economics elective 2 chapter 1 extension of trade theory 1

Economics

Elective 2 Chapter 1

Extension of Trade Theory

1

Choice of production Given that Robinson works 8 hours a day. His ability:

To catch a fish: 2 hours To collect a basket of fruit: 1 hour

What can he do?

2

No. of fish No. of baskets

4 & 0

3 & 0 / 1 / 2

2 & 0 / 1 / 2 / 3 / 4

1 & 0 / 1 / 2 / 3 / 4 / 5 / 6

0 & 0 / 1 / 2 / 3 / 4/ 5 / 6 / 7 /8

Choice of production

Combination that his time can be fully utilized:

4 fish & 0 basket of fruits





3

Choice of production

Data presented in a table and graph:

4

Combination Fish Basket of fruits

A 0 8

B 1 6

C 2 4

D 3 2

E 4 0

0 1 2 3 4 5 60

1

2

3

4

5

6

7

8

9

10

Basket of fruits

Fish

A

B

C

D

E

Can he produce 1 fish and 3 baskets of fruit?

Can he produce 5 fish and 6 baskets of fruit?

Production possibilities frontier (PPF)

Given Country A owns 6 units of resource to produce

Good X ( 2 units of resources required)

Good Y (1 unit of resources required).

Table to show maximum output combinations

Production point Good X Good Y

A 0 6

B 1 4

C 2 2

D 3 0

Production possibilities frontier (PPF)1. Production possibilities frontiers

shows the locus of the maximum output combination of two goods given the existing resources endowment and technological level Good Y

Good X0

6

4

2

1 2 3

A

B

C

D

E

Attainable, but resources are not fully used

F

Unattainable

Production Possibilities Frontier (PPF)

Production possibilities frontier (PPF)2. The limitation of production choice Country A has limited resources

not able to choose combination F (any point beyond the PPF) Country A will maximize the production

not produce at combination E (any point within the PPF) at any point within the PPF, producing more of any one good without

reducing the quantity of another.

Conclusion At any point on the PPF

Resources are fully utilized Production efficiency is attained

Production decision will be on the PPF only


3. The opportunity cost of production

a. Downward sloping PPF

Assume there’s only 2 products

Under scarcity, producing more Good X means less Good Y

Therefore

The opportunity cost of producing X is “Y”.

The opportunity cost of producing Y is “X”.



b. Sloping of PPF = Opportunity cost

Suppose original production is at point B

If production moves from point B to C

Produce 1 more unit of Good X

Give up producing 2 units of Good Y

That is, marginal cost of 1X = 2Y

Production possibilities frontier (PPF)3. The opportunity cost of production

b. Sloping of PPF = Opportunity cost From the graph:

Slope of PPF = = -2

Meaning that 2Y will be given up for producing 1X.

So, the opportunity cost of 1X is 2Y.

-2Y

+1X




As the opportunity cost of producing 1X = 2Y

Then, the cost of producing 1Y = X

Meaning that X will be given up for producing 1Y.

Reciprocal of slope of PPF = = -

Reciprocal of cost of Good X




Conclusion

Given a straight PPF with constant slope

where x-axis is Good X and y-axis is Good Y

Marginal cost = Average cost

The slope of PPF is the MC of Good X

The reciprocal of the slope is the MC of Good Y


Try it

Given the following PPFA of Country A.

The slope of PPF = = - 4

The marginal cost of producing 1X = 4Y

And the marginal cost of producing 1Y

= The reciprocal of the slope of PPF

= = -

The marginal cost of producing 1Y = X ( or 0.25X )


Try it

Given the following PPFB of Country B.

The slope of PPF = = - 0.1

The marginal cost of producing 1X = 0.1Y

And the marginal cost of producing 1Y

= The reciprocal of the slope of PPF

= = - 10

The marginal cost of producing 1Y = X

Production possibilities frontier (PPF)4. Change in PPF

a. Increase in resources Parallel outward shift Assume technology remains unchanged. Resources increase from 6 to 12 units.

Double the resources

Double the outputs

PPF shift outward

(from PPF1 to PPF2)

Slope of PPF remains

unchanged.

Good Y

Good X0

12

6

3 6

PPF2

PPF1

Production possibilities frontier (PPF)4. Change in PPF

b. Advancement in technology Tilt outward Assume resources remains unchanged Assume technology in producing Good Y remains unchanged Technology in producing

Good X is improved Less resources are needed to

producing the same output i.e. resources to produce Good X

drop from 2 units to 1 unit PPF tilts outward

(from PPF1 to PPF3) Slope of PPF (from 2 to 1) i.e. marginal cost of producing

Good X decreases.

Good Y

Good X0

6

3 6

PPF3

PPF1

Case study (Textbook p.8) Given resources = 90 units X requires 9 units and Y requires 3 units to produce.

1. Slope of PPF = -30 10 = -3 Marginal cost of producing X = 3Y Marginal cost of producing Y = X

Good Y

Good X0

30

10

PPF1

Case study (Textbook p.8)2. (a) The economy ‘s resources have increased by 60%. Total resources = 90 units x (1+60%) = 144units

The PPF has a parallel outward shift from PPF1 to PPF2. Slope of PPF remains unchanged,

i.e. marginal cost remains constant.

Good Y

Good X0

30

10 16

PPF2PPF1

48

Case study (Textbook p.8)2. (b) With technology improvement, production of X requires only 3 units of resources Total resources = 90 units

PPF tilts outward with the x-intercept increases to 30 and the y-intercept remains constant.

Slope of PPF3 = -30 30 = -1

Marginal cost of producing X = 1Y (decrease)

Marginal cost of producing Y = X = 1X (increase)

Good Y

Good X0

30

10 30

PPF3PPF1

Production possibilities frontier (PPF)5. PPF is concave to the origin

Marginal cost = Slope of PPF The law of diminishing marginal return

Marginal cost will finally rise

Slope of PPF will increase when X increases

i.e. more X , steeper the PPF PPF is concave to the origin

Good X From 2 to 3 units,

MC of X = 0.5Y From 5 to 6 units,

MC of X = 1.4Y

Production possibilities frontier (PPF)5. PPF is concave to the origin

Good Y From 2 to 3 units,

MC of Y = X = 0.5 X

From 4 to 5 units,MC of Y = X = 1.4 X

Higher the production of Y,higher the MC

Trade theory

Using the PPF to illustrate The principle of comparative advantage The advantages of international trade

Assumption Marginal cost is constant PPF is a downward sloping straight line

Trade theory1. Consumption choice in an autarkic economy

The consumption possibilities frontier shows the locus of the maximum combinations of consumption of an economy

Without international trade, consumption is restricted by its production

So, PPF = consumption possibility frontier

Given the PPF of Country A Under autarky,

if production at point Cthe max. consumptioncombination is 2X and 2Y

So, consumption can’t exceed PPF.

Points inside are attainable consumption combinations.

Trade theory2. Trade line (Price line)

A straight line passing through the production point, which shows the consumption opportunities brought by trade.

Suppose Country A produces 2X and 2Y (point C) Under autarky, it’s max.

consumption combination.

If trade with other country with international price 1X = 1Y

Good Y

Good X0

6

4

2

1 2 3

C

PPFA

3

5

1

P

Q

S

R

4

Trade line

Trade theory

2. Trade line (Price line) For international trading, Country A

Exchanges X for Y, it can move from point C to P or Q

or Exchanges Y for X, it can move from point C to R or S

Country A can consume at any point along the trade line

Slope of trade line = 1

MC of X = 1Y

Trade theory

3. Changes in consumption possibilitiesWithout trade With trade

With trade, the consumption possibilities will be increased by the blue part.

Trade theory

3. Changes in consumption possibilities From given data

Opportunity cost of producing 1X = 2Y Opportunity cost of producing 1Y = 0.5X Terms of trade (International price): 1X =1Y

Production cost of 1Y is less than the international price Country A has a comparative advantage in producing Good Y,

because its production cost of Good Y is lower. Therefore, Country A should specialize in producing Good Y. Then, trade Good Y for Good X.

Trade theory3. Changes in consumption possibilities

After specialization and trade:

Production of Y (units)

International price1X = 1Y

Maximum consumption combination (Trade line)

Export Y(units)

Import X(units)

Y(units)

X(Units)

6

0 0 6 0

1 1 5 1

2 2 4 2

3 3 3 3

4 4 2 4

5 5 1 5

6 6 0 6



Good Y

Good X0

6

4

2

1 2 3

PPFA

3

5

1

4

Trade line

5 6

Without trade, possible consumption combinations are bounded by PPFA.

1. After trade, possible consumption combinations are beyond PPFA.

2. Increased by the blue part.



Under autarky, max. production/consumption is 2X and 2Y. After trade, max. production/consumption is 3X and 3Y. Gain from specialization and trade: 1X and 1Y

Good Y

Good X0

6

4

2

1 2 3

PPFA

3

5

1

4

Trade line

5 6

Two-country model1. The PPF and comparative advantage

Suppose Country A and Country B both produce Good X and Y

The PPFs show their production combination.

Under autarky,

Country A: 2X and 2Y

Country B: 2X and 2Y

World total output: 4X and 4Y

Good Y

Good X0

6

3

PPFA

3

PPFB

62

2

Two-country model2. Specialization and trade according to

comparative advantage

From PPFs,

Slope of PPFA = = - 2mean that the opportunity cost producing 1X is 2Y

Slope of PPFB = = - 0.5mean that the opportunity cost producing 1X is 0.5Y

Country B has lower cost in producing Good X (given up less Y)

i.e. Country B has comparative advantage in producing Good X

and Country A has comparative advantage in producing Good Y

Mutual beneficial term of trade: 2Y > 1X > 0.5Y

[ International price 1X=1Y is mutually beneficial ]

Two-country model3. Gain from trade

For Country A

PPFA: Before specialization

Trade line: Specialization in Good Y (6 units)

and then trade for 1Y=1X

Original choice

Point A (2X and 2Y)

Choice made by trade:

Point B (3X and 3Y)

Gain from trade: 1X and 1Y

Good Y

Good X0

6

3

PPFA

3

Trade line

62

2

4 51

1

5

4

A

B


For Country B

PPFB: Before specialization

Trade line: Specialization in Good X (6 units)

and then trade for 1Y=1X

Original choice

Point A (2X and 2Y)

Choice made by trade:

Point B (3X and 3Y)

Gain from trade: 1X and 1Y

Good Y

Good X0

6

3

PPFB

3

Trade line

62

2

4 51

1

5

4

A

B


In conclusion

Without trade:

Country A produces 2X and 2Y

Country B produces 2X and 2Y

World total output = 4X and 4Y

After trade

Country A produces 6Y

Country B produces 6X

World total output = 6X and 6Y

Overall gain = 2X and 2Y, which are equally shared by Country A and Country B in previous example

Two-country model4. From PPF of 2 countries to the PPF of the world

If Country A & B produce Good Y only,

Country A produces 6Y and Country B produces 3Y

World total output = 0X and 9Y (Combination P)

Base on the principle of comparative advantage, with trade

World total output = 6X and 6Y (Combination Q)

If Country A & B produce Good X only,

Country A produces 3X and Country B produces 6X

World total output = 9X and 0Y (Combination R)

Base on the principle of comparative advantage, with trade

World total output = 6X and 6Y (Combination Q)

Two-country model4. From PPF of 2 countries to the PPF of the world

Production combination

Good X Good Y

Both Country A & B produce only Good Y with all the resources P 0 9

Specialization and trade based on comparative advantage Q 6 6

Both Country A & B produce only Good X with all the resources R 9 0

Good Y

Good X0

6

3

PPFB

3

62

2

R

9

P9

PPFA

PPFW

Q

Combination in autarkic economy

Two-country model (Higher level)

With concave PPF

Given the consumption choice under autarky

Slope of PPFA at point P = -2, i.e. MC of 1X = 2Y


With concave PPF

Assume the international price: 1X = 0.5Y

Trade opportunities expand consumption combination


With concave PPFAssume the international price: 1X = 0.5Y Compare the opportunity cost:

Country A has comparative advantage in producing Good Y Therefore, Country A will produce more Good Y and less Good X

Country A Opportunity cost

Marginal cost at P 1X = 2Y 1Y = 0.5X

International price 1X = 0.5Y 1Y = 2X


Gain from tradeAssume the international price: 1X = 0.5Y Expanded consumption possibilities benefit Country A With production combination at point Q, Country A can adjust the

consumption to R by exporting Y and importing X. Compare with consumption combination under autarky (point P),

Country A is better off at point R with more Good X and Y.

Comparative advantage and its relationship with globalization

Economic globalization The process of which international trade and production

activities across countries or regions become more frequent

42

Main features of economic

globalization

Integration of worldwide markets

Globalization of production activities

International economic cooperation


1. Integration of worldwide markets

a. Goods markets

b. Financial and investment markets

c. Labour markets


a. Goods markets

Expanding international trade

Total value of merchandise trade to GDP

International trade is growing faster than GDP

More circulation of goods worldwide

From individual goods markets to global

market


a. Goods markets

International cooperation

Expansion of free trade

Breaking trade barriers, e.g. quota restrictions on garments

World Trade Organisation (WTO)

Bilateral or multilateral agreements

Closer Economic Partnership Agreement (CEPA)

European Economic Area (EEA)

North America Free Trade Area (NAFTA)

ASEAN Free Trade Area (AFTA)


a. Goods markets

Firms and customers under globalization Firms

More competitions from the entry of overseas firms HK: Traditional restaurants vs. McDonald’s (from USA) Japan: SONY vs. Samsung (from Korea) USE: General Motor vs. Toyota (from Japan)

Customers More information, more choices More chances to buy goods from different parts of the

world, e.g. ebay, Taobao…


b. Financial markets

Capital flow across countries

Rapid development of information technology

Integration of financial market

Enhance capital flow across countries

Capital raising is no longer restricted to local sources.

E.g. China investors can purchase financial assets

overseas through electronic transaction channels.



Global expansion of financial markets

As restrictions on capital flow have been relaxed,

QFII (Qualified Foreign Institutional Investor)

– foreign investors can do the mainland security trading

QDII (Qualified Domestic Institutional Investor)

– mainland investors can invest in HK and overseas stock

market on a limited basis



An increase in foreign direct investment (FDI)

Free capital flow allows foreign direct investment

More FDI a region has, the closer its relationship is with the

economic development of other regions.

E.g. the rapid growth of some towns in Guangdong and

Sichuan


c. Labour markets

An increase in immigrants and imported labour

Globalization leads to relaxation of restriction on immigration

and import of labour

Immigrants with professional talents to enhance economic

development

E.g. 80% of the residents in Dubai are foreigners.


c. Labour markets

The extension of outsourcing or relocation of tasks

Set production lines in countries with low production cost

Outsourcing and relocation to countries with comparative

advantage lead to more profit

E.g. the mainland China and Vietnam


c. Labour markets

Increasingly networked labour market Use of the Internet

Allow overseas employment Beyond the restriction of national boundaries and immigration policies E.g. home office programme designers, overseas medical consultant

Advantages To workers: more job opportunities To boss: more able to hire suitable workers

Disadvantage To workers: greater competition


2. Globalization of production activities

a. Changes in the nature of international division of labour

b. Dynamic comparative advantage

c. The expansion of the organization and scale of enterprises

d. The increasingly networked business models



a. Changes in the nature of international division of labour Relocation of production tasks based on

Technology Resources To minimize cost and maximized profits

Typical example American Boeing aeroplanes

Mechanical parts: from different countries Assembly: USA



a. Changes in the nature of international division of labour Definition of international division of labour

In the past specialize in producing goods which they have comparative advantage a country specialized in producing whole products e.g. US produced a whole car locally.

Nowadays specialization of the part of goods which comparative advantage different countries specialize in producing different parts of the same

product e.g. Tablet computer

Hardware from China and software from Japan or Korea



b. Dynamic comparative advantage the comparative advantage in a good or component part will shift

from one region to another with changes in economic development.

For example In the past 10-20 years, HK imported Japanese automobiles Recently, HK imports Korean and European automobiles Less comparative advantage due to:

High production cost and exchange rate in Japan Technology of automobile outflow and modified by other countries Lower production cost in other countries due to economic growth

FDI helps bringing new technologies from developed countries to developing countries

Production is relocated to countries with lower production cost

Comparative advantage and its relationship with globalization2. Globalization of production activities

c. The expansion of the organisation and scale of enterprises Globalization allows integration and expansion across countries

Foreign direct investment Setting up of selling points Setting up of production lines Procurement Distribution network Supporting service centres

The rise of emerging market Asia: China, India, Vietnam, and Russia The Middle East Central and South America: Brazil, Maxico, Chile South AfricaCentral For example

Typical example: HSBC

Comparative advantage and its relationship with globalization2. Globalization of production activities

d. The increasingly networked business models Online platforms make the world more closely interconnected. Elimination of geographical barriers such as

Online banking (e.g. HSBC, Citibank) Online investment (e.g. Scottrade, ShareBuilder) Online wealth management (e.g. E*Trade Finance) Online marketing and promotions (e.g. Alibaba) Online auctions (e.g. ebay, Yahoo! Auction) Online sales and payments (e.g. Amazon, Paypal) Online courses (e.g. Harvard University)

Obvious changes can be found in Logistic Procurement Distribution Product life cycle


3. International economic cooperation

International organizations that promote global trade /

economic cooperation

WTO – World Trade Organization

IMF – International Monetary Fund

World Bank



Regional economic cooperation

EEA – European Economic Area

NAFTA – North American Free Trade Area

AFTA – ASEAN Free Trade Area

CEPA – Closer Economic Partnership Arrangement



International political union

BRICS – Brazil, Russia, India, the People's Republic of China and

South Africa (5 emerging markets)

EU – European Union (27 member states in Europe)

APEC – Asia-Pacific Economic Cooperation (21 countries/regions)

ASEAN – The Association of Southeast Asian Nations (10 member

states in Southeast Asia)

The effects of globalization

1. Gain from trade

2. An increase in employment opportunities and income

3. A change in income distribution

4. Effects of capital flow across countries

5. The increase in market competition

6. The issue of environmental conservation


1. Gain from trade

Globalization enhances economic growth

Free trade is beneficial to both rich and poor countries

According to the principle of comparative advantage,

specialization and trade lower the production cost and greater

world output.

Higher output and lower costs lead to lower prices

Consumers have more choices


2. An increase in employment opportunities and income

Economic growth

increase in global demand of goods and services

increase in demand of labour

more job opportunities

higher income for workers


3. Change in income distribution

i. Economic restructuring

Industries with comparative advantage:

Workers have more job opportunities and higher income.

Industries with comparative disadvantage:

Firms are forced to close down.

Workers will become unemployed

Income distribution changes:

From people working in industries with comparative disadvantage

to people working in industries with comparative advantage



ii. Increase in labour demand and supply

Integration of world market leads to both

Increase in demand of labour (higher demand of professionals)

Increase in labour supply (mostly low-skilled workers)

A greater income gap



iii. Differences in the mobility of production resources

High income earner

More educated easy to learn new skills higher occupational

mobility

More chances to invest their income in worldwide financial market

Low income group

Less educated Lower occupational mobility

Easy to be unemployed if their bosses decide to shift production

lines overseas


4. Effects of capital flow across countries

i. Enhance global economic growth

Free flow of capital across countries

Enable enterprises and consumers to get money easier

More investment opportunities

Capital can be invested for greater returns in overseas market

Free flow of capital into developing countries

Speed up the economic growth

Improve living standard


4. Effects of capital flow across countriesii. Increasing financial risks

Rapid inflow or outflow of capital fluctuations to the price of assets, e.g. shares and real estate, Financial crisis

Global speculation of hedge funds Rapid depreciation of South East Asian currencies The Asian financial crisis in 1997

Crisis from other countries Sub-prime mortgage crisis broke out in the US Derivatives products worldwide (Lehman Brothers bonds) are

linked to such mortgage Global financial tsunami in 2008


5. The increase in market competition

Expansion of multinational cooperation (MNC)

Advantages

Lower product/service prices and better product/service

Higher incentive for improving quality of product/service

More competitions lead to more consumer benefits

Disadvantages

Small / Medium local firms are unable to compete with MNC

Increase in monopoly power by MNC


6. The issue of environmental conservation

International investment

lead to rapid consumption of natural resources

worsen pollution and green house effect

Poor conservation policies / Lenient environmental standards

cause ecological damages

Economic growth vs. Environmental protection

Economics

Elective 2 Chapter 2

Economic Growth and Development

72

Economic growth and development

Economic growth and development means an increase in the _____________________ or a rise in the general ______________________

In a broader sense, it means an increase in economic welfare with improvements in

_________________________ _________________________ _________________________ _________________________ _________________________ _________________________

73

Indicators used to measure economic growth and development

1. __________________________________

2. __________________________________

3. __________________________________

74


1. Real GDP

Commonly measure: _________________ of real GDP

Higher the growth rate of real GDP

______________________________________

75


2. Per capita real GDP

Better measurement of

___________________________________

___________________________________

Per capital real GDP growth rate

+ve : ___________ living standard

-ve : ____________ living standard

76


3. Human Development Index (HDI)

a. Aspects covered in HDI

Takes into account socio-economic factors in different dimensions

of human development

___________________________

___________________________

___________________________

Increase in HDI represents a ___________ level of economic

development77



a. Aspects covered in HDI

Examples of measurement indicators

__________________________________ : the average number of years a

newborn baby is expected to live

___________________ attainment

Adult literacy rate: the % of adults who can read and write

Enrolment ratio: % of school age people enrolled in primary/secondary/tertiary schools

Per capital GDP at __________________________________ (PPP)

78


3. Purchasing power parity (PPP) a condition between countries where an amount of money has the

_________________________ in different countries. differences in purchasing power of a "basket of goods" across

countries _________________________

If a Big Mac price = US$4 in US and HK$10 in HK Real exchange rate = Nominal exchange rate = HKD 7.8 / USD 1

Given Per capita real GDP US$1000 in US and HK$7800 in HK With nominal exchange rate, real GDP of 2 regions are the same (US$1000) With PPP adjustment, the figure in HK is equivalent to ________________ So, HK has ___________ per capita real GDP 79



(Source: http://en.wikipedia.org/wiki/List_of_countries_by_Human_Development_Index)80


3. Why using Human Development Index (HDI)

b. Merits of the HDI

Income _________________

Per capita real GDP: can’t reflect the problem

HDI: can reflect people’s overall development

___________________________ (e.g. air pollution)

Per capita real GDP: can’t reflect the problem

HDI: can reflect the adverse effects of pollution on economic welfare

Therefore, the HDI is a more comprehensive measure.81


Give two reasons why the HDI can better reflect the overall

development of a region than per capita GDP.

1. Per capita GDP cannot reflect _________________________, but

the HDI includes such as ________________________________

_____________________________________________________,

so it can reflect the overall development of the population

truthfully.

2. Per capita real GDP cannot reflect _________________________,

but the HDI covers ___________, so it can reflect the adverse

effects of pollution on economic welfare. 82

The keys to economic growth

Productivity is the key to determining a country’s general living

standard and promoting economic growth.

Factors affecting economic growth:

1. ___________________________________________

2. ____________________________________________

83

Inputs

1. _________________________ Gift from the nature Having rich resources is favourable to economic development,

but it’s not a necessary condition for economic growth _________________ resources

Forest Water

_________________ resources Oil Coal

Demand of production ___ Demand of natural resources ___ ___________ price of natural resources More ___________to save energy and explore new resources

84

Inputs

2. __________________

__________ and ____________ that are used to

produce goods or services

For example

Factories

Machines

Infrastructure such as telecommunication and transportation

Saving and investment can accumulate physical

capital.

More (advanced) capital _________ productivity

___________ aggregate output85

Inputs

3. ______________________

It refers to the productivity workers acquire through _________,

_________ and _________.

It also includes _________, _________and the _________of

workers.

Investment helps accumulate human capital, e.g.

Education expenditure

Medical services

Higher the level of human capital _________the productivity

_________aggregate output86

Inputs

4. _______________________________

Production technology refers to the knowledge about

_______________________________________________________.

Agricultural technology: 16th – 19th vs. 20th century

Technology change makes it possible for the majority of people to

produce other goods and services

engage in various kinds of research

so, raise the standard of living

Learning production technology human capital _____

If education or training is __________ unable to master technology87

Policies1. _____________________________

Market economy respect private property rights

Law to protect, ensure buyers and sellers benefits through contacts

Better protection _____ incentives to save, invest or start business

Protecting private property rights is one of the gov’t most basic tasks

in raising productivity and living standard

_______________________ environment

________________ government

__________________________________

88

Policies2. ____________________________________

Increase in saving and investment capital ____

Investment expenditure in GDP ___________ economic growth

Researches found that:

higher the investment ____________ the economic growth

Gov’t policies might affect the saving behaviour

E.g.UK: Tax on the interest received from savings and dividends

_______________ people’s incentive to save money or invest

E.g. Singapore: implement forced national saving

_______________ economic growth

89

Policies3. Foreign direct investment (FDI)

FDI refers to investment projects owned and operated by a

_________________________.

More FDI ______________ in domestic capital

___________ wage / ____________ productivity

Gov’t policies

Tax _____________________

Providing _________________ land

________________ foreign exchange controls

90

Policies3. Foreign direct investment (FDI)

FDI of some countries and regions in 2006

Source: World Investment Report 2007, UN Conference on Trade

and Development, 2007 91

Policies4. Trade

____________________ can promote economic development.

Esp. important to small economies, such as HK and Taiwan

_____________ in China (Reform and opening up policy) has

brought to China a miracle growth in economic history.

92

Policies

4. Trade

93

Policies5. Education

Education is an investment in _______________________.

Education helps inspire people’s creativity _____________ and

____________ are beneficial to the society

Higher education level __________ income

Brings huge ____________ externalities

94

Policies

6. Population

Greater the population

Pros

greater the __________________

larger the ___________ force increase output

faster the accumulation of knowledge and the progress of technology

promote economic growth

Cons

Reduce the average quantity of capital available to each worker

_______ productivity _______marginal cost ______economic growth

With pros and cons, it’s difficult which population policy is the best

to a country.95

Policies

7. Research and development (R&D)

Technological progress is a key to raising _______________

and _____________________.

More advanced technology ___________ productivity

economic growth ____________ living standard

The gov’t can

____________ academic institutes to work on scientific researches

_______________________ to private companies to do more R&D

provide _____________ system to protect investors’ property rights

96

Comparing the economic growth and development of different regions

1. The HDI and population in poverty

97


1. The HDI and population in poverty

98


2. Differences in the growth of national income

Growth rates of real GDP around the world in 2007. 99


2. Differences in the growth of national income Developing countries with slow economic growth (2001-2007)

Slow economic growth difficult to reduce poverty Population living in extreme poverty in Sub-Saharan Africa had increased

from 11% in 1981 to 30% now.For reference:

China: Growth rate = 9.5%, PPP per capita GDP = US$8,394

HK: Growth rate = 6%, PPP per capita GDP = US$45,736100

Avg. growth rate 2001-2007

Est. growth rate in 2011

PPP per capita GDP

Guinea 2.7% 4% $1046

Zimbabwe - 5.4% 6% $395

Nepal 3.2% 3.5% $1270

Niger 4.6% 5.5% $755

Haiti 0.3% 6.1% $1164

Eritrea 3.4% 8.2% $681

Reasons for the differences in development

1. Faster growth in developing countries

Catch-up effect: Poorer economies' per capita incomes will tend to grow at faster rates than richer economies.

Developing countries have the ____________ to grow at a faster rate than developed countries because ___________________ (in particular, to capital) aren't as strong as in capital rich countries.

Furthermore, poorer countries can ___________ production methods, technologies and institutions currently used in developed countries.

Developing countries can speed up their economic growth by bringing in _____________ and ________________.

For example, China has brought in market economy, FDI and production technology from other countries.

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2. Some regions cannot be rich Political _____________

Seriously ____________ economic growth Lead to persistent ______________

_____________ institution and ___________ gov’t policies A corrupt gov’t and inefficient administration cause stagnation Inability of the institution and gov’t

can’t attract production, investment and saving slower the technological improvement

Lack of _______________________ Poor working environment emigration of professionals and talented people Low return on investment in human capital low incentive for labour to learn

new technology unable to accumulate human capital vicious cycle of long-term poverty

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3. To promote economic growth in developing countries

Sound institution is the key to

strengthen the ______________________

protect __________________________

control __________________________

increase ______________ directly and indirectly

reduce unnecessary government ___________________

maintain political ___________________

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The desirability and costs of economic growth

A. 1. Living standards

Economic growth better material life

Wealthy life

More ________________________

More ________________________

More ________________________

More ________________ enhancement of humanity

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A. 2. Reducing poverty

According to World Bank estimates

1% increase in per capita GDP of low-income countries

1.3% decrease in population in extreme poverty

Less poverty

Less ________________________

Less _________________________, e.g. HIV infections in Africa

More ___________ for education

With more working power

More resources can be ___________________

_____________ economic growth105


A. 3. Income distribution

Economic growth does not necessarily benefit all

If benefit goes to only ____________________ These rich people have higher real income and better living standard

The poor continues to ___________

With a widen wealth gap More ______________________

In the world, Rich countries _____________ the resources from poor countries

Poor countries suffer from ______________________________

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B. The trade-off between current and future consumption

Economic growth involves a trade-off between current and future consumption

Saving and investment

can accumulate capital raises _________________ promotes ____________________ increases ____________________

however, implies a decrease in current consumption

So, one of the costs of economic growth is a decrease in current consumption

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C. 1. Resources exhaustion and environmental pollution Production activities result in resource consumption More economic activities faster the resources are consumed

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C. 1. Resources exhaustion and environmental pollution Production activities bring about pollution More economic grows more the serious the pollution Increase in the global CO2 emission in the past few decades

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C. 2. Sustainable development Development that meets our own needs without doing damage to

the prospects of future generations 3 inseparable dimensions to the sustainability of

the ________________________ the ________________________ the ________________________

It also means finding ways to increase ________________________ improve the ________________________

While at the same time reduce _________________ narrow the ______________________ lower overall ____________ and ______________

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C. 3. Economic growth and sustainable development Although production activities consume resources and cause

pollution, Economic growth may benefit sustainable development

i. Wipe out ______________ Prevent the social problems which poverty brings

ii. Raise _______________ people become more aware of health and environment conservation

iii. Raise society’s __________ to bear the cost of environmental protection

iv. ____________________ progress Raise productivity Help reduce consumption of resources Development of environmental friendly technology

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C. Conclusion

Under the principle of sustainable development, human development

requires _____________________, _____________________ and

__________________________.

It aims at the common development of all __________and their

___________________________.

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economics elective 2 chapter 1 extension of trade theory 1

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