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Data Response 4.6

February 23, 2012

Distinguish between foreign aid and foreign direct investment

Foreign aid is defined as the economic, technical, or military aid given by one nation to another for purposes of relief and rehabilitation, for economic stablilization, or for mutual defense.  Whereas, foreign direct investment is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor.  The majority of FDI only takes place between the wealthy and developed countries, and it does not flow from the developed to the developing countries.  But foreign aid is moreover what the developed countries provide money for the less developed.



Explain why the earthquake and tsunami in Japan is likely to affect Japan’s capacity to donate foreign aid.

The earthquake and the tsunami that affected Japan will affect Japan’s capacity to donate foreign aid because they will need as much money they have to spend on the disposal of waste, providing shelter, and rebuilding itself.

Being the “fifth largest donor powerhouse and the world’s third-largest economy,” Japan is also the “fifth largest donor of development aid.”  Because of the earthquake, Japan will have no choice but to cut back in aid budgets in order to recuperate the north of Japan.


Explain how reductions in Japanese foreign aid might affect the economic development of the recipient nations.

Since Japan aids many of the Asian countries, these countries will suffer to some extent with their aid budgets from Japan will be cut.  “India, Indonesia, and the Philippines have expressed fears that projects funded by Japan may be dropped or rescheduled.”


Evaluate the arguments for and against foreign aid.

Arguments FOR aid.

-developing countries seek for aid for the purpose of economic development

economical reasons

-supplementing the lack of domestic resources such as foreign exchange

-enabling infrastructure changes to be made to the economy, such as dams and roads

-contributing 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


political reasons

-necessary in order to maintain power

-often in the form of military goods provides the power base that suppresses opposition and maintains the existing government in power.

-maintain balance of power between two nations


moral reasons

-developed countries have a moral responsibility to provide development assistance for the poorer coutnries

-humanitarian reasons

-responsibility to redistribute resources

-having exploited so many of them of the developing coutnries during colonialization


Data Response 4.5

February 21, 2012

Explain how improving infrastructure, like establishing mobile phone networks, can help to improve the rate of economic growth.

Improving infrastructure helps to increase foreign direct investment and GDP.  The foreign direct investment is defined as an investment abroad, usually where the company being invested in is controlled by the foreign corporation.  An investment in infrastructure will help increase the rate of economic growth.  There are several ways in which an improvement in infrastructure will improve the rate of economic growth.  First, improving infrastructure will attract the foreign direct investment, since they are interested in keeping the cost at its minimum and improving the quality of their goods.  Another thing would be that improving infrastructure would mean lower transportation times and costs, leading for the price of the good to decrease as well.  This will also allow fresh products to reach markets on a punctual manner, and allow capital assets to be transported to areas, as well as helping children get to school easier.

Explain how improved mobile phone networks in developing countries in Africa can contribute to reductions in levels of poverty.

Improved mobile phone networks in developing countries such as Africa can contribute to reductions in levels of poverty.  This action will help them because it will allow for them to have a better communication system and improve quality of life.  As stated in the article, “from the town used to have to leave the families they often support and travel many miles to attend the University of South Africa. They can now study from home, even receiving exam results, using their mobile phones,” and Fishermen can “use mobiles to get weather reports.”  Even though mobile phones may only be a way to “stave off boredom on public transports” for people in developed in countries, improving mobile phone networks in Africa will contribute to reductions in levels of poverty.  Improvement in mobile phones will improve in communications with one another, which is “an essential tool for economic regeneration.  They have a “dramatic impact on GDP and lead to an increase in foreign direct investment.”

Since Africa does not have sufficient existing infrastructure on the continent and many African countries do not have enough resources to build huge fixed-line infrastructure, so an improvement in communication is definitely a necessity.

Discuss the advantages and disadvantages of foreign direct investment for developing countries.

There are several advantages of foreign direct investment.  One is that the gap between savings potential and invest need can filled.  Second, it will increase in the foreign currency and can contribute to export earning of foreign currencies.  It can also create more job opportunities and provide tax revenue for host governments.  Lastly, it will transfer knowledge of technology knowledge and skills so it will help the developing countries.

On the other hand, there are negative aspects of foreign direct invest because it has a chance of destroying domestic firms.  Since foreign direct investment makes a firm and/or country more dependent, it leaves them vulnerable which is a negative effect.  Also, there may be a loss of culture as a result of improved technology in firms.


Data Response 4.4

February 20, 2012

Explain what is meant by a free trade area, such as EFTA?

 A free trade area is a group of countries that invoke little or no price control in the form of tariffs or quotas between each other.  This allows the agreeing nations to focus on their competitive advantage and to freely trade for the goods they lack the experience at making, thus increasing the efficiency and profitability of each country.  It is a trade bloc whose member countries have signed a free trade agreement.

EFTA is the European Free Trade Association, a free trade organization between Liechtenstein, Iceland, Norway , and Switzerland.

Analyse the benefits and costs of establishing a regional free trade area.

There are several benefits of establishing a regional free trade area.  First, considering the comparative advantage, it is a smarter choice by specializing in goods where countries have a lower opportunity cost, so that there can be an increase in economic welfare for all countries.  Second, invoking little or no price control in the form of tariffs or quotas between each other will lead to trade creation, when consumption switches from high cost producers to low cost producers.  As well as benefits for consumers importing goods, firms exporting goods where another nation has a comparative advantage will also see an improvement in economic welfare.  Lower tariffs on exports will enable higher quantity of exports boosting jobs and economic growth in a nation.  And if nations specialize in certain goods, they can benefit from economies of scales and lower average costs.  The benefits of economies of scales will ultimately lead to lower prices for consumers.  Establishing a free trade area will also increase competition.  With more trade, domestic firms will face more competition from abroad.  Therefore, there will be more incentive to cut costs and increase efficiency, and possibly prevent domestic monopolies from charging high prices.

Drawing upon real world examples, explain why bilateral trade agreements, such as that between EFTA and India, are becoming more popular.

Bilateral trade agreements exist where two countries establish a preferential trade agreement between themselves.  It has become popular because this act is beneficial to the countries included in the agreement.  These are two examples below with the EFTA and the NAFTA.

Between EFTA and India, this agreement is beneficial for both since the Swiss exports to India include machines, pharmaceutical and chemical products as well as precision instruments, while imports from India include textiles, agricultural products and components for the airline industry. The trade between the two countries make this act fair.

NAFTA, the North American Free Trade Agreement, is one of the most powerful and wide-reaching treaties in the world.  It governs the entire North American trade economy.  It is a treaty between Canada, Mexico, and the United States that was designed to promote greater trade between the three countries.  This eliminates a large number of tariffs on goods shipped between the three countries.  As a result of NAFTA, Mexico especially has purchased goods from the United States in much greater numbers than before.  This saves Mexican companies money on imports, and it saves American companies money on export shipping costs.  Canada has benefited in this way as well.

Data Response 4.3

February 10, 2012

Explain how a microcredit system works.

A microedit system is a system that lend small amounts to the poor in a developing country, as to break the poverty cycle, those in poverty must find ways of generating income to allow them to save.  The loans are directly targeted at the needs of those poeple and reflect the circumstances in which they operate.  They are often offered by Non-Governmental Organizations (NGO) as the commercial financial institutions are not prepared to work in this manner.  They regard the poor as high risk, as they cannot offer any security for the loans.


Examine the benefits of using microcredit systems in developing countries to promote economic development.

The benefits of using this microedit system is that this is an excellent way to promote growth and development, as they are directly targeted at the people who need them the most, and it also helps to promote an entrepreneurial culture from the ‘bottom-up’.  This system enable families to start up self-run businesses in their village, which will eventually become their steady source of income to support the family.  A major selling point of this microedit system is its ability to empower women.  Also, it improves a family’s financial access and allows them to invest in any economical activity, thus enabling people to come out of poverty.  Breaking the cycle of poverty is a major development goal. One way to do this is to provide opportunities for those that are economically inactive to become income earners and savers.

Examine the problems associated with operating microcredit systems and whether these could contribute to a worsening in the levels of poverty.

However, whether they are sufficient to boost an economy significantly is very debatable and they are likely to be most effective when combined with other development strategies.  A problem associated with operating microedit systems are that it is not well managed.  Compared to the bank system, the microedit management institution is  deficient.  Another problem is that there is a high interest rate associated with the money the poor borrow from this system.  And because of that, the poor cannot pay them back.  There is a high interest rate because this system borrows from commercial banks so putting a high interest rate  is inevitable for them.  But that factor could contribute to a worsening in the levels of poverty.

Data Response 4.2

February 10, 2012

Explain what is meant by a negative externality.

An externality is a situation where production or consumption of a good or service has an external impact on a third party.  Externalities are costs or benefits, which are not reflected in free market prices.  Negative externalities are external costs and costs that are considered negative to the economy.  If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it.

Using supply and demand diagrams, explain how negative externalities result in market failure.

If a firm had to pay the full social cost of its production activities, the additional cost would shift the supply curve, or private marginal cost curve to the left.  Thus, the MSC curve represents the social marginal cost, the vertical distance between the two supply curves indicating the value of the negative externality, or the external marginal cost.  The marginal cost curve represents the costs faced by the firm in the absence of externality.  The marginal benefit curve is the same as the demand curve for the good.  The red part represents the welfare loss.  The market equilibrium in the absence of the negative externality is Pm and Qm.  However, the externality means that the optimum equilibrium for the society would be Ps and Qs, where the MSB is equal to the MSC.  Thus, the market will lead to overproduction of this good and there will be a welfare loss equal to the red-shaped triangle.

Examine why an increase in the level of poverty within Burkino Faso contributes to environmental degradation.

An increase in the level of poverty within Burkino Faso contributes to environmental degradation because it pushes “unemployed youth to go after resources which do not belong to anyone/ public-common resources.”  And they also “cut green wood without waiting for it to reach maturity. ”  The youth gathers immature fruits before it ripens, and only when the fruit is allowed to ripen, is there a chance of regeneration because the seeds of the ripe fruit can germinate and grow up to replace big trees.

That destroys the economy because there is an increase in rate of degradation of forests.  And this happens because they have an increase in demand which exceeds supply.  “The population is growing and the resources are no longer sufficient to feed it. The area that we have restored is not enough to cover the demand.”  The acceleration of degradation affects the soil and the degradation of forests threatens the existence of more than sixty plant species and threaten the biological diversity of the country.

Discuss strategies that the government of Burkina Faso could introduce to reduce the extent of forest degradation.

One way that the government of Burkina Faso could introduce to reduce the extent of forest degradation is to impose taxes on agricultural good or tax on the land for the farmers.  As tax is imposed on agricultural goods, it will increase the price on agricultural goods, making them less accessible consumers, which will decrease the demand, hence the suppliers will have no choice but to decrease the amount they supply.  Also, by imposing tax on the property, it will make the land less accessible to farmers to pay of their rents or personal lands.  And by the extra revenue the government earn from these imposed tax on agricultural and other related goods or services, it enables them to invest that money on preserving, conserving, and restoring the soil and other natural resources.

Questions from Triple-A Reading

February 3, 2012

1. Explain the importance of human capital in contributing to economic development.

Human capital is one of the four factors of production, which is essential for economic growth.  The quantity of labour is important. An increase in the population can increase the number of young people entering the labour force and that increases in the supply of labour can increase economic growth.  An increase in the population can also lead to an grow in market demand, thus stimulating production in the economy. However, a growth in the population will introduce a problem to the economy as well.  If the population grows at a faster rate than the level of GDP, the GDP per capita will fall.

However, it is not only dependent upon the amount of labour.  The quality of labour will lead to further economic growth.  The quality will depend on the quality of education in countries.  Improving the skills of the work force is seen as being a key factor in promoting economic growth.  Many LDCs have made efforts to provide universal primary education.  The more capital is used, labour has to be better trained in the skills to use the capital.  Investing money on an education is highly beneficial in the long run.  It is an opportunity cost in terms of current consumption and thus it is often referred to as investment spending on human capital.

2. Explain the difference between economic growth and economic development.

Economic growth occurs when there is an increase in the productive potential of the economy and is best measured by the increase in a country’s real level of output over a period of time, i.e. the increase in real Gross Domestic Product (real means adjusted for inflation).  On the other hand, economic development is a process where there is improvement in the lives of all people in the country. This involves not only living standards, such as greater availability of goods and services (and also the ability to purchase them) but also the promotion of attributes such as self-esteem, dignity and respect, and the enlarging of people’s freedom to choose and to take control of their own lives. While a country may grow richer therefore, through the growth of its real output, it does not necessarily mean that it will develop.  Economic growth is considered a narrower concept than economic development.

3. Discuss the view that the achievement of higher economic growth rates should be the priority of developing economies.

The four basic sources of growth are natural resources (land,minerals, fuels), human resources (supply of labour and the quality of labour), physical capital and technological factors (machines, factories, roads), and institutional factors (banking system, legal system).  The sources are no different in a less developed economy than those in an advanced industrialized economy.  Economic growth is caused by improvements in the quantity and quality of those factors of production that the country has available.  Hence, higher economic growth rates imply an increase in those factors to satisfy the demand of goods and services.  Higher economic growth rates should be a priority for developing nations as it will increase an economy’s output.   With that, we will be able to start noticing an expansion in job opportunities, and advance in education.  Higher economic growth rates will help the developing nations to have a better economy in housing, health care, insurance, and infrastructure.

4. Explain what is meant by sustainable development.

Sustainability is the ability of the environment to survive its use for economic activity.  For a sustainable development, it must have a neutral effect on resources. Any resources used must be renewable and there must be no lasting impact on the environment. It is important that development is sustainable to ensure that it can endure in the long-term and is not built on the exploitation of natural resources that may run out in the future.  Achieving sustainable development is developing in extending property rights, taxing the polluter, issuing permits to pollute, introducing congestion charges, and using direct controls and regulations.

5. Explain how extending property rights and land ownership can help bring about more sustainable development.

Extending property rights and land ownership means extending ownership of resources to allow people to protect the environment and other resources more effectively.  By doing so, it will bring about more sustainable growth because it raises the private cost to the same level as social cost.

Extending property rights and land ownership will bring about more sustainable growth because it raises the private cost to the same level as the social cost. Before extended property rights and land ownership, the private cost at P1 at equilibrium between demand (the amount of goods and services consumers are wiling and able to buy at a given price in a given time period) and supply (the amount of goods and services producers are wiling and able to supply at a given price in a given time period) is lower than the social cost at P2. That means that where there is no harm in producing a quantity of Q1 of a given product, there is harm done to the society entire. For sustainability, production should be at Q2 and price at P2, because only then are the negative externalities, the negative effects of the actions of individuals or firms on third parties, internalized in a sustainable manner. Extending property rights implies extending people’s ownership of natural factors to allow them to protect the environment more effectively. That means should individuals or firms pollute these natural factors, people can sue them or take other action to protect those factors. If that is paired with extended land ownership, when people control more land, then the protection of the environment will overall be more effective.  Individuals and firms have to pay higher costs to avoid lawsuits and other action from the owners of the lands, shifting the private cost curve to align with the social cost curve, ultimately making economic development more sustainable.

6. Discuss the view that economic growth will inevitably conflict with sustainable development.

Economic growth is good for development, but it can be rather harmful to sustainable development.  Growth used to be seen as the most integral part of economic development, assuming that all gains will trickle down in the economy and allow the wealth to reach all parts of the population. However, growth rarely disperses equally, as the richer become richer and the poorer gain only little. The income distribution will widen. Also, many gains flow off in the form of profits for multinational corporations that provided foreign direct investment. Further, negative externalities such as pollution can, despite increases in output, harm sustainability as less developed countries tend not to have or have very little legal protection of the environment. Developing countries often rely on exporting primary goods and other non-renewable resources, so as the economy grows and exports more and more, the resources will not last as long. In addition, as output growth is sought after, land and biodiversity can be lost to, for example, either increased agriculture or urbanization, making growth less and less sustainable. Finally, lifestyle changes might be forced upon the individual, affecting his/her happiness and a loss of family life or culture. Thus, economic growth will likely conflict with sustainable development.

International Economics Vocabulary

February 3, 2012

Factor endowments are the factors of production that a country has available to produce goods and services.

Specialization exists where a country specializes in the production of goods and services where they have comparative advantage in production. They will then trade to get the goods and services in which they do not specialize.

Absolute advantage for a good exists where a country is able to produce more output than other countries using the same inputs of factors of production.

Comparative advantage for a good exists where a country is able to produce a good at a lower opportunity cost of resources than another country.

Free trade is international trade that takes place without any barriers, such as tariffs, quotas, or subsidies.

tariff is a duty tax that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.

quota is an import barrier that set upper limits on the quantity or value of imports that may be imported into a country.

subsidy is an amount of money paid by the government to a firm, per unit of output, to encourage output, to encourage output an to give the firm an advantage over foreign competitors.

Voluntary Export Restraint (VER) is a voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product/products.

The infant industry argument proposed that new industries should be protected from foreign competition until they are large enough to compete in international markets.

Dumping is the selling of a good in another country at a price below its unit cost of production.

Anti-dumping is legislation to protect an economy against the import of a good at a price below its unit cost of production.

free trade area (FTA) exists when an agreement is made between countries, where the countries agree to trade freely among the members of the group, but are able to trade with countries outside the free trade area in whatever ways they wish, for example, the North  American Free Trade Agreement between the US, Canada and Mexico.

customs union is an agreement made between countries, where these countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the custom union.

common market is a customs union with common policies on product regulation, and the free movement of goods, services, capital, and labor.

The World Trade Organization, also known as the WTO, is an international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.

The Balance of Payment is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given time period.

The balance of trade is a measure of the revenue received from the exports of goods minus the expenditure on the imports of goods over a given time period.

The currency account is a measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest and dividends) and net transfers of money (foreign aid, grants, and remittance).

The capital account is a measure of the buying and selling 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 time period.

The current account surplus exists where the revenue from the export of goods and services and income flows is greater than expenditure on the import of goods and services and income flows over a given time period.

The current account deficit exists where 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 time period.

The Marshall-Lerner condition states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.

The J-Curve theory suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term.

An exchange rate is the value of one currency expressed in terms of another, for example, $1 = 1.60 euros

fixed exchange rate is an exchange rate regime where the value of a currency is fixed to the value of another currency, or to the value of some other commodity like gold.

floating exchange rate is an exchange rate regime where the value of a currency is allowed to be determined fully by the demand and supply of that currency on the foreign market.

depreciation is when the value of a currency decreases in terms of another currency in a floating exchange rate system.

An appreciation is when the value of a currency increases in terms of another currency in a floating exchange rate system.

Purchasing power parity (PPP) theory suggests that under a floating exchange rate system, exchange rates adjust to offset differential rates of inflation between countries that are trading partners in order to restore balance of payments equilibrium.

The terms of trade is an index that illustrates the value of a country’s average export prices relative to their average import prices.

Deteriorating terms of trade, also known as adverse terms of trade, exist when the average price of exports falls relative to the average price of imports.

Elasticity of demand for exports is a measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports.

Elasticity of demand for imports is a measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports.