Macro 5

The gap between levels of development between the regions is sometimes referred to by development economists as the

"north-south problem."

The World Bank considers any country with a gross national income (GNI) of less than $______________ per capita (in 2012 U.S. dollars) as a low-income country.

$1,006

Lower middle income countries have a per capita GNI ranging from $_______________ to $__________________

$1,006 - $3,975

The World Bank has established a poverty line of $___________ per day (2005 U.S. dollars) as the threshold for absolute poverty. At this level, almost 1.3 billion people remain below the extreme poverty line

$1.25

High-income countries have a per capita GNI range of $______________

$12,275+

upper middle income countries have a per capita GNI ranging from $_________________to $______________________

$3,976 to $12,275

Aid may come in the form of... (4 things)

1 - Grants 2 - Loans 3 - Technical Assistance 4 - Profit-seeking investment

Common arguments against free trade

1 - Jobs: People losing their jobs at a factory is bigger news than people gaining jobs from trade. The job losses are more centralized; one factory firing several hundred people at the local T-shirt plant is more easily seen and understood than the decentralized jobs that are gained. 2 - National Security: The claim that certain industries are necessary to produce in a country for the protection of that country. Many industries use this argument when it is not necessary 3 - Cultural Heritage: The cultural heritage argument is that there is a product that is so much a part of the country's culture and heritage that it would harm the country if it was made overseas. 4- Infant industry: used by new, or "infant," companies. They argue that new companies in the country cannot compete with established companies from other countries. 5 - Unfair Competition - The unfair competition argument is based on the idea that all countries should play by the same rules, but, realistically, not all countries do. The WTO is based on this idea, as well. If both countries are members of the WTO, and one feels the other is being unfair, they can make a complaint with the WTO. 6 - Protection as a bargaining chip: a country will threaten trade barriers to get another country to do what it wants. Often, the country that makes the threat is not willing to deliver on the threat

Benefits of free trade (5)

1 - Value Creation 2- Increased consumption 3- Increased competition 4 - Lowers cost through economies of scale 5 - Enhanced flow of ideas

International finance includes: (3 things)

1) Balance of payments 2) The currency markets, 3) How various exchange rate systems affect 1 & 2

Costs / negatives of free trade (1 thing)

1) jobs in specific industries are lost.

The key to controlling population growth is the total fertility rate (TFR), or the number of children a woman will bear during her childbearing years. A TFR of _____ keeps population constant. In 1960-1965, the world TFR was ____ By 2010, it had fallen to 2.5—only 1.6 in the industrial countries

2, 5

Almost all developing countries are really two societies in the same country—one modern, urban, and market oriented; and the other made up of rural-dwelling people who are uneducated and largely employed in agriculture, with very little of their economic activity passing through the market. This coexistence is called _________________________

Dualism

The rule of 70 is used to estimate________________________________________________________ and gives a good estimate of how many years it will take a country to double its standard of living based on its growth rate.

How fast an economy will grow.

In a 2012 report, WIPO identified three categories based upon a country's innovation relative to its per capita income. First are the "_____________________________"—high-income countries that support human capital and stable innovation infrastructures. Next are the "________________________________"middle-income countries with recent improvements in the skill and education of their labor force and infrastructures. The third category is the "___________________________________"—countries that have potential based on their level of income but currently lack the proper foundation for innovation.

Innovation Leaders Innovation Learners Innovation under performers

Experience at the World Bank indicates that providing basic social services, specifically in health and education, has been the most effective way to work toward both growth and poverty relief.

Just Read

One reason why low-income countries invest little in human capital is that they have little to invest. One reason they have little to invest is that they have had such low levels of investment in human and other kinds of capital in the past. This trap is called the vicious circle of poverty—little investment because there is a low level of income, and a low level of income because there has been little investment.

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According to the World Bank and the Stockholm International Peace Research Institute (SIPRI), world military expenditures in 2011 (shown in Table 16.3) were estimated to be $1,738 billion, which represents 2.5% of global GDP, or $249 per person ("Public Sector," n.d.; Stockholm International Peace Research Institute, 2012).

Just read

For most of its history, the United States has had high tariffs and other trade restrictions. The highest U.S. tariff ever was imposed by the Smoot-Hawley Tariff Act of 1930, at an average charge of 53%. Some economists believe that the Smoot-Hawley tariff may have been one of the principal causes of the Great Depression

Just read

A more recent resource for economic development has been microfinancing. Microfinancing is when financial services are offered to microentrepreneurs and small business owners who usually lack access to traditional banking avenues. By using microfinancing instead of a traditional bank loan, entrepreneurs are able to establish relationship-based banking as well as group-based models, which involve several entrepreneurs coming together and applying for loans as a group.

Just read.

Domestic laws or policies other than tariffs and quotas that interfere with the free exchange of goods and services across national borders are called.......

Non tariff barriers

Workers can be divided into three groups, and trade affects each group differently. What are the groups, how does trade impact them?

Non-tradable jobs: These are usually service jobs, like plumbing. It is not possible to outsource a plumber. The majority of government jobs are also in this category. For this group, there are no costs to trade; only the benefits of lower prices and more selection. Tradable jobs in areas of competitive advantage: There will be an increase of jobs in this area. The increase in demand often leads to higher wages and salaries. Not only will this group benefit by more demand for their services, but the people in this group will also benefit from lower prices and a greater selection of goods. Tradable jobs in non-competitive advantage areas: This group bears the costs, as they will lose their jobs. However, they will gain from lower prices and a greater selection of goods.

A majority of the World Bank's funds have gone into structural adjustment lending. These loans are generally paid in three stages as countries meet conditions imposed by the bank. Typical conditions include reducing monetary expansion, increasing domestic tax effort, providing more basic services for people who are poor, and selling off or significantly improving the performance of inefficient state-owned enterprises.

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According to the Organization for Economic Cooperation and Development, the acceptable threshold for a foreign direct investment (FDI) relationship is 10%—that is, the foreign investor should own 10% or more of the voting stock or shares of the foreign company to establish a controlling interest.

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Developing countries have important similarities: a low per capita income, a large share of resources devoted to agriculture, a tropical climate, a mix of both modern/urban and rural/agricultural, income inequality, high fertility rates, and a low investment in human capital.

Read

Especially important roles of government in a market system are to define and protect property rights and to encourage competition and discourage monopoly. The experience of developed, industrial nations offers evidence that private ownership of property and competition play important roles in economic development. Private property—the ability to buy and sell and exchange the products of one's labor—is an essential condition for individual incentives to work, save, invest, and take risks. When governments restrict property rights, they can reduce these work and investment incentives, slowing the economic growth process.

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In developing countries, foreign direct investment can bring needed capital, expertise, and technology. Since foreign direct investment is done privately, it is a way for countries to grow without having to deal with other governments. For example, developing countries might be inclined to borrow money from the World Bank to improve their infrastructure, but that loan comes with strings attached. By contrast, private foreign citizens may want to invest in businesses in that developing country (FDI). Those businesses then create income, which creates tax revenue, which can support infrastructure projects. Despite this type of capitalism having a track record of success, developing countries might oppose this form of investment, as they feel it gives foreigners too much control over their country.

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Mercantilism put heavy emphasis on controlling shipping, maintaining colonies, discouraging imports, and promoting exports. Two famous economists are responsible for developing the arguments for a policy of free trade. Adam Smith's Wealth of Nations in 1776 made a strong case for freedom in every sphere of economic activity. David Ricardo, a 19th-century British economist and member of Parliament, was very interested in the practical question of what trade policy the United Kingdom should pursue. He developed the principle of comparative advantage in his classic 1817 book On the Principles of Political Economy and Taxation.

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Tariffs, quotas, and nontariff barriers interfere with free trade. A tariff or quota will raise the price, reduce imports, reduce consumption, and increase domestic production of the protected good.

Read

The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) are two large multilateral trade organizations. In 1947, developed countries signed the General Agreement on Tariffs and Trade (GATT). Regular trade negotiations led to reductions in tariffs by the United States and its major trading partners through GATT. In 1995, GATT was replaced by the World Trade Organization (WTO). According to the WTO: "The World Trade Organization (WTO) deals with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible." In July 2016, 164 countries were members of the WTO. The WTO has stronger enforcement powers than GATT, and if it finds that a member has violated the rules, it can impose trade sanctions on that country. That the majority of countries have become members of WTO is a reflection of the vast good that comes from free trade and the harm that trade barriers impose.

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The United States welcomes foreign direct investment and gives tax credits and subsidies to foreign companies that create jobs in various states. For example, if BMW builds a car factory in Spartanburg, South Carolina, this causes other companies (such as BMW's top suppliers) to also relocate there, thus revitalizing the community. However, depending on the country doing the investing, there may be national security concerns. For example, a Chinese company owns the Waldorf Astoria in New York City, New York. The Waldorf Astoria had been where U.S. presidents and other U.S. officials stayed when addressing or working at the United Nations. In 2015, the U.S. government stopped using the hotel as its base because of security concerns.

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Who gains from tariffs? Domestic producers, including their owners, workers, and suppliers. These firms can charge a higher price and have a larger market share, which benefits everyone connected with them. The government also gains in the form of tariff revenue. Who loses? Domestic consumers are paying more and getting less, so they lose. Foreign producers have lost sales. Also, the country imposing the tariff has given up some of the benefits of free trade noted earlier—more output, competition, and economies of scale.

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The World Bank is primarily a lending institution that makes long-term, low-interest loans to promote economic growth in developing countries. Located in Washington, DC, it receives its funds from wealthier member countries as well as loan repayments and borrowing in world financial markets. It is the primary multilateral foreign aid agency. The United Nations offers some more specialized multilateral aid programs in health, education, and services to children. Both the World Bank and its partner institution, the International Monetary Fund, were created when representatives of the major nations met in Bretton Woods, New Hampshire, in 1944 to make plans for international economic coordination in the postwar period.

Read.

A summary of transactions between U.S. residents and foreigners is called....

The balance of payments

WIPO stands for....

World Intellectual Property Organization

In most cases, international trade takes place between _______________________and ________________________

individuals and firms

prior to Adam Smith, dominant view was that government should direct many spheres of economic activity, especially international trade. This view, called ....

mercantilism

How do you calculate the rule of 70 (number of years to double standard of living) for a given country?

number of years = 70 ÷ Growth Rate

Imports equal the quantity consumed minus the quantity supplied domestically ( for chart purposes, B - A)

read

Aid is distributed using three areas of international cooperation...

the multilateral trading system, the field of development financing, and the area of technical assistance.