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 fish & 2 basket of fruits
2 fish & 4 basket of fruits
1 fish & 6 basket of fruits
0 fish & 8 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
Production possibilities frontier (PPF)
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”.
Production possibilities frontier (PPF)
3. The opportunity cost of production
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
Production possibilities frontier (PPF)
3. The opportunity cost of production
b. Sloping of PPF = Opportunity cost
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
Production possibilities frontier (PPF)
3. The opportunity cost of production
b. Sloping of PPF = Opportunity cost
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
Production possibilities frontier (PPF)
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 )
Production possibilities frontier (PPF)
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
Trade theory3. Changes in consumption possibilities
After specialization and trade:
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.
Trade theory3. Changes in consumption possibilities
After specialization and trade:
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
Two-country model3. Gain from trade
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
Two-country model3. Gain from trade
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
Two-country model (Higher level)
With concave PPF
Assume the international price: 1X = 0.5Y
Trade opportunities expand consumption combination
Two-country model (Higher level)
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
Two-country model (Higher level)
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
Comparative advantage and its relationship with globalization
1. Integration of worldwide markets
a. Goods markets
b. Financial and investment markets
c. Labour markets
Comparative advantage and its relationship with globalization
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
Comparative advantage and its relationship with globalization
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)
Comparative advantage and its relationship with globalization
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…
Comparative advantage and its relationship with globalization
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.
Comparative advantage and its relationship with globalization
b. Financial markets
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
Comparative advantage and its relationship with globalization
b. Financial markets
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
Comparative advantage and its relationship with globalization
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.
Comparative advantage and its relationship with globalization
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
Comparative advantage and its relationship with globalization
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
Comparative advantage and its relationship with globalization
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
Comparative advantage and its relationship with globalization
2. Globalization of production activities
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
Comparative advantage and its relationship with globalization
2. Globalization of production activities
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
Comparative advantage and its relationship with globalization
2. Globalization of production activities
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
Comparative advantage and its relationship with globalization
3. International economic cooperation
International organizations that promote global trade /
economic cooperation
WTO – World Trade Organization
IMF – International Monetary Fund
World Bank
Comparative advantage and its relationship with globalization
3. International economic cooperation
Regional economic cooperation
EEA – European Economic Area
NAFTA – North American Free Trade Area
AFTA – ASEAN Free Trade Area
CEPA – Closer Economic Partnership Arrangement
Comparative advantage and its relationship with globalization
3. International economic cooperation
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
The effects of globalization
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
The effects of globalization
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
The effects of globalization
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
The effects of globalization
3. Change in income distribution
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
The effects of globalization
3. Change in income distribution
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
The effects of globalization
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
The effects of globalization
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
The effects of globalization
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
The effects of globalization
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
Indicators used to measure economic growth and development
1. Real GDP
Commonly measure: _________________ of real GDP
Higher the growth rate of real GDP
______________________________________
75
Indicators used to measure economic growth and development
2. Per capita real GDP
Better measurement of
___________________________________
___________________________________
Per capital real GDP growth rate
+ve : ___________ living standard
-ve : ____________ living standard
76
Indicators used to measure economic growth and development
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
Indicators used to measure economic growth and development
3. Human Development Index (HDI)
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
Indicators used to measure economic growth and development
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
Indicators used to measure economic growth and development
3. Human Development Index (HDI)
(Source: http://en.wikipedia.org/wiki/List_of_countries_by_Human_Development_Index)80
Indicators used to measure economic growth and development
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
Indicators used to measure economic growth and development
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
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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.
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Policies
4. Trade
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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
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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
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Comparing the economic growth and development of different regions
1. The HDI and population in poverty
97
Comparing the economic growth and development of different regions
1. The HDI and population in poverty
98
Comparing the economic growth and development of different regions
2. Differences in the growth of national income
Growth rates of real GDP around the world in 2007. 99
Comparing the economic growth and development of different regions
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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Reasons for the differences in development
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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Reasons for the differences in development
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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The desirability and costs of economic growth
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
The desirability and costs of economic growth
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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The desirability and costs of economic growth
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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The desirability and costs of economic growth
C. 1. Resources exhaustion and environmental pollution Production activities result in resource consumption More economic activities faster the resources are consumed
108
The desirability and costs of economic growth
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
109
The desirability and costs of economic growth
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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The desirability and costs of economic growth
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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The desirability and costs of economic growth
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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