There are two types of aid: humanitarian and development. Humanitarian aid provides food, medicine and emergency relief. Development aid improves human resources, technology and funds specific projects.

Aid can even be further broken down into: Long term aid, Tied aid, Project aid, Technical assistance aid and Commodity aid.

Aid is an effect means of promoting the development of poorer countries. Evaluate this statement:

Advantages of aid: Improves health education and welfare, Better technology and capital accumulation, and Stimulates economy and foster investment.

Disadvantages of aid: Encourages corruption, Encourages dependency, Wasteful projects, Increased indebtedness.

Explain 3 institutional factors that may contribute to potential economic growth in developing countries:

Natural factors: Country’s endowments in natural resources

Human factors and human capital: Skills, experience, education and health

Physical capital: Accumulation of factors of production, roads, and infrastructure

Institutional factors: Banking and microcredit

Evaluate the view that economic growth will lead to economic development:

Consequences of Growth:

+Higher incomes

+Higher government revenue

+Improved welfare

-Greater inequality

-Negative externalities

Types of Growth to Avoid: Jobless growth, Ruthless growth, Futureless growth, Voiceless growth

country comparison to the world: 126

Population growth rate:
1.177% (2010 est.) country comparison to the world: 106

Unemployment rate:
9.9% (2010 est.) country comparison to the world: 110 10.2% (2009 est.) Exports – commodities: petroleum, natural gas, and petroleum products 97%

20 minutes

No evaluation

Definition of terms of trade: (index of export prices/index of import prices)

An example of improvement in terms of trade can be when export prices rise relative to import prices

When there is an improvement in terms of trade, more imports can be bought with same quantity of exports

The Terms of Trade can increase when there is:

a relative rise in the domestic inflation rate. This will make domestic goods more expensive relative to imported goods. As a result, export prices will rise relative to imported prices and terms of trade would improve

a rise in the demand for domestic exports. This will increase their price and, ultimately, the terms of trade would improve.

Comparative advantage exists when one country is able to produce a good more cheaply, in comparison to other goods produced domestically, than another country.

Free trade is trade that occurs between countries without any barriers or hindrances.

A tariff is a tax on imports, which can either be specific (so much per unit of sale) or ad valorem (a percentage of the price of the product).

Quotas have the effect of restricting the maximum amount of imports allowed into an economy.

Export subsidies allow exporters to supply the market with more product than the natural equilibrium would have allowed.

Globalisation essentially means a trend towards much more global production and a greater degree of interdependence between the various countries of the world.

Trade creation is the increased trade that occurs between member countries of trading blocs following the formation or expansion of the trading bloc.

Trade diversion is the decrease in trade following the formation of a trading bloc as trade with low cost non-trading bloc members is replaced by trade with relatively high cost trading bloc members.

The current account records imports and exports of goods (sometimes known as the ‘balance of trade’ or ‘visible trade’) and imports and exports of services (sometimes known as ‘invisible trade’). It often also records income flows (flows of interest, profits and dividends that may have arisen from investment flows) and transfers of money.

The capital account of the balance of payments records the flows of money into and out of a country for investment and other purposes. There will be inflows of money (credits) and outflows of money from a country (debits).

Exchange Rates

1. Fixed – this is an exchange rate system where one currency is fixed in value against another. It involves the government working to keep the parity via intervention on the currency markets. These give certainty but can cost vast sums of foreign exchange from national reserves.
2. Floating – this is an exchange rate which accepts that market forces will determine rates based on how they view a country’s trade performance and its economic and political stability. These systems cost less to maintain but can result in vast swings and changes in currency values. This can seriously affect trade performance and confidence.
3. Managed or dirty float – which is where the rate is floating but between upper and lower limits that the domestic government keeps it to. It brings more stability but at less cost to the national reserves.

Appreciation – this describes an upward movement in a freely floating exchange rate.

Revaluation – this also describes an upward movement in an exchange rate, but in a fixed exchange rate system.

Depreciation – this describes a downward movement in a floating exchange rate.

Devaluation – this means that the government has changed the fixed rate of a fixed exchange rate downwards.

China’s current account surplus can be a result of its investment in the U.S., as investment is an export. In that case, the trade surplus that China hold is not that bad, as U.S. businesses can use that money, become more productive, and distribute higher wages to their workers. U.S. investors have not really had the chance to invest in other nations, or in other words, export to other nations, due to the policy that has existed for decades. Policies have forced the younger generations to give up their savings to help the older generations. This meant that young people were unable to invest as much in other countries.

The U.S. has been hesitant in accusing China of currency manipulation, as there could be serious political and economical consequences. In fact, the U.S. has fixed its own currency to other nations in order to gain trade advantages in the past as well. China’s currency, the yuan, has in fact depreciated 6.9% to the U.S. dollar between February and October of 2009. American manufacturers argue that the yuan is undervalued by 20 to 40% against the dollar, which allows China to have huge advantage in trade. If the yuan were cheap, Chinese exports would be cheap as well, and so American consumers would be more willing to buy imports. This hurts the domestic producers of the U.S. since consumers would not buy as much of their product. Chinese consumers would not buy American products since the dollar would be stronger relative to their currency, and so the American exports would be expensive. This would explain why American producers would be unhappy about China keeping its yuan purposefully low.

However, forcing the yuan to become more expensive would not help the problem that exists in the U.S. A way to fix the problem would be to reduce Chinese imports and increase exports to China. Making the yuan stronger would have no effect since the Chinese could just reduce the supply of their currency on their market. Reducing their currency supply would cause the yuan to appreciate against the dollar. Prices within China woud fall, and Chinese producers would then be able to produce their products at a lower cost. Once again, Chinese exports would be cheaper, so American consumers would continue to purchase Chinese products.

Due to the weakness of the yuan, the exports in China have been high. As a result, China’s foreign exchange reserves contains $2.27 trillion as of September 2009, which is 20% more than the year before. China’s foreign exchange is the world’s largest, and this is all because it has continually had a current account surplus. The U.S. is especially upset about this, since China’s surplus is U.S.’s deficit.

China states that it wants its currency to be internationally convertible, but it maintains control over their currency and economic policy. Basically, China’s currency is not determined by supply and demand. Therefore, it is incredibly difficult for the U.S., or any other nation, to appreciate or depreciate China’s currency.

There are other nations that also have an appreciating currency, which they are desperately trying to depreciate. The Japanese currency, the yen, is a fine example of this. The yen has rose 14% in value between May and September of 2010. In an attempt to devalue their currency, the Japanese government sold around $20 billion worth of yen onto the market. Another problem in Asia is that there is inflation building up, leading to interest rates rising as well. Investors view this as a great opportunity to invest, and many Western investors have sent money over to Asia. Brazil is another nation that has a strong currency. Their currency has grown 30% stronger relative to the US dollar as of 2010 when compared to 2009.  The authority has mentioned that it might impose taxes on short-term fixed income investments, which would reduce the number of foreign investments, or exports. Their current account deficit would therefore, shrink.

All in all, every nation secretly wishes to have a weak currency so that they can export more and import less, and therefore, build up their current account surplus, or foreign exchange reserves.

The article highlights the pros and cons of implementing the Euro, which is the single currency that exists in most of the European nations. The article focuses primarily on Spain, who has experienced both upsides and downsides of having a single currency. In the case with Spain, the advantage of having the Euro was the idea of big is better, which encouraged investment in the currency zone. Investors viewed the Euro as a strong currency, due to the fact that many nations were using it, and so they invested heavily in the currency. it. For a while, the increased investment spurred the growth of the Spanish economy. Other advantages of a single currency includes: cuts converting costs, increased transparency competition within a currency zone, and reduces uncertainty within the currency zone. The disadvantage of the Euro that was apparent was that a uniform monetary policy may not fit all in the currency zone. Spain is now experiencing a trade deficit, and in order to fix that, they need to devalue the Euro. However, this would influence all other European nations that are using the Euro, and many would oppose such an action. Therefore, they have no choice, but to use other, tougher methods to fix their economic problem. Other disadvantages of a single currency includes: policies may have different effects on members, and transition costs.

Balance of Payments = Current Account + Capital Account

Current Account = Visible Trade (Imports and Exports of Goods) + Invisible Trade (Imports and Exports of Services) + Net Transfers

Capital Account = Net Transfers of Capital + Net Investment and Loans + Changes in National Reserves

Section 4.6: Exchange Rates

3 systems: Fixed, Floating (Flexible), and Managed

Fixed Exchange Rate System: Government intervention to maintain a fixed exchange rate

Floating (Flexible) Exchange Rate System: Supply and Demand determine the exchange rate

Managed Exchange Rate System: Exchange rate generally allowed to float but government intervene to avoid sudden fluctuations

Increase in Demand + Decrease in Supply = Currency Appreciation

Decrease in Demand + Increase in Supply = Currency Depreciation

6 factors that influence exchange rates: Interest Rates, Changes in Income, Changes in Preferences, Relative Rates of Inflation, Speculation, and  Foreign Currency Reserves.

Currency Appreciation = Exports more expensive for overseas buyers + Imports cheaper for domestic buyers

Currency Depreciation = Exports cheaper for overseas buyers + Imports more expensive for domestic buyers

USA Current Account:

Prior to the global economic crisis, the US dollar was strong, which meant that they were importing more than they were exporting. As a result, they developed a current account deficit, which kept on building up year after year until recently. Now that the US dollar is weak, they are importing less than they are exporting, which means their current account deficit is slowly contracting.