Distinguish Between Economic Growth And Sustainable Economic Growth

Distinguish between economic growth and sustainable economic growth (4) Economic growth in the short term relates to changes in AD, and in the long term to changes in productive capacity. Positive economic growth is expressed in terms of an increase in real GDP over time. Sustainable growth means growth that does not compromise the ability of future generations to enjoy a similar standard of living. More simply, it is growth that can be continued over the long run rather than growth that rests, for example, on the depletion of non-renewable resources such as coal. Is FDI or international borrowing the most efficient way to promote development in a less developed country? (6) FDI means investment in an economy by a foreign owned company. International borrowing is borrowing from an institution in another country, such as a commercial bank or the IMF. FDI can be highly effective in promoting development as it can lead to technology transfer-where new technology trickles down to related industries, increasing the rate of productivity growth. Foreign companies can also develop local human capital through training; especially important if the developing country has limited educational infrastructure. On the other hand, FDI may simply result in a foreign owned monopoly which is harmful to efficiency, the repatriation of profits and the employment of foreign nationals, mitigating these positive effects. International borrowing on the other hand brings its own risks; it requires servicing, and the significance of this depends on the percentage of output that the interest burden represents; the higher it is, the more the burden restricts growth. Also, borrowing from the IMF may bring conditionalities such as a requirement to liberalise which itself may harm development and growth. In conclusion, FDI may be more efficient in promoting growth, especially where the country is unable to sustain a high level of investment, or suffers from a high capital output ratio (k) and a low savings ration (s). Even then though, growth is not the same as development, it is just an important enabling condition; neither method guarantees development. Explain the importance of institutions in determining economic growth (10) Institutions are formal or informal organisations within an economy ar between economies. They may be public or private sector. Most commonly we consider financial institutions, those concerning education and those concerning healthcare provision. institutions are of critical importance in enabling growth. Financial institutions drive the accumulation of savings and the provision of investment funding. Yet the advent of the internet and mobile telephone based banking systems now enables economic agents to connect with such institutions outside of the domestic economy, making domestic financial institutions of diminishing importance. Furthermore, international capital flows, for example those concerning FDI, are also vitally important in driving growth in many developing economies. Institutions that provide healthcare and education drive human capital formation which in turn facilitates economic growth. The experience of China for example suggests that the provision of basic literacy skills can be of great importance in attracting FDI. On the other hand multinational companies (MNCs) themselves can be important providers of human capital development, potentially in high technology areas otherwise unknown within the country. The significance of this effect depends on the level of technology used by the MNC and the degree to which domestic rather than expatriate labour is employed. if the government is considered to be an institute then it too can be important in enabling economic growth. Effective monetary and fiscal policy can create the stability required to attract FDI and to encourage both domestic savings and investment. On the other hand, the government in a developing economy may lack the skills and resources to do this effectively. Whilst institutions enable economic growth, many other factors are important in determining the growth rate. For example the Harrod Domar model indicates that, within certain limiting assumptions, the growth rate is equal to the savings ratio (s) divided by the capital output ratio (k). Whilst institutions influence both factors, they are further influenced by, for example, the exchange rate and distribution of income within the economy. Then again, these factors too can be strongly influenced by institutional forces. Is summary, institutions are important in enabling economic growth but are by no means the only driver of economic growth. To some extent their importance can be mitigated by forces such as FDI, yet they remain vital as drivers of human capital development and they strongly influence the extent to which an economy is integrated into the global economy. Evaluate the extent to which globalisation is a force for good (20) Globalisation describes the rapid increase in the level of international trade. It is also defined as the ability to make and sell anything anywhere in the world, Globalisation can be a force for good if it facilitates economic growth. It has the potential to do so by enabling countries to specialise in their areas of comparative advantage and then trade. This in turn drives up exports and increases aggregate demand, ceteris paribus driving forward economic growth: (Quick diagram, AD expanding) the producers within the trading bloc more internationally price competitive and to protect them from international competition. Clearly there may be conflicts between these objectives and the broader objectives of the WTO. Trading blocs serve to distort the pattern of international trade whilst the WTO exists to promote free trade. This may lead to considerable conflict. However, the extent of the conflict depends upon factors such as how large the trading bloc is in terms of share of international trade. If it has a large share, any protectionist measures should have a large effect, and the conflict with the WTO will be significant. However, a trading bloc of relatively small economies with a small share of international trade will be far less significant in terms of its conflict with the WTO. Also, the extent of the protectionist measures employed by the trading bloc will determine how far it conflicts with the WTO. If extensive import tariff barriers are erected and export subsidies are employed, then the conflict will be significant. Any reduction in efficiency brought about by a free trade area will conflict with the WTO which aims to increase efficiency by breaking down trade barriers. However, it could be argued that the WTO itself is highly inefficient in removing trade barriers. Certainly the pace of reform driven by the WTD is very slow. It has delivered no real benefit to the developing economies of the world which still languish below the developed countries in terms of share of international trade. Africa for example, home to many of the World's poorest nations, has a declining share of international trade despite the endless negotiations and discussions of the WTO. Indeed, schemes such as the EU Common Agricultural Policy (CAP) continue to massively distort international trade with the tacit approval of the WTO. Products in which the EU has no comparative advantage such as sugar are heavily subsidised and exported to the Third World, with a devastating effect on those economies that benefit neither from WTO status or membership of a trading bloc. in comparison to the economic damage caused by CAP, the economic impact of the WTO and trading blocs are fairly insignificant. The WTO permits its members to negotiate trade agreements that distort the pattern of international trade, which in a sense has a similar effect to the policies agreed by free trade areas. This means that the WTO and free trade areas have objectives that perhaps conflict far less than is first apparent. For example, the EU and USA have negotiated a number of special agreements with China to voluntarily restrict trade in, for example, textiles. These agreements plainly distort the pattern of trade and protect the interests of certain WTO members with the full understanding and implied agreement of the WTO. Worse still, WTO members such as France sometimes flaunt the principles of free trade and undermine the WTO, for example in the case of long standing restrictions on beef exports from Britain to France. This type of activity seems to be more directly in conflict with the WTO, not to mention EU competition law, than any agreements by members of a trading bloc. Overall, although in theory the objectives of a trading bloc and the WTO may appear to be in direct conflict, there is a strong argument to suggest that the WTO is so ineffective and inefficient as to make the conflict quite trivial. Despite the existence of the WTO, the World's poorest economies continue to become poorer in comparison with the richer nations of the World. Each year, tens of millions of people starve to death in the Third World whilst members of the WTO and trading blocs continue to protect their own interests. Evaluate the benefits of international trade (20) International trade is when one economy trades goods and/or services with another economy. The economist Ricardo pioneered research in this area and developed the theory of comparative advantage, which can explain many of the benefits of international trade. Absolute advantage is when an economy can produce something at a lower resource cost than another economy. Comparative advantage is when an economy can produce something at a lower opportunity cost in terms of resources than another economy. When considering international trade, comparative advantage is the most significant factor. The principle of comparative advantage rests on several assumptions: The simplifying assumption is made that labour is the only factor of production. Labour is assumed to have full occupational mobility within countries, but is assumed to be unable to move between countries Goods produced are assumed to be homogeneous within countries Goods can be transported without cost between countries The labour and goods markets are assumed to be perfectly competitive in both countries. Firms are maximising profits and consumers are maximising utility The principle can be visualised most effectively through a numerical example. Suppose that England and Portugal both produce only wine and cloth, and have ten workers each equally divided between the two products: In England, each worker can make 120 units of wine or 6 units of cloth. In Portugal, each worker can make 80 units of wine or 2 units of cloth. England has an absolute advantage in both products as 1 unit of labour from England can produce more cloth and more wine than 1 unit of labour from Portugal, England also has a comparative advantage in cloth-it can produce cloth at a lower opportunity cost than Spain can. England can produce 1 unit of cloth at an opportunity cost of 20 units of wine, but Spain can produce 1 unit of cloth at a higher opportunity cost of 40 units of wine. Assuming that both economies specialise, with England putting eight workers onto cloth production and Portugal putting ten workers onto wine production, the following results: Cloth Wine England 48 240 0 Portugal 800 Total 48 1040 Overall, output has increased and, ceteris paribus, welfare will increase. In this case, provided that the terms of trade between England and Portugal (ie the "exchange rate" between the two products), then specialisation and international trade will lead to increased efficiency and welfare. A significant advantage of international trade therefore is that is permits specialisation. Specialisation is when an economy focuses on producing that in which it has a comparative advantage. Specialisation can lead to increased output, increased efficiency and improved welfare, which is the ultimate purpose of any economic system. The advantages of specialisation were first identified by Smith, and the concept was developed by Ricardo. However, specialisation can bring disadvantages too an economy can become highly reliant on international trade and face significant risks from, for example, exchange rate fluctuations and shifts in comparative advantage. For UK producers in businesses characterised by high fixed costs, the opportunity to specialise and access markets where they can achieve significant economies of scale may be a very important one. Another advantage of international trade is that it exposes producers to higher competition. This creates an incentive for them to be efficient, and reduces X inefficiency (which is where a producer produces above or off the average cost curve). Again the effect should be lower prices, increased innovation, improved consumer choice and improved welfare. However, if domestic producers cannot compete effectively, the result of this exposure may be highly damaging to the economy. For example, the EU textiles industry is suffering from exposure to Chinese competition and cannot compete effectively on cost in most sectors. The extent to which this is a problem depends upon how effectively trade barriers and protectionist measures can be introduced and enforced. Ultimately, exposure to competition may lead to the break up of inefficient or profit maximising domestic monopolies, or at least to significant efficiency gains. This is most significant for welfare where the monopolist produces a necessity-for example power suppliers in the UK. However, exposure to competition may lead such monopolists to cut investment spending in the short term to gain a cost advantage at the expense of longer term efficiency and productivity. Reduces inequalities of income across the world should be a natural result of international trade. Less developed countries with abundant low cost labour should be able to grow at the expense of higher cost producers in developed countries. However, this has not been the experience of Africa in the last decade, which has suffered from a reduced share of international trade whilst overall international trade has grown strongly. It seems that the use of protectionist measures such as the Common Import Tariff of the EU, and the dumping of EU agricultural produce in less developed markets have prevented this potentially vital benefit from being realised. International trade should enable countries that are not endowed with certain natural resources to gain them through trade. This should lead to increased consumer choice and welfare. It may also lead to more far reaching implications; China is richly endowed with coal, but has almost no oil and gas reserves. Trade that permits China to obtain gas, and switch from inefficient coal fired power stations to more efficient gas fired power stations. This could lead to a reduction in global warming. However, unless China is provided with a suitable incentive to take this step, this significant potential benefit is unlikely to be realised. On balance, the most significant potential advantage of international trade is that it permits specialisation and therefore increased welfare. However, this advantage only holds in the absence of trade restrictions that