to replace the ol … Read More

via Kanako’s Blog

JAL (via Takaki’s Blog)

Takaki, the points you made in this post were great! You went straight to the point in explaining the steps JAL took to solve their problem and the effectiveness of the aforementioned. You did a good job in mentioning the cost factors, such as gasoline. Since you are learning about elasticity, how do you think the different types of elasticity played a role in what happened to JAL? Also, try to include some diagrams to help explain your ideas thoroughly.

I think that JAL has overcome the bankruptcy issue that was occurring in January. They have made a few changes, like reducing the amount of flights going out and changing some of the prices, but as you can still see the JAL airlines still running after the incident, it is looking as it is progressing to stay steady. Prices of the gasoline has rissen which adds up to the airline fee as well. Many of the employees jobs were cut though, and has been … Read More

via Takaki’s Blog

International Economics Diagrams

Term	Diagram
China has an absolute advantage in the production of both shoes and cloth. It can produce more of both than India with the same factor inputs. However, India has a comparative advantage in producing shoes, since they only give up 2.5 meters of cloth for each pair, whereas China gives up 4 meters of cloth. China should specialize in cloth and India should specialize in shoes.
Before trade, Qe corn is produced domestically at a price of Pe. When free trade takes place, Q1Q2 of corn imported at the world price of Pw and Q1 of corn is produced domestically.
The imposition of a tariff upon imported corn means that the price will rise from PW to Pw + tariff. Imports will fall from Q1Q2 to Q3Q4 and domestic production will increase from Q1 to Q3. The shaded rectangular box represents government revenue. The shaded triangles represent deadweight losses, the one on the right representing consumers no longer being able to pay the price of Sworld+tariff and the one on the left representing the inefficient use of resources by producers.
When the government gives a subsidy to domestic producers, the domestic supply curve shifts downwards from SDomestic to SDometic+Subsidy. The price to consumers remains the same, but imports fall from Q1Q2 to Q3Q2 and domestic production increases from Q1 to Q3.
As evident, trade creations allow for a benefit of greater economic integration as the entry of countries into a customs union leads to the transfer of production from a high cost producer to a low cost producer. Before the trade creation, it was costly for country B to trade with country C because of the tariffs, but after the trade creation is becomes cheaper.
As evident, a trade diversion can be a disadvantage of greater economic integration. The entry of country into a customs union leads to the transfer of production from a low cost producer to a high cost producer. Before the trade diversion, trade between country D and B was less than after country B joined the trade diversion.
The country has a current account deficit and is at A on the diagram. The exchange rate of the currency is lowered to rectify this. In the short term, because of existing contracts and imperfect knowledge, the deficit worsens to Y. However, in the long term, if the Marshall-Lerner condition is fulfilled, export revenue will begin t increase and import expenditure will start to fall. The current account deficit will get smaller, moving in the direction of Z on the diagram, forming a J-Curve.
The exchange rate of the pound against the Euro is being determined solely by the demand for the pound and the supply of it in a floating exchange rate system. In this case, the exchange rate will be 1 pound = 1.26 Euros.
The supply for the pound has increase from S1 to S2. This may have been caused by an increase in foreign interest rates, increased demand for foreign products, speculations that the pound will decrease in value, or a more favorable investment climate in foreign countries. In all cases the UK citizens want more foreign currency, thus increasing the supply of pounds on the foreign exchange market, allowing for depreciation of the pound. The exchange rate of the pond will fall to 1 pound = 1.15 Euros.
The demand for the pound has increase from D1 to D2. This may have been caused by an increase in United Kingdom (UK) interest rates, increased demand for UK products, speculations that the pound will increase in value, or a more favorable investment climate in the UK. In all cases the EU citizens want more pounds, thus increasing the demand for the pound on the foreign exchange market, allowing for appreciation of the pound. The exchange rate of the pond will rise to 1 pound = 1.37 Euros.

International Economics Real World Examples

Term	Real World Example
A tariff is a duty (tax) that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.	The US imposed a tariff on tires from China in 2009.
A quota is an import barrier that set upper limits on the quantity or value of imports that may be imported into a country.	The US dropped Chinese textile quotas, and is now expecting products sent to the US to triple.
A subsidy is an amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competitors.	Because of the nature of the farming industry (family businesses) the U.S. government subsidized family farms to help them compete against the fast-paced, interconnected world.
A free trade area (FTA) exists when an agreement is made between countries, where the countries agree to trade freely among the member of the group, but are able to trade with countries outside the free trade area in whatever ways they wish.	North American Free Trade agreement between the United States, Canada, and Mexico
A customs union is an agreement made between countries, where the countries agree to trade freely among themselves, and the also agree to adopt common external barriers against any country attempting to import into the customs union.	Switzerland-Liechtenstein customs union
A common market is a customs union with common policies on product regulation, and the free movement of goods, service, capital, and labor.	The European Union (EU)
Trade creations occurs when the entry of a country into a trading bloc leads to the production of a good moving from a high-cost producer to a low-cost producer.	When the UK joined the EU, its car producers are no longer subject to the EU common external tariff and I can export more cars to EU member countries.
Trade diversion occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer to a high–cost producer.	When the UK joined the EU it had to impose a common external tariff on butter from the low-cost producer New Zealand, and start to import butter from high-cost EU producers.
A current account surplus exists where the revenue from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a given period of time.	China currently has a current account surplus which surged 30% in the second quarter of 2010. China’s third quarter surplus totaled $102.3 billion on Tuesday, December 31, 2010.
A current account deficit exists where the revenue from the export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given period of time.	The United States has had a current account deficit since 1992, and it has been growing every year. In the third quarter of 2010, the US current account deficit shows to me $127 billion.
An Exchange rate is the value of one currency expressed in terms of another,.	€1 = US$ 1.60.
A fixed exchange rate is an exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, or to the average value of a selection of currencies, or to the value of some other commodity, such as gold.	Currently, Hong Kong has a fixed exchange rate regime.
A floating exchange rate is an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and the supply of the currency on the foreign exchange market.	Currently, the United States has a floating exchange rate regime.