Unit 4: Developments in the Global Economy

A rising trade-to-GDP ratio means cross-border trade is growing relative to domestic production, so the economy or world economy is becoming more integrated through goods and services.

If the stated trade measure is 30 billion and nominal GDP is 120 billion in the same currency and period, the ratio is $30/120\times100=25\%$. If the ratio and trade value are known, GDP equals trade divided by the ratio written as a decimal.

A transnational company (TNC) owns or controls productive activity in more than one country. Foreign direct investment (FDI) is cross-border investment that establishes or expands a lasting business interest and influence, such as building a facility or acquiring a business.

Migration is the movement of people to live or work in another country. Greater international migration connects labour markets and is a characteristic of globalisation alongside rising trade and FDI.

For a recipient country, migrants can fill vacancies, add skills and entrepreneurship, raise productive capacity and pay taxes. Effects depend on employment, skills, duration and public-service capacity; origin countries may receive remittances but can lose scarce workers.

These causes reinforce one another: lower trade barriers matter more when transport is affordable, while cheap communication makes TNC coordination and cross-border supply chains practical.

The gains form a chain rather than separate promises: larger markets may create scale economies, which lower unit cost; if rivalry passes savings into price, real purchasing power and consumer surplus rise.

Average income can rise while inequality also rises: expanding high-productivity sectors reward skilled/mobile factors, while displaced workers face structural unemployment or lower relative wages.

International specialisation means concentrating resources on goods and services a country can produce at relatively low opportunity cost, then trading for other output. When comparative costs differ, specialisation and exchange can raise total output and consumption possibilities.

A country can gain overall while particular workers, regions or firms lose. The size and distribution of the gain depend on factor mobility, adjustment support, market power, trade barriers and the prices at which exports exchange for imports.

Absolute advantage means producing more output with the same resources. Comparative advantage means producing at a lower opportunity cost. Trade gains depend on comparative, not absolute, advantage.

Country A has comparative advantage in wheat because 0.5 cloth is sacrificed rather than 1. Country B has comparative advantage in cloth because 1 wheat is sacrificed rather than 2. If the exchange rate lies between these opportunity-cost ratios, both can consume beyond their pre-trade possibilities.

The simple model assumes two countries and two goods, constant opportunity costs, fixed and fully employed resources, factors mobile within but not between countries, no transport costs or trade barriers, and homogeneous products.

A trade pattern describes who trades with whom and the product and service composition of those flows. The volume of world trade is the quantity traded; its value can also change because prices or exchange rates change.

The drivers interact. An emerging economy may gain comparative advantage through productivity growth, join an agreement that lowers barriers, and then become a larger supplier in regional value chains.

A trade flow is an export or import moving between particular countries. A useful explanation identifies the direction, partner, product or service, and whether the evidence measures value, volume or share.

A complete causal chain links the shock to relative cost or demand, then to competitiveness or market access, and finally to the value, volume, composition or destination of trade.

The terms of trade index compares the average price of a country's exports with the average price of its imports. It measures the import purchasing power of a unit of exports, not the quantities traded.

If the export-price index is 142.3 and the import-price index is 121.3, the terms of trade are $142.3/121.3\times100=117.3$ (1 d.p.). Relative to a base of 100, export prices have risen more than import prices, so the terms of trade have improved.

If both indices begin at 100 and export prices fall 4.8% while import prices fall 3.1%, the new index is $95.2/96.9\times100=98.25$: a deterioration even though both prices fell.

The terms of trade improve when export prices rise relative to import prices and worsen when import prices rise relative to export prices. Each factor matters through one or both price indices.

The effect is conditional on the trade basket, market power, contract currency, firms' pricing decisions and the duration of the change. For a commodity exporter, a world commodity-price movement may dominate domestic cost changes.

An improvement in the terms of trade means a given quantity of exports can purchase more imports; a deterioration means it can purchase fewer. The welfare and trade-balance effects are not automatic because quantities respond to prices.

A deterioration reverses the purchasing-power effect, but may make exports more price competitive. If export and import quantities respond strongly enough, higher net export volume can offset the less favourable price ratio.

The World Trade Organization (WTO) provides a multilateral framework in which member governments negotiate, apply and review rules intended to make international trade more open and predictable.

Liberalisation can be slow because agreements require negotiation among members with conflicting interests. Enforcement depends on members bringing cases and complying with outcomes; WTO membership does not eliminate protectionism.

Trading blocs differ by how much policy and factor-market integration members share. Each deeper form normally includes the central feature of the preceding form.

A common external tariff identifies a customs union; free movement of labour and capital identifies a common market; a shared currency and central monetary authority identify monetary union.

Trade creation occurs when removing an internal barrier replaces higher-cost domestic production with lower-cost imports from a member. Trade diversion occurs when preference shifts imports from a lower-cost non-member to a higher-cost member.

Net benefit depends on the size of internal barrier reductions, the common external barrier, cost differences, demand elasticities, distance, market competition, factor mobility and how adjustment gains and losses are distributed.

The WTO promotes multilateral, rules-based liberalisation, whereas a trading bloc gives preferential access to its members. Regional integration can support freer trade internally while discriminating against outsiders.

There is no necessary conflict: a regional agreement can remove substantial internal barriers, build support for wider liberalisation and operate within WTO conditions. The judgement depends on whether it creates new trade or mainly raises discrimination against non-members.

A reason explains the policy aim, not whether the restriction is efficient. Evaluation compares the targeted benefit with consumer costs, resource misallocation, administrative cost and the risk of foreign retaliation.

A protectionist policy changes the price, quantity, cost or administrative conditions of trade to favour domestic activity or limit imports.

A tariff fixes the tax rate while import quantity responds; a quota fixes the maximum quantity while the price and quota rent respond. A subsidy supports domestic supply but does not directly make the imported product pay a tax.

Protection changes prices, output, trade and income distribution. Its effects must be traced separately for consumers, producers and government before judging living standards or equality.

Across countries, widespread protection can distort comparative advantage, reduce specialisation and world output, raise prices and provoke retaliation. Domestic gains may therefore be transferred from consumers or foreign producers rather than created.

The balance of payments records transactions between residents of one economy and the rest of the world over a period. Receipts are credits and payments are debits.

A current-account deficit must be matched by net financing, reserve changes and the other accounting entries, allowing for errors and omissions. For example, lower inward FDI or portfolio investment weakens the financial-account position, not the current account directly.

A current-account deficit means total current-account debits exceed credits; a surplus means credits exceed debits. The balance reflects trade, income and transfers, not exports and imports alone.

Diagnose the component, duration and size relative to GDP. A one-year deficit may reflect investment-related imports, whereas a persistent deficit linked to weak productivity suggests a deeper competitiveness problem.

To reduce an excessive surplus, the reverse adjustment may include currency appreciation, stronger domestic demand or investment, higher imports and policies that raise household consumption. Adjustment can be shared between surplus and deficit economies.

Use a policy mix matched to the cause: demand restraint addresses excessive import demand, while supply-side policy addresses weak long-run competitiveness.

Global trade imbalances are persistent current-account surpluses in some economies mirrored by deficits elsewhere. They link trade flows to international borrowing, lending and asset ownership.

Significance depends on duration, the balance as a share of GDP, reserve holdings, currency denomination, what financing funds and whether adjustment is orderly. Capital-goods imports that raise future capacity can make a deficit more sustainable than consumption financed by unstable short-term inflows.

An exchange rate is the price of one currency in terms of another. Regimes differ by how that price is determined and how strongly authorities commit to influence it.

A floating rate can still be influenced by interest rates or intervention; it is managed only when authorities deliberately steer it. A fixed rate may be adjusted officially but is not continuously market-clearing.

Intervention can be limited by finite reserves, speculative pressure and conflict with inflation, growth, employment or financial-stability goals. Interest-rate effects depend on relative rates, risk and expectations; QE does not mechanically set an exchange rate.

To support a falling peso against the dollar, a central bank can sell dollars and buy pesos. The transaction simultaneously increases demand for pesos and supplies dollars.

A floating currency appreciates when demand rises relative to supply and depreciates when demand falls or supply rises. Each factor works through trade or capital flows and expectations.

Both revaluation and appreciation mean that a currency buys more foreign currency. The difference is the exchange-rate regime and the cause of the rise.

If a floating rate moves from 1 domestic unit buying $0.80 to$0.90, it appreciates. If a government changes a fixed parity from $0.80 to$0.90, it revalues the currency.

Both devaluation and depreciation mean that a currency buys less foreign currency. The difference is whether the fall is an official parity decision or a market movement.

If a floating currency falls from $1.20 to$1.05 per domestic unit, it depreciates. If an authority lowers a fixed parity by the same amount, it devalues the currency.

A depreciation makes exports cheaper to foreign buyers and imports dearer domestically; appreciation reverses these price effects. Quantities, contracts, capacity and expectations determine the final outcome.

Appreciation tends to weaken net exports, growth and employment but lowers import costs and inflationary pressure. It can also make foreign assets cheaper for domestic investors.

A competitive depreciation or devaluation is an attempt to lower a currency to gain export price competitiveness and redirect demand towards domestic output, sometimes described as a beggar-thy-neighbour policy.

If many countries try to depreciate together, they cannot all improve relative competitiveness. Repeated intervention can create currency conflict, volatile capital flows, protectionism and weaker international cooperation.

International competitiveness is an economy's ability to sell goods and services in world markets on price and non-price terms while sustaining productive performance. The syllabus measures focus on relative, not absolute, performance.

If wages rise 3% while productivity rises 5%, unit labour cost tends to fall. If productivity falls with unchanged wages, unit labour cost tends to rise and firms may raise export prices.

The factors interact: high wages can coexist with strong competitiveness when productivity and non-price quality are high, while depreciation cannot repair weak infrastructure or unreliable products.

Assess goods and services separately and compare with trading partners. A domestic improvement is not a relative gain if competitors improve faster.

Infrastructure, health, innovation and reduced administrative delay can reinforce the specified policies by improving productive reliability and non-price performance.

Choose measures to match the diagnosed weakness and compare short-run price effects with long-run productivity and quality. A coordinated package may work better than an isolated subsidy or exchange-rate move.

An internationally competitive economy can sustain demand for its goods and services against foreign alternatives. Significance runs through exports, investment, productivity and employment, not ranking tables alone.

Benefits depend on productive capacity, income distribution, import content and environmental costs. Strong domestic demand, services or capital inflows can make a temporary trade deficit manageable, while export success based only on low wages may not raise living standards.

Absolute poverty exists when income or resources are insufficient to meet essential needs such as food, safe water, shelter, sanitation, healthcare and basic education. Relative poverty exists when a household's income is far below the typical income in its own society, limiting participation in the living standards regarded as normal there.

If every household's real income doubles, fewer people may fall below an absolute poverty line. But the share below 60% of median income can remain unchanged because the relative threshold doubles too.

A poverty measure combines a poverty line with household income or consumption data, then counts or describes those below the line. The chosen line determines whether the measure is absolute or relative.

For international comparison, purchasing power parity converts incomes according to what money can buy rather than market exchange rates. Within a country, equivalised disposable household income can adjust for taxes, benefits and household size.

Poverty changes when households' earning capacity, employment, transfers, taxes or the real cost of essential goods changes. The same event can affect absolute and relative poverty differently because their reference lines differ.

Assess scale, distribution, duration and implementation. Growth that raises the median faster than the bottom can reduce absolute poverty while relative poverty stays unchanged or rises.

Income inequality is the uneven distribution of flows received over a period, such as wages, rent, interest, profit and transfers. Wealth inequality is the uneven distribution of the stock of owned assets minus liabilities at a point in time.

A retired homeowner may have low current income but high net wealth. A young professional may have high income but little or negative net wealth after student or housing debt.

A Lorenz curve plots the cumulative percentage of households or people, ordered from poorest to richest, against their cumulative share of income or wealth. The 45-degree line represents perfect equality.

The farther the Lorenz curve bows below the equality line, the more unequal the distribution. If one country's curve lies everywhere closer to equality than another's, it has the more equal distribution. Crossing curves do not provide an unambiguous ranking from the graph alone.

The Gini coefficient summarises the curve: it is the area between the equality line and the Lorenz curve divided by the entire triangular area below the equality line. It ranges from 0 for perfect equality to 1 for perfect inequality; it may also be reported from 0 to 100. A movement from 0.34 to 0.30 indicates less measured inequality.

Inequality arises because people and countries differ in productive opportunities, market rewards, asset ownership and the taxes and transfers that reshape those rewards.

Income and wealth inequality can reinforce one another: higher income makes saving and asset purchase easier, while assets generate income and can finance better education or business investment. Across countries, low income can restrict the investment needed to raise productivity.

Inequality changes incentives, access to opportunity and the way income is spent. Moderate reward differences may encourage effort and risk-taking, while severe inequality can prevent capable people from investing in themselves or enterprises.

The net effect depends on mobility, credit markets, public services, institutions and how inequality was produced. Inequality from innovation differs from inequality sustained by exclusion or inherited market power.

Economic change alters which skills, sectors, regions and assets receive the largest rewards. Development can therefore widen inequality in one phase and narrow it in another; the result is not automatic.

Track both market income and disposable income, and separate temporary transition costs from persistent exclusion. The speed of job creation, access to education and credit, regional mobility and redistributive policy determine who captures productivity gains.

A free market economy allocates resources mainly through private property, prices, profit and voluntary exchange. Because income reflects market demand, productivity, bargaining power and asset ownership, unequal outcomes are a significant feature of capitalism.

Actual capitalist economies are mixed economies. Progressive taxation, transfers, minimum wages, competition policy and universal public services can alter disposable income and opportunity without removing private ownership or market prices.

Public expenditure can purchase long-lived productive assets, pay for the government's continuing activities, or transfer purchasing power without buying current output. The economic effect depends on which category changes.

Capital and current purchases directly count within government consumption or investment in aggregate demand. Transfer payments do not count directly because no output is purchased; they affect aggregate demand when recipients spend their disposable income.

The size and pattern of public expenditure change as national income, population structure and public expectations alter demand for services and the government's capacity to finance them.

Countries differ in income, demographics, political choices, private provision and administrative capacity, so equal expenditure-to-GDP ratios need not buy the same services. A rise in the ratio can occur because nominal spending grows, real spending grows, GDP falls, or spending falls more slowly than GDP.

Public expenditure as a proportion of GDP shows the relative scale of government spending, but its significance depends on composition, financing and spare capacity rather than the ratio alone.

If GDP falls faster than expenditure, the ratio rises even without a real spending expansion. Conversely, a growing economy can accommodate higher real spending with a stable ratio.

A direct tax is levied directly on a person's or organisation's income, profit or wealth. An indirect tax is levied on expenditure or production and is collected from the seller, which may pass some or all of the burden to buyers through prices.

Who sends the payment to government is not necessarily who bears the economic burden. The incidence of an indirect tax depends on demand and supply elasticities; a direct business tax can also affect owners, workers or customers over time.

Tax structures are classified by how the average tax rate changes as income rises. The average rate is total tax paid divided by income; it is different from the marginal rate on the next unit of income.

If a household earning $20,000 pays$2,000 and one earning $100,000 pays$20,000, their average rates are 10% and 20%, so the schedule is progressive. A fixed amount per unit of fuel can be regressive when lower-income households spend a larger share of income on it.

Tax-rate changes alter disposable income, prices, incentives and revenue. Their macroeconomic effects depend on the tax, its incidence and behavioural responses.

Fiscal terms separate an annual flow from an accumulated stock and separate built-in budget responses from deliberate policy choices.

A recession can create a cyclical deficit as tax receipts fall and benefit payments rise. Recovery reverses that component automatically. A structural deficit persists without policy or supply-side change and therefore adds to debt across the cycle.

A fiscal deficit changes with revenue, expenditure and the economic cycle; national debt changes through accumulated borrowing, repayment and the cost of servicing existing liabilities.

Debt sustainability also depends on debt relative to GDP: growth in nominal GDP can lower the ratio even when the cash stock rises, while currency depreciation raises the domestic burden of foreign-currency debt.

The significance of fiscal deficits and national debt depends on their size relative to GDP, duration, financing cost, ownership and what the borrowing funds.

External or foreign-currency debt adds exchange-rate and foreign-currency risk. Persistent structural deficits can weaken confidence and credit ratings; cyclical borrowing may support output and automatically shrink during recovery.

Governments combine fiscal, monetary, exchange-rate and supply-side policies with direct controls because each objective has different causes and trade-offs.

Diagnosis comes first: demand restraint cannot produce missing energy, while a subsidy cannot permanently offset an economy-wide demand boom. Time lags often make a coordinated short-run and long-run package stronger than one instrument.

The 2008 global financial crisis damaged bank balance sheets, credit and confidence, causing consumption and investment to fall. Governments and central banks used expansionary demand-side policies to limit the resulting contraction in aggregate demand.

With private demand collapsing and inflation pressure weak, expansion reduced the risk of a deeper recession. International spillovers mattered because one country's imports support another's exports.

Tax avoidance uses legal arrangements to reduce tax liability, while evasion illegally conceals liability. A transnational company can shift reported profit between jurisdictions through prices charged in transactions among companies in the same group.

A single government is constrained by mobile capital, information gaps, legal appeals, bargaining over investment and competition from other jurisdictions. Joint rules reduce opportunities to move profit without matching real activity.

A policy change begins with the people, firms and markets directly affected, then spreads through national income, prices, finance and international trade. The same policy can create gains at one scale and costs at another.

A subsidy to a domestic industry may preserve jobs in one region and raise national output, yet increase taxes, divert resources from other sectors and lower foreign producers' sales. If partners retaliate, trade and efficiency can fall globally.

Trace incidence, multiplier and spillover effects; then compare short-run adjustment with long-run productivity. Size, openness, exchange-rate regime, mobility of labour and capital, and coordination with other countries determine how far effects travel.

Policymakers choose instruments before the economy's current state, future shocks and behavioural responses are known with certainty. A policy can therefore be correctly aimed yet mistimed or produce a different magnitude from that expected.

Recognition, decision, implementation and impact lags can allow conditions to change before a policy takes full effect. For example, tightening demand against a temporary supply shock may lower inflation only after output and employment have already weakened.

Use scenario ranges, timely indicators, automatic stabilisers, targeted temporary measures and coordinated policies, then revise as evidence improves. These reduce error but cannot eliminate uncertainty.

The Human Development Index (HDI) combines health, education and income into a single value between 0 and 1. It measures capabilities and living standards more broadly than income per person alone.

Each indicator is converted into an index using stated minimum and maximum values. The education indicators are combined, then the three dimension indices are combined using a geometric mean. A higher HDI requires progress across the dimensions because a very weak dimension holds down the composite.

Purchasing power parity makes income more comparable by reflecting what money can buy. GNI records income received by a country's residents, including net income from abroad, rather than domestic production alone.

HDI is useful because it compares three central dimensions of development in one standardised measure, allowing countries and changes over time to be ranked more broadly than by income alone.

Compare the overall score and the separate dimensions. If two countries have similar HDI but different life expectancy or schooling, the component pattern gives a more useful policy diagnosis than the rank.

Development indicators reveal access to productive opportunities and essential services that a single income or HDI value can miss. Each should be read as a signal with a stated direction and limitation.

Use several indicators together and compare definitions, dates and population coverage. Rising connectivity alongside clean water and medical access gives stronger evidence of broad development than any one series.

Economic constraints restrict investment, productivity, foreign exchange or the ability to turn growth into higher living standards. They often reinforce one another rather than operate separately.

Non-economic factors constrain development by weakening institutions, security, trust and the continuity needed for people and firms to invest. Their effects still travel through economic channels.

These factors can create a vicious circle: conflict weakens governance and revenue, poor services reduce opportunity, and capital or skilled labour leaves. Stable institutions can reverse the feedback by making productive investment more credible.

Market-oriented strategies aim to strengthen price signals, competition, private ownership and access to finance or global markets so resources move towards more productive uses.

Interventionist strategies use public investment, protection, price or exchange-rate management and coordinated ownership to address missing markets, instability and capability gaps.

Industrialisation, tourism, primary industries, debt relief and aid use different assets and financing routes. Their development value depends on linkages, distribution and whether short-run receipts build lasting capacity.

International institutions support development through different mandates: long-term development finance, short-term macroeconomic and balance-of-payments support, or locally delivered programmes and advocacy.

The institutions can complement one another: IMF stabilisation may address an external financing crisis, World Bank finance may build longer-run capacity, and NGOs may reach specific communities or monitor delivery.