“Aid is an effective means of promoting the development of poorer countries.” Evaluate this statement.

4 Apr

Many government use aid to achieve economic development, which is one of the macroeconomic goals. Economic development is a broad concept involving improvement in standards of living, reduction in poverty, and economic choice may also be included.

For economic reasons, aid supplements the lack of domestic resources such as foreign exchange. It also enables infrastructure changes such as dams roads, which would also be an increase in consumption of merit goods. From the aid, the cycle of poverty can be broken with more people with increased incomes leading to more investment.

In terms of politics, foreign aid is used to maintain power. The foreign aid in the form of military goods can suppress opposition and maintains the existing government in power. This may allow for swifter changes and help the development of poorer countries.

Generally, effective aid should overcome the low savings rate as explained in the economic reasons for aid. The money should also help reduce foreign exchange outflows to allow domestic companies to build the infrastructure of development. Aid should also reduce dependence on private investment. Ultimately, with these goals achieved, the standard of living can be increased, along with knowledge and local opinion. This latter would continually boost economic development as people would understand what to invest in. The country will now be able to provide more than just cheap food. Lastly, it also allows choice to be exercised by receiving countries. Tied aid on the other hand, reduces choice as since the developing country may not be getting the best deal. For these reasons, both the rich and the poor in developing countries will benefit, but especially the poor as the percent increase in income may be greater proportionally than to the rich.

Explain the various types of aid which a developing country might receive.

4 Apr

There are three main types of aid: humanitarian, bilateral, multilateral. Humanitarian can either be by individual country to country or via a major organization, not in a form of a loan. This is aid is usually for a specific issue like the aid received for the Tohoku Earthquake in the Sendai area from the Japanese Red Cross foundation. Bilateral aid is in the form of a loan given by one country to another although the time needed to repay this loan is longer. It may also be granted as “soft or below market terms”. Multilateral is when separate countries pay money to major foundations who decide how the money is distributed and to whom.

Mock Reflection

4 Apr

Generally, I think I did well on the mocks although there are topics I need to smooth out. I think for section 2: microeconomics, I need to straighten out the concepts behind max sales revenue and profit maximization. I also need to understand the marginal cost and revenue curves and their relationships within the diagram.

For section 3: macroeconomics, I thinkĀ  I don’t have problems understanding any concepts except for long-run phillips curve which requires more practice then anything else. I understand it but I’m slow with explaining it since it takes me a while for me to be comfortable with my understanding.

For section 4: International economics, I need to review economic integration. This includes globalization, trading blocs, trade creation and diversion, trading blocs and obstacles to integration. I may also need to review a little bit of balance of payments although I felt that I understood it quite well during the unit. I definitely need to review Terms of trade which I don’t have much recollection on except for the fact that I spent a lot of time studying it for the unit exam.

I think the most review I will need to do is for Section 5: developmental economics, which is also why I intend to start reviewing from this section. I will start by reading the text book completely one time and while jotting down important concepts like the sources of growth, etc.

I am aiming for a 7 so I will need to know a lot of examples. I will find a minimum of 5 examples from each section each week so I can have enough real life examples to use in the exam. I will finish all the questions from the past papers, while practicing the diagrams. On paper three for the exam with the newspaper article, I had trouble figuring out what diagram to draw for the second diagram question. I need to practice reading these economic articles and extracting key points as quickly as I can. This can be improved through past papers and following the economic news.

 

Explain the accelerator.

16 Mar

In an economy, firms will invest based on the change in demand rather than what demand actually is. The relationship between income and demand is the accelerator theory. The accelerator theory states that the changes in income and in the output of consumer goods will lead to proportionately greater output of capital goods. Like the multiplier effect, we are looking at the effects of injections, specifically investment, on aggregate demand except more specifically, we are looking at how income has an accelerated effect on investment which stimulates the explains the instability in the trade cycle. There are some qualifications for the accelerator to take place:

  • The industry has to be producing at full employment
  • Increased demand for capital goods will only increase if the increase in demand is believed to be permanent.
  • There could be a rise in the prices of capital goods and therefore can be a fall in demand and more savings instead. Then the accelerator would be reduced.

The accelerator assumes that the relationship between change in consumption and the change in investment is fixed but there are exceptions. There is a time lag between a change in consumption and the implementation of investment decisions.

Explain the multiplier and how it is calculated.

14 Mar

The multiplier effect reflects the governments attempt to increase aggregate demand since the initial sum of government expenditure, or injections, would increase as it goes through the economy. This would in turn stimulate factors in AD, moving it the AD curve to the right, thus stimulating the economy and achieving macroeconomic goals. The multiplier effect is a ratio of change in national income to an initial change in one or more of the injections into the circular flow of income. Changes in AD could effect the national income, or GDP, more than just the value of change. It is a chain reaction in which the sum injected into the economy would end up more than what it was initially. For example, when the government spends more money on health care, this money would be used to buy new equipment, to improve facilities and for other medical goods and services. The consumption of these goods would then increase and therefore increases the profits of these producers that make these equipments.

Some of the money would be given to the doctors and nurses or used to hire more medical workers. This would also affect AD since with the money, they will buy other goods and services for their own wants and needs like food, clothes, etc. This would then increase the consumption of these goods, thus increasing profits of these producers.

The rate or amount passed on in this chain diminishes but it will still be more than what it was originally. The ratio is calculated by dividing the change in GDP by the change in injections. For example, if the increase in GDP was $100 m and the increase in government spending was $50m then there is a multiplier of 2. There are three key factors that determine the value of multiplier which are all leakages:

  • The size of the savings ratio
  • The amount of expenditure on imports
  • The level of taxation

An increase going in could also mean in an increase of money out of the economy. A larger amount of savings means a smaller multiplier value since it the money doesn’t pass on. An increase in pay would also mean more people spending more money on imported goods which is also money lost on the economy. An increase in pay also means higher taxation. This would go back to the government which would also leave the economy. This would be somewhat of an exception if the government uses this money for the public sector or employment where the money would return to the economy. Because of these factors, the multiplier value would depend on how much of people’s income is spent on consumption which is know as the marginal propensity to consume. The multiplier value would then be 1/ 1-MPC which is the marginal propensity to consume.

Seminar reflections: Cambodia and Zimbabwe

9 Mar

There is a severe food shortage problem where Cambodia’s workforce is eating about one meal a day. This is one of the main sources of the economic problem along with the corruption in the government since the labor is also one of the factors of production. If people are unhappy or are starving, they have less energy to work and therefore the quality of the workforce will drop. This would greatly affect the economic development.

Zimbabwe’s situation is quite obvious with the fact that most of the major problems come from the government. Because of Mugabe’s rule, the people are suffering. There is no freedom of speech and anything that threatens Mugabe’s power, the government annihilates it. The land is also given to Mugabe’s loyal followers so the maintenance is really bad. This means that the crops aren’t growing to their potential and is not giving the country a chance to grow. The biggest problem is that Mugabe has no wish to help the country.

Out of the economic development barriers, the biggest economic barrier is political and financial barriers. The political barriers come from the corrupt government while the financial barriers come from the corrupt government as well since the revenue isn’t being utilized effectively.

This first seminar was tough since we haven’t gotten used to the system and so it was difficult to participate. Kenny was really good with asking questions and trying to make us talk but since people either didn’t have anything to say about the topic or are just uncomfortable participating he just moved on. The Zimbabwe seminar was easier for me to understand since most of it revolves around Mugabe the the people’s rights. For my own seminar with my group on Ghana, I wish to motivate people to talk during seminars by organizing information in note form. If the information is set out in an easy to read, easy to understand manner, more people will be willing to participate as well as understand the material and have opinions.

IB Mock Review: Q3

16 Feb

Using the PPC, explain the impact that a discovery of vast oil reserves would have on an economy.

A Production Possibility Curve (PCC) shows the maximum combination of goods or services that can be produced in an economy in a given time period, if all the resources in the economy are being used fully and efficiently. The PPC curve is based on the fact that there are unlimited wants and needs but limited resources or factors of production. FOPs are the resources employed to produce goods and services. The PPC curve shows the maximum output of the country. The country’s actual output is the production of goods and services in an economy achieved in a given time period, which would be A. When the country increased in FOPs from A to B, the potential output increased. Potential output is the possible production that would be achieved in an economy if all available factors were employed. This increase in resources leads to potential growth which occurs when the quantity and/or quality of factors of production within an economy is increased. It is represented by an outward shift of PPC1 to PPC2. Angola is a country that just experienced this potential growth in the economy due to new-found oil. The GDP increased by about 400% as revenue from countries investing in Angola and trade increases. According to the new PPC, the Angola’s actual output has increased which allows them to produce more units of each good or service.