Unit 4 The global economy

• Trade can increase competition, lower prices, expand choice, and provide access to resources • Trade can raise foreign exchange earnings, access larger markets, generate economies of scale, and improve resource allocation and production efficiency • Diagram: free trade illustrating exports when world price is above domestic price • Diagram: free trade illustrating imports when world price is below domestic price

• Tariffs affect markets and stakeholders through price, production, consumption, expenditure, revenue, and welfare effects • Diagram: tariff effects on price, production, consumption, expenditure, revenue, and welfare

• Quotas restrict import quantity and affect price, production, consumption, expenditure, revenue, and welfare • Diagram: quota effects on price, production, consumption, expenditure, revenue, and welfare

• Subsidies affect domestic producers, consumers, governments, foreign producers, and welfare • Diagram: subsidy effects on price, production, consumption, expenditure, revenue, and welfare

• Administrative barriers include standards and regulations • They can restrict trade without using tariffs or quotas directly

• Arguments include infant industries, national security, health and safety, environmental standards, anti-dumping, and unfair competition • Further arguments include balance of payments correction, government revenue, job protection, and ELDC diversification

• Arguments include misallocation of resources, retaliation, increased costs, higher prices, and less choice • Trade protection can reduce efficiency incentives and export competitiveness

• Free trade and protection should be evaluated using efficiency, equity, stakeholders, and long-run effects • Policy judgments depend on context and objectives

• Preferential trade agreements can be bilateral, regional, or multilateral • The World Trade Organization is the key multilateral trade institution

• Trading blocs include free trade areas, customs unions, and common markets • They increase integration between member economies

• Advantages include wider market access, economies of scale, labour mobility, stronger bargaining power, political stability, and cooperation

• Disadvantages include loss of sovereignty and challenges to multilateral trade negotiations

• Monetary union is a deeper form of economic integration

• The WTO has objectives and functions linked to trade rules and negotiations • WTO influence is affected by difficulty reaching agreement on services and primary products • Unequal bargaining power between members affects WTO influence

• Floating exchange rates are determined by demand and supply for a currency • Currency depreciation and appreciation describe decreases and increases in currency value • Diagram: exchange rate determination and changes in equilibrium in a floating exchange rate system • Calculation: using exchange rates to find the price of a good in different currencies

• Currency demand and supply change with exports, imports, FDI, portfolio investment, remittances, speculation, inflation rates, interest rates, growth rates, and central bank intervention • Calculation: changes in currency value from data

• Exchange rate changes affect inflation, growth, unemployment, current account balance, and living standards • Diagram: AD/AS showing possible macroeconomic consequences of exchange rate changes

• Fixed exchange rates can involve devaluation and revaluation • Governments and central banks maintain fixed rates through intervention • Diagram: how a fixed exchange rate is maintained

• Managed exchange rates can become overvalued or undervalued • Diagram: exchange rate determination and changes in equilibrium in a managed exchange rate system

4.6.1Balance of payments

• Balance of payments records credit and debit items • Accounts can show surpluses or deficits • Calculation: elements of the balance of payments from data

4.6.2Components of the balance of payments

• Current account includes trade in goods, trade in services, income, and current transfers • Capital account includes capital transfers and transactions in non-produced non-financial assets • Financial account includes FDI, portfolio investment, reserve assets, and official borrowing

4.6.3Interdependence between accounts

• The balance of payments has an overall zero balance • Credits are matched by debits • Deficits are matched by surpluses

• Sustainable development links economic progress with environmental and social sustainability • Sustainable Development Goals provide a framework for development priorities

• Economic development is multidimensional and cannot be captured by income alone • Development includes living standards, health, education, inequality, energy use, and environmental outcomes

• Single indicators include GDP or GNI per capita at PPP • Other indicators include health, education, inequality, energy, and environmental indicators

• Composite indicators include Human Development Index (HDI), Gender Inequality Index (GII), Inequality adjusted Human Development Index (IHDI), and Happy Planet Index • Composite measures combine multiple dimensions of development

• Measurement approaches have strengths and limitations • Economic growth and economic development may be related but are not identical

• Poverty traps are self-reinforcing conditions that keep people or economies poor • Diagram: poverty cycle showing linked factors perpetuating poverty

• Barriers include rising inequality, weak infrastructure, inappropriate technology, low human capital, and dependence on primary production • Other barriers include lack of market access, informal economy, capital flight, indebtedness, landlocked geography, tropical climates, and endemic diseases

• Weak institutions include legal system weaknesses, ineffective taxation, weak banking systems, and insecure property rights • Other barriers include gender inequality, corruption, lack of good governance, and unequal political power and status

• Different barriers have different importance depending on country context • Evaluation should consider how barriers interact and reinforce one another

• Trade strategies include import substitution, export promotion, and economic integration • Diversification reduces dependence on narrow sectors or products • Social enterprise can support growth and development goals • Diagrams: draw from relevant diagrams used in other sections

• Market-based policies include trade liberalization, privatization, and deregulation • These strategies aim to improve efficiency, incentives, and market access

• Interventionist policies include redistribution through tax policies, transfer payments, and minimum wages • Merit good provision includes education, health, infrastructure, energy, transport, telecommunications, clean water, and sanitation

• Inward FDI can support growth and development • Foreign aid includes humanitarian aid, development aid, debt relief, ODA, and NGO support • Multilateral development assistance includes the World Bank and International Monetary Fund

• Institutional change includes improved access to banking, microfinance, and mobile banking • Institutional strategies include women's empowerment, reducing corruption, property rights, and land rights

• Strategies should be evaluated for strengths and limitations in promoting growth and development • Government intervention and market-oriented approaches should be compared in context • Progress toward selected Sustainable Development Goals should be assessed in two or more countries