International Economics and Development
Economic Globalization
Economic globalization involves the reduction of barriers limiting the free movement of business, trade, investment, and labor across international borders. Globalization is the unification or joining together of the world’s economies and its various commercial, business, and financial markets.
Reasons for Globalization
- Deregulation: Relaxation of government controls and increased reliance on market forces of demand and supply.
- Multinational Expansion: Businesses with branches in multiple countries (e.g., iG and EHOME) can expand operations overseas, often lowering costs, improving efficiency, and raising profitability.
Negative Impacts of Globalization
- Income Inequality: Growing disparity between incomes of workers in globalized cities and those in rural regions.
- Environmental Degradation: The trade-off for rapid economic growth can be environmental destruction and pollution, impacting non-material living standards, including health.
- Short-Term Unemployment: Closure of uncompetitive local industries. However, in the long term, globalization can potentially increase employment in efficient areas with a comparative cost advantage.
Free Trade
Free trade is a theory advocating for international trade without protectionist measures like tariffs, subsidies, and import quotas.
Absolute and Comparative Advantage
Free trade increases economic growth and GDP but can limit the growth of infant industries (new industries with higher production costs). Tariffs can act as subsidies or incentives for these industries.
Exchange Rates
The exchange rate measures the price of one currency when exchanged for another (e.g., the Australian dollar against other currencies). The Trade Weighted Index (TWI) adjusts the exchange rate based on a basket of weighted currencies. A floating exchange rate system means the price of a currency is determined in the foreign exchange market by buyers (demanders) and sellers (suppliers).
Government Debt
While governments may move towards budget surpluses, non-official debt can still represent a significant portion of a nation’s total debt. This can be caused by government spending during recessions to stimulate the economy.
Unemployment
Cyclical Unemployment
Caused by a shortage of aggregate demand (AD) or weak demand-side conditions. Occurs when unemployment exceeds a certain threshold (e.g., 5%). Cyclical unemployment rises during economic downturns and recessions.
Addressing Cyclical Unemployment
Monetary Policy
Expansionary monetary policy involves lowering interest rates to discourage saving and encourage borrowing and spending, boosting consumption, investment, and aggregate demand.
Deregulation of the Labor Market
Reducing government controls over wages and working conditions, promoting enterprise bargaining (workplace agreements) where pay is linked to productivity improvements.
Natural Unemployment
Unemployment that is unavoidable through policy interventions.
Causes of Poverty
- Limited Productive Capacity: Due to low efficiency or low volume of resources.
- Limited Foreign Trade and High Debt: Trade protection policies of richer countries and high foreign debt hinder access to markets.
- Income and Wealth Inequality: Widening income gaps and concentration of wealth.
Strategies for Poverty Reduction
- Infrastructure Development: Improves living standards, business confidence, and the Human Development Index (HDI).
- Sustainable Debt Management: Reducing wasteful projects and potentially writing off debt for heavily indebted poor countries.
- Reducing Trade Protection: Lowering trade barriers to increase trade, economic growth, and reduce debt.
- Addressing Inequality: Combating corruption, promoting fair competition, and implementing progressive taxation.
- Foreign Aid: Providing financial assistance (hard and soft loans, grants) and technical support to address deficiencies in savings and investment.
Population, Labor Force, and Unemployment
Population Growth: The total population growth rate is the sum of natural increase (birth rate minus death rate) and net migration (immigration minus emigration).
Labor Force Participation Rate: The percentage of the working-age population willing and able to work. Influenced by welfare and tax policies.
Unemployment Rate: The number of unemployed individuals as a percentage of the total labor force.
Labor Force: Individuals aged 15 and over who are employed or actively seeking employment.
Strong Labor Market: Characterized by low unemployment and high employment levels.
Development Economics
Economic Growth vs. Economic Development
Economic Growth: An increase in the real value of goods and services produced over time, measured by the annual growth rate of real GDP.
Economic Development: Improvement in both material (consumption, income) and non-material (life expectancy, education) aspects of life, particularly in low-income countries. Measured by indicators like the HDI.
Measuring Economic Development
Economic development is often viewed as accelerated economic growth, leading to poverty reduction and improved living standards. GDP per capita has limitations as it doesn’t reflect income distribution or quality of life. The HDI combines economic and social indicators. The Millennium Development Goals address key areas like poverty, education, gender equality, and health.