Sample IB Question-Past Paper 1

4. a. Analyse the methods by which Gross Domestic Product (GDP) may be measured.

Outline:

• Define analyze.
• Break down in order to bring out the essential elements or structure.
• Define GDP.
• GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets.
• Explain components of GDP.
• GDP = I + C + G + (net exports)
• Investment, Consumption, Government expenditure, and Exports minus Imports.
• 3 methods for analyzing GDP:
• Expenditure method.
• Explain how it's calculated.
• Income method.
• Explain how it's calculated.
• Output method.
• Explain how it's calculated.
• Add diagram of circular flow of income.
• Explain diagram.
• Include example if appropriate.

Answer to Question:

This essay will break down the methods by which GDP may be measured in order to bring out the essential elements or structure. GDP can be defined as the measure of all incomes within the borders of the country, regardless of who owns the assets. GDP has the following components: GDP = I + C + G + (net exports). I = investment, C = consumption, G = government expenditures, and net exports = exports minus imports.

Figure 1.3: The different methods of measuring GDP.

There are the three methods for analyzing GDP: the income, expenditure, and output method. The income method is calculated by adding up all of the "rent, wages, interest, and profits" in order to measure GDP. This method refers to c. The expenditure method measures a. It measures the total expenditures on goods and services in the economy to find GDP. The output method, however, measures b, which is done by looking at the value of the output of the goods and services.

The circular flow of income model (figure 1.3) shows a very basic way of understanding economic activity. Households spend money on goods and services (a), and provide land, labor, capital, and management as factors of production. Firms receive the factors of production and money, and in turn grant households wages, rent, interest, and profit (c), as well as the goods and services (b) that they purchased. So, the households receive goods and services, as well as the components of (c). This model, however, doesn't address injections and outflows, and hence is a very simple model.

All three methods of measuring GDP should yield the same value more or less - they are simply different methods of finding the same value.

4. b. “Using real Gross Domestic Product (GDP) data is a very useful means of comparing economic activity between countries.” Discuss this statement.

Outline:

• Define discuss:
• Offer a considered and balanced review that includes a range of arguments, factors, or hypotheses.
• Define GDP:
• GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets.
• GDP = I + C + G + (net exports)
• Investment, Consumption, Government expenditure, and Exports minus Imports.
• Claim:
• Populations vary among countries, so while China for example may have a higher GDP than Canada, its GDP per capita is a lot smaller, because China's population is a lot bigger than Canada's. Therefore, GDP per capita would be a more useful way of comparing economic activity.
• Counterclaim:
• However, a large portion of the economic activity in the country may actually be from foreign direct investment (FDI), which would include assets not owned by the country, but instead, by other countries. FDI is long-term investment by multinational corporations (MNCs) in countries overseas. In some developing countries, a large portion of their GDP comes from FDI. Consequently, while it may seem that the developing country has a certain GDP, countries that own the FDI in that country are actually making a large contribution to the country's GDP, which would make it seem like the country itself is doing better than it really is. So perhaps GNI per capita would be an even better measure of economic activity, because GNI (Gross National Income) per capita only measures the total income of the country's owned assets. GNI doesn't include FDI, and does include its own FDI in other countries, as well as the incomes of its citizens that are not within the country's borders.
• Conclusion:
• While GDP may be a useful means of measuring economic activity between similar countries in terms of population and levels of FDI, since most countries differ from one another in many respects, it may be more useful to instead compare economic activity through GNI per capita figures.

Answer to question:

This essay will offer a considered and balanced review that includes a range of arguments, factors, or hypotheses in order to answer the question above. GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets. Its components are: GDP = I + C + G + (net exports), where I = Investment, C = Consumption, G = Government expenditure, and (net exports) = Exports minus Imports. Populations vary among countries, so while China for example may have a higher GDP than Canada, its GDP per capita is a lot smaller, because China's population is a lot bigger than Canada's. Therefore, GDP per capita would be a more useful way of comparing economic activity. 

However, a large portion of the economic activity in the country may actually be from foreign direct investment (FDI), which would include assets not owned by the country, but instead, by other countries. FDI is long-term investment by multinational corporations (MNCs) in countries overseas. In some developing countries, a large portion of their GDP comes from FDI. Consequently, while it may seem that the developing country has a certain GDP, countries that own the FDI in that country are actually making a large contribution to the country's GDP, which would make it seem like the country itself is doing better than it really is. So perhaps GNI per capita would be an even better measure of economic activity, because GNI (Gross National Income) per capita only measures the total income of the country's owned assets. GNI doesn't include FDI, and does include its own FDI in other countries, as well as the incomes of its citizens that are not within the country's borders.

To conclude, while GDP may be a useful means of measuring economic activity between similar countries in terms of population and levels of FDI, since most countries differ from one another in many respects, it may be more useful to instead compare economic activity through GNI per capita figures.

Haiti Day Zero- Role of Domestic Facotrs, International Trade

1. In your opinion, what is Haiti’s most valuable resource endowment? Explain. [10 Marks]

Haiti's most valuable resource endowment, in my opinion, is labor. Since "40% of the population is under 14 years of age," Haiti has a young, low-skilled workforce that could be used to produce goods and services. Haiti's has suffered a lot, making its people more resilient. The people may be motivated to aid the country by producing goods and services. They can work in the T-shirt factories, because the work doesn't require high-skilled labor. This would provide wages to more people in Haiti, allowing them to dramatically improve their living standards (relatively speaking). Since 2/3 of the population is unemployed, firms could produce their goods in Haiti by using the available cheap labor to do so. Cheap labor will attract firms, and Haiti's people will increase their incomes.

2. Choose two development or growth strategies and explain how these could be implemented in Haiti. [15 Marks]

Fairtrade Schemes: One development strategy that could benefit Haiti massively could be the implementation of fair trade schemes. Fairtrade labeling allows producers to certify their products, allowing consumers to know that the producers were payed a fair price. Trade companies may want to certify their products, because it may increase demand for their products. Since "66% of all Haitian's work in the agricultural sector on small subsistence farms," the FLO could spark a lot of development and growth in Haiti. To qualify for the International Fairtrade Certification Mark, the trading company must meet certain criteria. One criteria is to purchase the producer's product at least at the Fairtrade minimum price, ensuring that the producer covers production costs and can earn a living income. The trading company must commit to a long-term contract with the producer, ensuring security. Producers can receive credit from the trading company, and money to aid local community development. If Haiti's people engaged in Fairtrade schemes, they would receive all of those benefits. This would ensure most of Haiti's people with a living income, money for local development, security, and credit.

Import Substitution: Another development strategy Haiti could implement would be import substitution, which is an inward-oriented growth strategy. The government would have to adopt a policy stating which goods to produce domestically, provide subsidies to domestic producers, and implement a protectionist system with tariff barriers to keep competition out.

3. Evaluate the strengths and weaknesses of each strategy. [15 Marks]

Fairtrade Schemes: As previously stated, Haiti's people will benefit immensely from these schemes, because most of the workforce is in the agriculture industry. They will receive money for their production and living costs, and money for local community development. Those who produce organic products will receive even more benefits. They will be able to receive credit from the trading companies, and will have security from long-term contracts. This may put Haiti out of poverty and really spark growth and development in the country. However, there may not be enough trading companies willing to participate in the Fairtrade Schemes, so it's unlikely that everyone will benefit from it. The traders will also experience higher costs, which may offset the benefits of having the certification mark. This strategy may be more effective with less emphasis on agricultural production in Haiti.

Import Substitution: Since Haiti has a current account deficit, by implementing an import substitution they could reduce the deficit and therefore improve their balance of payments. The strategy would protect domestic jobs (increasing jobs in Haiti, which it's really lacking), protect local culture and social habits, and would protect Haiti from multinational corporations. There are many weaknesses of this strategy, however. Jobs may only be protected in the short-run. In the long run, there may be lower growth, which may hinder job creation. Haiti will experience higher prices, due to inefficiency. Research and development will be reduced due to a lack of competition, and the strategy may lead to higher inflation rates. Other countries may take retaliatory protectionist measures against Haiti. This strategy may only benefit Haiti in the short run. In the long run, however, it would need to employ other strategies. Also, since its workforce isn't skilled, it is doubtful that they'll be able to produce most imported products domestically, since they're manufactured goods that require certain skills and capital to make.

4. How could corruption be a barrier to the future development of Haiti? [10 Marks]

Corruption is a huge barrier to future development in Haiti. Haiti has been found to be one of the most corrupt countries in the world, so it definitely is experiencing corruption's evils. Corruption is more likely to occur under the following conditions: when there's high government spending on capital investment projects, when accounting practices are not being formulated or controlled well, when there are underpaid government officials, when there are uncontrolled political elections, when there's a weak legal structure, and a lack of freedom of speech. Obviously, Haiti must be experiencing at least one of these situations, causing corruption.

Corruption could be a barrier to the future development of Haiti in a number of ways. Electoral corruption will lead to people being elected that won’t adopt policies that people want, reducing satisfaction in the country and causing conflict. Corruption allows people to surpass the law, therefore increasing incentives to break the law. Corruption leads to market failure, because the most efficient producers won’t always get the contract they should be getting. Bribes increase costs of businesses, leading to higher prices. This will reduce people's spending abilities, and may lead to more people importing goods instead. This will increase the current account deficit, harming the balance of payments. Contracts may not be followed, reducing foreign direct investment (FDI) and trust. FDI is very valuable to developing countries, especially Haiti, because it can provide employment (by MNC's entering the country), education, and training. Education and training would greatly help Haiti, because it has a young and unskilled workforce. FDI will also increase government tax revenue, which it can then use to invest in Haiti's economic development. Construction and environment regulations may not be followed, affecting peoples’ welfare. Monetary gains from corruption often leave the country, reducing available capital.

5. What do you think Haiti will be like in 20 years? [10 Marks]

In 20 years, I think that Haiti could go either way. It's rather difficult to predict the future of anything, yet alone the future of something in two decades. If Haiti's corruption, disasters, and overspecialization in agriculture and textiles continues, it will not see much economic growth or development. However, if the country finds a way to implement Fairtrade Schemes, then, as stated previously, that may spark some real progress. Haiti's most valuable asset right now is its unemployed, low-skilled workforce, that could be used to increase exports and change the current account balance. The country must also find a way to reduce corruption, so that more FDI enters the country, which could provide education, training, and employment to Haiti. It could also aid development in ways discussed previously.

IB Economics 2016 Prediction

My economic prediction for 2016 is that real estate prices in China will decrease. The justification and reasoning of this includes that since real estate has been becoming increasingly expensive in China, due to the increase in middle class in China, "ghost cities" are being created. The supply of real estate will not meet demand and thus the price of Chinese real estate will soon decrease.

Link to article

Measuring Economic Development (Single and Composite Indicators)

Country with low human development: Niger

• Social indicators:
• HDI ranking and value: #187 0.337
• Age structure:
• 0-14 years: 49.8% (male 4,387,785/female 4,308,312) 
• 15-24 years: 18.4% (male 1,586,720/female 1,626,457) 
• 25-54 years: 25.9% (male 2,261,287/female 2,266,576) 
• 55-64 years: 3.3% (male 294,446/female 274,268) 
• 65 years and over: 2.6% (male 234,079/female 226,242) (2014 est.)
• Population growth rate: 3.8%
• School life expectancy: 
• total: 5 years
• male: 6 years
• female: 5 years (2012)
• Life expectancy at birth: 57.97 years
• Total fertility rate: 7.57 births per woman (2012)
• Education expenditures: 4.5% of GDP (2012)
• Economic indicators:
• GDP: 7.407 billion USD (2013)
• GDP per capita: 415.42 USD (2013)
• GDP - composition by sector: 
• agriculture: 35.2% 
• industry: 14.2% 
• services: 50.6% (2013 est.)
• Unemployment rate: 5.10%
• Public debt: 19.3% of GDP (2013 est.)
• Stock of direct foreign investment - at home: 84,560,003,072 US$
• Labor force - by occupation:
• agriculture: 90% 
• industry: 6% 
• services: 4% (1995)
• Dependency ratio: 112.68

Calculated gini coefficient based on data: 0.2868

Country with high human development: Uruguay

• Social indicators:
• HDI ranking and value: #50 0.790
• Age structure:
• 0-14 years: 21% (male 356,851/female 344,576) 
• 15-24 years: 16% (male 269,820/female 262,830) 
• 25-54 years: 38.9% (male 639,766/female 658,257) 
• 55-64 years: 10.1% (male 158,170/female 178,194) 
• 65 years and over: 13.9% (male 185,132/female 279,376) (2014 est.)
• Population growth rate: 0.4%
• School life expectancy:
• total:16 years 
• male: 14 years 
• female: 17 years (2010)
• Life expectancy at birth: 76.91 years
• Total fertility rate: 2.06 births per woman (2012)
• Education expenditures: 4.4% of GDP (2011)
• Economic indicators:
• GDP: 55.71 billion USD (2013)
• GDP per capita: 16,350.73 USD (2013)
• GDP - composition by sector:
• agriculture: 7.5% 
• industry: 21.5% 
• services: 71% (2013 est.)
• Unemployment rate: 6.6%
• Public debt: 57.2% of GDP (2012 est.)
• Stock of direct foreign investment - at home: $20,690,000,000 (31 December 2013 est.)
• Labor force - by occupation: 
• agriculture: 13% 
• industry: 14% 
• services: 73% (2010 est.)
• Dependency ratio: 56.12

Calculated gini coefficient based on data: 0.3848

Conclusions

What conclusions can you draw about the correlation between GDP, HDI, income equality, social and economic indicators between developed and developing countries?

Developed:
-GDP: 55.71 billion USD (2013)
-HDI ranking and value: #50 0.790
-Calculated gini coefficient based on data: 0.3848

Developing:
-GDP: 7.407 billion USD (2013)
-HDI ranking and value: #187 0.337
-Calculated gini coefficient based on data: 0.2868

Developed countries, such as Uruguay, have a much higher GDP compared to less developed countries, such as Niger. This is, of course, only based on my sample. Both USA (a developed country), and China (considered a developing country) have GDP's in the trillions, however. Developed countries have higher HDI's; however, I assumed that their income equality would also be better. With Uruguay and Niger as examples, based on the data it appears that there is more income equality in Niger. This just goes to show how careful we must be when making generalizations about undeveloped countries.

Does a high HDI correlate with relative income equality? What about low HDI?

According to the data gathered, it seems that a high HDI does not necessarily correlate with relative income equality, if compared to a country with low HDI. Uruguay's gini coefficient was found to be 0.3848, while Niger's was 0.2868.

Is a high GDP indicative of high levels of human development?

High GDP seems to indicate high levels of human development. Uruguay, for example, has a GDP of about 56 billion USD, while Niger only 7 billion USD. Uruguay has a HDI ranking of 50 while Niger 187. As such, there appears to be a correlation.

To what extent did your country with low HDI exhibit the following characteristics? 

Let us begin with low standards of living. Niger's GDP per capita is around 400 USD. Its total fertility rate is almost 8 births per woman, which suggests very low standards of living. Supporting 8 children on 400 USD a year, including yourself and all other expenses, sounds nearly impossible. Even if they do manage to survive somehow, the GDP per capita is so low and the fertility rate is so high that there simply cannot be a high standard of living.

Niger definitely exhibit low incomes. A GDP per capita of around 400 USD is insanely low. Compare that to Uruguay, where the GDP per capita is around 16,000. Uruguay's citizens make in one year what Niger's citizens make in 40 years!

Based on the calculations, it appears that Niger did not exhibit income inequality, if compared to Uruguay. Niger had a gini coefficient of 0.2868, while Uruguay had a gini coefficient of 3848, which is relatively worse.

Regarding poor health, Niger's life expectancy at birth is 19 years lower than Uruguay's, which is a huge difference. The high total fertility rate of 8 children and a very low GDP per capita of 400 USD all suggest that the citizens of Niger experience poor health. The low GDP of Niger, compared to Uruguay, also suggests that there cannot be a lot of expenditure on heath care. A low GDP means that the government gets less revenue than Uruguay's government, and thus they have less money to spend on health care.

Niger most definitely exhibits symptoms of inadequate education. Only 4.5% of the country's already very low GDP is spent on education, and the total school life expectancy is 5 years. Uruguay's is 16 years. This suggests that most residents of Niger complete only half of high school, which most likely amounts to a low-skilled labour force.

Low levels of productivity are definitely evident in Niger, based on previously examined indicators. The low GDP per capita suggest a very low output per person, and the conclusion that Niger has poor health conditions also support the hypothesis that there are low levels of productivity within the country.

Compared to Uruguay, Niger most definitely shows high rates of population growth and dependency burdens. There is a population growth rate in Niger of 3.8%, while in Uruguay it is only 0.4%. Niger's dependency ratio is twice as high as Uruguay's—112.68 and 56.12 respectively.

Niger did not show high levels of unemployment. It has an unemployment level of ~5%, while Uruguay, a highly developed country, has an unemployment level of ~6%. Perhaps this is due to the high dependency ratio: many kids who are not working are not counted towards the level of unemployment. Also, while the unemployment level may be relatively low in Niger, since the GDP per capita is only 400 USD, it suggests that that 5% value is not that accurate. Sure, people may be "employed"; however, does that really mean anything if they're incomes are, on average, 400 USD?

Compared to Uruguay, Niger does have a higher dependence on agricultural production. However, only ~35% of Niger's GDP comes from agriculture compared to ~51% from services. Therefore, there does not appear to be a very significant dependence on agricultural production.

Regarding foreign direct investment, there is about 85 billion USD worth of foreign investment stock in Niger, compared to about 20 billion USD in Uruguay. That is over four times as much, and considering their huge differences in GDP, 85 billion USD worth of foreign investment stock is a lot more in Niger than if it were in Uruguay, because suggests a large percentage of revenue does not stay in Niger.

How can you explain the concepts of single and composite indicators? To what extent are these indicators effective?

A single indicator could be considered something like the unemployment rate. It measures one variable, such as the level of unemployment. A composite indicator is something like HDI. Its value is based on multiple different single indicators, which amount to a more effective indicator of economic development. A single indicator is not as effective in terms of showing economic development, because it only takes into consideration one variable. Sure, the unemployment level in a country, such as Niger, may be low (~5%); however, many other indicators (GDP per capita, foreign investment stock, public debt, school life expectancy, and life expectancy) are not necessarily suggesting high human development within Niger. Therefore, composite indicators are more effective than single indicators, because they take into consideration multiple variables, which together amount to a more well-rounded conclusion on HDI.

Development Economics Review Questions, Student Work Point 28.3

End of Chapter Review Questions

1. Using a PPF diagram, explain how it is possible for a country to achieve economic growth.

Economic growth is an increase in the amount of goods and services produced per head of the population over a period of time. So, to increase that amount the following can be done. There are four categories of sources of economic growth: natural factors, human capital factors, physical capital and technological factors, and institutional factors.

Regarding natural factors, a country such as Singapore with a small amount of land of ~581.5 square kilometers in 1965 was able to achieve economic growth by increasing its land size. Singapore has increased its land size to ~697.2 square kilometers, which is an increase of about 20%. That is a huge percentage of land increase, and the new land will allow factories, offices, schools, hospitals, households, basically anything that requires land, to be built. There will be space for factors of production, which should lead to an increase in economic growth.

The problem with the preceding paragraph's statement, however, is that it may not be beneficial for other countries to take on this approach of achieving economic growth. Malaysia, for example, would not benefit nearly as much from that increase in land. That same increase in land would only amount to a 0.03% increase! It is fair to say that the costs of increasing land size would not be justified by the potential gains for a country such as Malaysia, or most countries for that matter. Therefore, instead of increasing the quantity of land, they can focus on increasing the quality of land. This can be done through fertilization, better planning of land usage, improved agricultural methods, and through building tall structures. Hong Kong, for example, is a great example of building upwards. They have an abundance of skyscrapers that have helped increase factors of production and make the most of their available land.

Regarding the second category of factors, human capital, it can be increased as well through either quantity or quality. Encouraging population growth or increasing immigration levels will increase the quantity of human capital. By improving education for children, vocational training, healthcare, and by re-training the unemployed, the quality of human capital can be increased. This should help the country achieve economic growth, because it will increase the amount of goods and services produced per head of the population, or in other words, productivity.

Regarding physical capital and technological factors, once again economic growth can be achieved by either increasing the quality or quantity of this factor. The quantity of this factor can be increased by building factories, offices, machinery, shops, or motor vehicles. Quality can be improved by bettering higher education, research and development, and access to foreign technology and expertise. This will, once again, increase the amount of goods and services produced per head of the population, which is an increase in economic growth.

The last category, institutional factors, is what can also help a country achieve economic growth. An adequate banking system, legal system, educational system, infrastructure, political stability, and good international relationships should all contribute to an improvement in economic growth.

To illustrate these ways of achieving economic growth, a production possibilities frontier (PPF) diagram has been created. Let us say that the quality of human capital has been increased. This will increase productivity, and therefore lead to greater output per person. The market for two goods, Laptops and Phones, has been graphed in the format of a PPF:

As we can see in Figure 1, when the quality of human capital increases, output per person increases. This leads to more goods/services being produced, such as phones or laptops. That is why X shifts to X1, and Y shifts to Y1. The more north-east the curve expands, the greater total output there is within a country. If it is expanding, there is economic growth. W and Z are points at which we can produce laptops or phones. W is not the most efficient point, because we can produce more. Z is a point at which production is maximized. With economic growth, however, Z moves outwards to Z1.

2. To what extent is it fair to say that economic growth inevitably leads to economic development?

Economic growth is an increase in the amount of goods and services produced per head of the population over a period of time, while economic development is an improvement in welfare, by means of increasing life expectancy, education levels, or reducing child mortality rates.

Higher levels of economic growth lead to an increase in GDP per capita, which should increase welfare. People will have greater disposable income and will be able to afford food, clothing, healthcare, and other necessities. The issue, however, is how GDP per capita is calculated. GDP / population = GDP per capita. Some few extremely wealthy individuals may push the GDP to higher levels and create the illusion of an increase in incomes. Some groups may not experience improvement, while only a few individuals will. Therefore, this argument supports the idea that economic growth may not necessarily lead to economic development.

With higher economic growth GDP will increase. An increase in GDP will mean that government revenue from taxation will increase, because the more transactions are taking place, the more revenue goes to the government. An increase in government revenue will mean that the government will have more resources to improve education, healthcare, and infrastructure. These improvements should lead to greater economic growth, and create a perpetual loop of both economic growth and development improving. However, most developing countries have an inefficient taxation system in place. Nevertheless, they will still benefit from increased GDP, because it will still increase government revenue. Where that increase in government revenue will go is of course uncertain. A corrupt government may prevent economic growth to lead to economic development in this situation.

Market-based activities which increase GDP growth may only benefit the rich. The greater not so wealthy population may not benefit from an increase in GDP.

Most importantly, economic growth comes at the cost of increased pollution. In other words, the welfare gain from economic growth may only be short-term. The long-term costs of economic growth may very well lead to a greater decrease in welfare, therefore not leading to economic development at all. It will lead to quite the opposite. This is because greater economies require more resources. More energy is demanded. As such, this leads to huge emissions of carbon dioxide, which greatly contribute to global warming. Global warming may increase the scarcity of safe water and food, cause droughts, spread tropical diseases, and decrease usable land mass due to a rise in sea levels. This will no doubt in the long-run decrease the welfare of future generations.

To conclude, economic growth can lead to economic development under the right circumstances. Whether we are looking in the short-term or the long-term can also affect the answer to the question. Economic growth must be done in a certain way to lead to valuable economic development.

3. To what extent could it be argued that all developing countries share the same set of characteristics?

All developing countries share the following same set of characteristics: low standards of living, characterized by low incomes, inequality, poor health, and inadequate education; low levels of productivity (output per person); high rates of population growth and dependency burdens (people over 15 and under 64 must support people outside that range); high and rising levels of unemployment and underemployment; substantial dependence on agricultural production and primary product exports; prevalence of imperfect markets and limited information; dominance, dependence, and vulnerability in international relations. While they do share common sets of characteristics, they are different in some respects. Developing countries vary in their sources of income. One country may get their income from diamonds and oil, while another may produce agricultural products.

Developing countries differ in history. Thus, they will be different in regards to social, political, and economical aspects. They also vary in population and geographical size. For example, China has a huge geographical and population size, whereas Djibouti may not. They are both developing countries. They also vary in ethnic and religious breakdowns; however, they tend to have multiple ethnicity and religions in each developing country. The industry structures are also different, per capita income levels differ, and so does the political structure in each developing country.

So while generalizations can be made about developing countries, they do differ in many respects. As such, it can be argued that they share the same set of characteristics; however, upon further examination one will find their true diversities.

Economic Development

Step 1:

Democratic Republic of Kongo: There is a lot of progress to be made in this country. It has experienced 20 years of brutal conflict, and is dealing with poverty, disease, and a corrupt government. All of these factors contribute to a hinderance of growth within the country.

Brazil: Education has improved over the last 4 years. This was measured by school attendance.

Indonesia: The country has experienced urbanization, democratization, and living standards are rising in rural and urban areas. Women have greater opportunities in all aspects of life. There are more job types in Indonesia than previously, and people are finding it easier to find a job.

Kenya: Farmers are getting irrigation systems. Schools are being built to improve education within the country. Residents have more disposable income which allows them to educate their children. People have greater opportunities to attend college.

Step 2:

Latvia: 48

Russian Federation: 57

Niger: 187

Latvia has the highest HDI ranking amongst Russia and Niger and itself. The life expectancy in Latvia is 74. For Russia it is 69, and for Niger it is 59. There appears to be a correlation between life expectancy and HDI rank. GDP per capita in USD for Latvia is 23,337. For Russia it is 25,248, and for Niger it is 1,052 USD. The population of Latvia is 2,041,111, Russia 142,467,651, and Niger 18,534,802.

Step 3:

Chosen indicators: life expectancy, child mortality, income per person, food supply, and primary completion of school % total.

Primary completion of school % total (~1970-2005): Niger from 10% to 40%, Russia 90% to 90%, Latvia 70% to 90%.

Life expectancy (years) (1800-2000): Niger from 30 to 55, Russia 30 to 73, Latvia 30 to 75.

Child mortality (0-5 year-olds dying per 1,000 born) (1800-2000): Niger 433 to 96. Russia 419 to 9.6. Latvia 405 to 7.9.

Income per person (1800-2000): Niger from 446 to 804. Latvia from 751 to 11,790. Russia from 1430 to 13,900.

Food supply (kilocalories/per person & day) (1992-2005): Niger from 1,925 to 2,245. Latvia from 3,272 to 3,054. Russia from 2,926 to 3,226.

Step 4: 

Step 5:

Russia's biggest obstacle is reducing CO2 emissions. It, by far, has the greatest amount of CO2 emissions per person. Overall, the amount has been increasing throughout the years. Russia could overcome this obstacle by investing in renewable energy sources.

Niger's child mortality rate and life expectancy is the lowest among the three countries. Niger could overcome this obstacle by improving nutrition and healthcare.

Latvia's population has been decreasing over the last couple of years. This may reduce the amount of people in the workforce and therefore reduce output. Latvia could overcome this obstacle by making its country a more attractive place to live in. A big reason why people move out is for college or higher wages in other countries. Investing in improving college education and increasing wages in Latvia may address this issue.

Reflection Questions:

What are the weaknesses and strengths of the Human Development Index (HDI) as an indicator of progress in comparison to GDP/GNP per capita? (Total 5 marks)

The HDI comprises of factors such as: GDP per capita, percentage of people receiving education in a certain age group, and life expectancy. It is used to measure economic development. HDI has the following strengths. It is widely used by most countries, and therefore it is possible to compare economic development between countries. It reveals general global trends, and can indicate improvements in the country's infrastructure when factors such as life expectancy improve. Despite its advantages, it does have disadvantages. Data from developing countries might be inaccurate and difficult to confirm. HDI does not address the availability of education between social classes. Wealthy students may be able to pursue extensive education; however, less wealthy individuals may not even be able to attend grade school.

As for GDP per capita, it has a number of advantages. First of all, GDP per capita indicates how much income individuals have. Greater GDP per capita might indicate better living standards. However, GDP per capita does not address inequality. There may be many individuals with a low GDP per capita, while a few individuals have an abnormally large GDP per capita. This could create the illusion of most people having reasonable income. GDP per capita also doesn't include household items, bartering, volunteer work, or black market activities. GDP per capita is more financial. The country of interest may be progressing in other regards, such as improving education; however, GDP per capita will not show this progress. Therefore, the HDI is a better measurement of progress, because it accounts for a wider range of variables that overall lead to a better understanding of a country's conditions. 

Explain two reasons why increased investment in education is essential for development in developing economies. (Total 4 marks) 

Increased investment in education is essential for development in developing countries, because in developing countries there are many individuals who cannot receive a primary education to due financial constraints. Increased investment in education will most likely increase school attendance. This will lead to more people getting educated, and in the long run will allow for a more diverse workforce to emerge. More people will be able to have careers in engineering, medicine, or law. The country will then be able to switch from manufacturing introductory or secondary products to perhaps tertiary. This will stabilize their exports by having a greater variety of goods and services to offer, so that when there are fluctuations in the market, the country does not suffer too severely.

What evidence would indicate to an economist that a country is experiencing economic development as well as economic growth? (10 marks) 

The following indicators could provide evidence of the country experiencing economic development: increase in food supply per person, increase in the literacy rate, improved health, increase in life expectancy, increase in income per capita, or improvement of environmental standards. There are of course other indicators, but if an economist found these indicators to be increasing, they could hypothesize that the country is experiencing economic development. The factors should not, however, be examined separately, because while one indicator may be improving, the rest could be getting worse.

As for economic growth, the following indicators could provide evidence of the country experiencing economic growth: infrastructure improvements, such as better roads, improved housing; an improvement in GDP would indicate that the country is producing more goods/services; or a decrease in the unemployment level. While there are other indicators, an improvement in these indicators could hint at economic growth. Of course, they must not be studied separately, while one may improve, another may get worse.

Evaluate the strategies (based on your findings in gapminder) that may be used to achieve economic development. Refer to real world examples in your answer. (15 marks)

A good indicator of economic development is life expectancy. In 1990 the life expectancy in Niger was 47 years. The overall access to water was 35% that year. In 2010, however, we see that life expectancy rose to 61 years while the overall access to water was 49%. As access to water improved, life expectancy improved. In 1995 the life expectancy in Niger was 50 years, and 3.4% of GDP was spent on healthcare. In 2010, however, life expectancy is 61 years and 5.2% of GDP is spent on healthcare. Once again, as healthcare gets greater investment, life expectancy improves. There are many other ways that economic development could be achieved in Niger. As a greater percentage of the population is completing primary education, life expectancy has been increasing. We see that various factors contribute to economic development within Niger. As a result, they, possibly, have lead to an improvement in life expectancy.

Terms of Trade in the Balance of Payments

Year-to-year trends in terms of trade (%change):

• 2001-2002:
• 106.32-106.85
• 0.50% improvement
• 2002-2003:
• 106.85-102.08
• -4.46% deterioration
• 2003-2004:
• 102.08-108.21
• 6.01% improvement
• 2004-2005:
• 108.21-112.56
• 4.02% improvement
• 2005-2006:
• 112.56-112.09
• -0.418% deterioration
• 2006-2007:
• 112.09-114.03
• 1.73% improvement
• 2007-2008:
• 114.03-125.76
• 10.3% improvement
• 2008-2009:
• 125.76-120.92
• -3.85% deterioration
• 2009-2010:
• 120.92-118.77
• -1.78% deterioration

Year-to-year trends in trade balance (%change):

• 2001-2002:
• no data
• 2002-2003:
• no data
• 2003-2004:
• no data
• 2004-2005:
• no data-(-1.28)
• 2005-2006:
• (-1.28)-(-0.76)
• 40.625% (increase)
• 2006-2007:
• (-0.76)-(-0.26)
• 65.8% (increase)
• 2007-2008:
• (-0.26)-(-0.8)
• -208% (decrease)
• 2008-2009:
• (-0.8)-2.44
• 405% (increase)
• 2009-2010:
• 2.44-3.32
• 36.1% (increase)

Imports/exports of New Zealand

• Imports:
• Demand for New Zealand's imports, I think is inelastic and elastic in some respects. New Zealand imports both inelastic and elastic goods in an even manner, or so it appears.
• Exports:
• I think that New Zealand mostly exports inelastic goods, such as concentrated milk (18% of all exports). Therefore, based on my observations, demand for New Zealand's exports is inelastic.

Does it appear that changes in the TOT affected the trade balance?

• Based on my research, no. For example, even when there was a 10% improvement in the TOT, the trade balance experienced a percentage change of negative 200%. We also see that when there was a 4% deterioration in the TOT, there was a booming percentage change of 405% in the trade balance. According to economic theory, however, they should be related. A deterioration in the TOT should lead to a deterioration in the trade balance. The limit of this economic theory is that it only is true consistently when all other factors are constant. In real life, everything else is not constant usually.

Internal Assessment-Example Commentary A

Criteria A: 3/3 

Criteria B: 2/2

Criteria C: 2/2 

Criteria D: 2/3 

Criteria E: 3/4

Total score: 12/14

This commentary applies relevant economics terminology, and even defines some terms (aggregate demand, aggregate supply). Diagrams are fully labeled and given full explanations. Concepts/theories are appropriately applied throughout the commentary to pose a solid argument at the end of the commentary. There is appropriate economic analysis throughout the article, because short-term and long-term effects on proposed solutions are given. Assumptions about concepts/theories are not adequately addressed, and therefore it cannot be said that effective and balanced reasoning has occurred within the commentary. The effects on different stakeholders (low-income parties, high-income parties, government) are addressed. Pros and cons of certain solutions are given. I would suggest the writer of this commentary to address the assumptions that come with every economics concept/theory, so score higher on criteria D and E. To do this, however, the writer should perhaps incorporate their understanding of relevant terms as they perform analysis/evaluation in order to decrease the word count. Some great ideas were proposed at the end, that start-ups should receive government aid in terms of receiving better education.

Economic Integration Review Questions & 3 Extra Questions

End of chapter review questions

1. Using a diagram, explain the difference between a free trade area and a customs union. Use real world examples.

A free trade area and a customs union are both trading blocks. A trading bloc is a group of countries that join together in some form of agreement in order to increase trade between themselves and/or to gain economic benefits from cooperation on some level. These are the types of trading blocks: preferential trading areas, free trade areas, customs unions, common markets, economic and monetary union, and complete economic integration.

Members of a customs union are further economically integrated with one another than members of a free trade area. A free trade area is an area in which countries within the area have agreed to trade with one another freely. This means that are no tariffs, or if there are, they have been reduced. NAFTA is an example of a free trade area. While the countries (USA, Mexico, and Canada) have reduced tariffs when trading with each other, they do not have a common policy for trading with countries outside of NAFTA. Therefore, NAFTA is not a customs union.

A customs union is a free trade area in the sense that free trade occurs between its members. Countries that are part of a customs union have a common foreign trade policy. What that means is that they have a common tariff on goods/services that are imported from countries outside of the customs union. The SACU is a real world example of a customs union.

Figure 1.1: A free trade area

Figure 1.2: A customs union

As you view the two figure above, notice how the two trading blocks treat outer parties differently. In a free trade area, countries within the free trade area simply trade freely with one another, meaning that they trade with no or reduced tariffs. How they trade with outer parties (for example country D) is for them to decide separately. Country C trades freely with country D, while country B imposes tariffs on country D. In a customs union, however, all members in the union have agreed on a common policy. It is usually a tariff of sorts.

2. Discuss the likely effects of membership of a customs union. Be sure to use a real world example.

A customs union is an agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the customs union. This situation can be seen in Figure 1.2 above. When a country joins a customs union, for example Uganda joining the EAC, trade creation and trade diversion occurs. Trade creation has occurred between Uganda, Tanzania, Rwanda, Kenya, and Burundi. Since they are all part of the EAC, they can trade freely among themselves. When Uganda wasn't part of the EAC, they most likely had to pay some sort of tariff to export to members of the EAC. Now that they are part of the EAC, they no longer have to pay tariffs to do so. Trade creation occurs when a country that leads the production of a good/service enters a customs union and transfers from a high-cost producer to a low-cost producer.

Even though trade creation has happened, countries that used to be able to trade with Uganda in a certain way may no longer be able to after Uganda joins the EAC. After Uganda joins the EAC, countries outside the EAC that want to trade with Uganda will have tariffs imposed on their goods, this creating trade diversion. Trade diversion occurs when a country that leads the production of a good/service enters a customs union and transfers from a low-cost producer to a high-cost producer. Due to these pros and cons of membership, Uganda must carefully consider whether it is beneficial for them to remain a part of the EAC.

3. Evaluate the consequences of membership of a monetary union. Be sure to use a real world example.

A monetary union is a common market with a common currency and a common central bank. The consequences of membership in a monetary union will be evaluated by providing the real world example of the eurozone. When Austria became a member of the eurozone, a monetary union, it had already adopted the euro as their currency. They had also accepted the ECB as their central bank. By joining the eurozone Austria can forget about exchange rate fluctuations between itself and other members of the eurozone, because they now share a common currency. Trade and cross-border investment between Austria and other eurozone members should improve as a consequence.

Austria will no longer be able to set interest rates, because the ECB is responsible for such matters. Changing the interest rates will no longer be an option for influencing the inflation rate, unemployment rate, and the rate of economic growth. Austria is also unable to alter their own exchange rates in order to make their exports more internationally competitive and to change the cost of imports. Austria also experienced a huge cost when joining the eurozone, because they had to take off the old currency off the market and make many other adjustments in their country. Therefore, we can see that there are both positive and negative consequences when obtaining membership of a monetary union.

Three review questions, with answers, about the entire unit we have just finished for 28.10.2015

1. What is trade creation? Be sure to use a real world example to illustrate trade creation.

Trade creation occurs when a country that leads the production of a good/service enters a customs union and transfers from a high-cost producer to a low-cost producer. Let’s assume that when Mexico joined NAFTA in 1994, it had a comparative advantage over the US in taco production. Before the birth of NAFTA the US had placed a tariff on Mexican tacos. The situation is shown in Figure 1.1 (see next slide).

With the tariff in place, the US would supply Q2 tacos in the US. Mexico would supply Q2Q3 tacos to the US. Both suppliers set a price of P(Mexico)+tariff. When Mexico joined NAFTA, however, the tariff was removed. Now the US supplies Q1 tacos in the US, which Mexico supplies Q1Q4 tacos to the US. Both suppliers sell tacos at a price of P(Mexico). There are Q3Q4 more tacos being bought and therefore trade creation has taken place. Consumer surplus increased by the right shaded triangle, and world efficiency increased by the left shaded triangle.

There has been a world welfare gain because less resources are being used to produce the tacos. It is likely that with the integration of free trade the US may had a comparative advantage in another good/service that it began supplying more of to Mexico.

2. Discuss the consequences of a appreciation of a country's currency on the country's economy.

In order to adequately answer this question, we must understand what appreciation is. Appreciation occurs when a country's currency increases in value relative to other currencies. The positive consequences will be listed first. When a currency appreciates in value, its exchange rate value becomes higher. A higher exchange rate value will make imports cheaper. Not only will imported finished goods be cheaper, but also raw materials. If raw materials can be imported at a lower cost, then domestic producers will be able to produce goods at a lower cost. This situation will increase welfare gain in the country because prices will decrease. Since finished imported goods will also become cheaper, domestic producers will have more pressure to keep their prices competitive, and therefore lower than before. Since imports are cheaper, it means that more things can be imported. Every unit of currency will grant more goods/services.

Even thought there are a lot of advantages to an appreciating currency for a country, there are also negative consequences. Domestic unemployment is likely to increase, because domestic producers will now have more pressure to compete with the cheaper imports. In order to cut costs, workers will be laid off. It is also likely that demand for domestic goods/services will decrease, due to the cheaper imports. More imports will be demanded, since they are now relatively cheaper. Also, export industries will suffer because a high exchange rate will make their exports more expensive for other countries. Having more expensive exports means that demand for them will decrease, thus reducing revenue. Reduced revenue will also play a part in the increase in unemployment, because less workers may be needed for the level of demand.

3. With the help of a diagram, explain three factors that would cause a currency to depreciate in value.

A currency is said to depreciate in value when its relative value to other currencies has decreased. If demand for the country's goods/services decreases, then demand for the country's currency will decrease as a consequence. A decrease in demand will make the currency more likely to depreciate. Even though that may be true, why would demand for a country's goods/services decrease? Demand would decrease if inflation rates in the country were higher than in other countries, because it would mean that the goods/services in that country are more expensive compared to other countries. Another factor could be a decrease in incomes in other countries. The lower their incomes, the less they are able to buy. As such, demand for a certain country's goods/services should decrease. Also, a change in tastes could decrease demand. What the country offers may not be what the consumers want. They may want another country's goods/services, thus decreasing demand.

If the country's investment prospects worsen, less investors will be investing in that country. Investors will invest in a country where the prospects are better. If interest rates in the country decrease, then people will save their money in another country, and therefore in another currency. This will decrease demand for the currency, and thus make it depreciate. Also, if speculators believe that the currency will depreciate in value, then they will exchange to a safer currency, in order to maximise the value of their currency.

A situation in which demand for the Euro has decreased can be seen in Figure 1.3:

Figure 1.3

We can see from Figure 1.3 that when the quantity demanded for the Euro (or any currency) decreases, it will depreciate in value. We can see that happening on the graph, where the price of Euros in Pesos has decreased from P to P1. Why this occurs can be discovered in the preceding paragraphs.

Trading Blocs/Economic Integration Group Presentation

Exchange Rate Manipulation-Balance of Payments

1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

China undervaluing its currency threatens the industrial economies of its largest trading partners in the following way. To devalue a currency means to simply lower the value of the currency. In other words, it means that other currencies, such as the USD, can purchase a larger quantity of RMB's per unit of USD. By undervaluing the RMB, China's exports become very cheap for global consumers, such as the US. This increases demand for Chinese exports in the global market from countries such as the US. In the US, for example, that would mean that demand for domestic goods would decrease, because they can import those goods from China at a lower price. This harms the domestic market in the US, and may lead to an increase in unemployment within the US.

Definitions:
-Export: a product or service sold abroad
-Unemployment: the number or proportion of unemployed people

The situation described above will be illustrated by figure 1.1 and 1.2:

Figure 1.1

Figure 1.2

Figure 1.1 represents a situation in which the US is not importing calculators from China. The domestic producers produce Q4 at P3 and the US imports Q4Q5 calculators at a price of P3 from the. In figure 1.2 we can see a situation in which the US is importing calculators from China. Since China's currency is undervalued, China is able to export its supply of calculators at a lower price than the rest of the world. In this situation the domestic producers produce Q2 calculators at a price of P2, while Q2Q3 is imported from China at a price of P2. From these graphs we can see exactly how China's cheap exports affect the calculator market in the US. Domestic producers get less revenue, and the domestic market for calculators has gotten smaller, therefore increasing unemployment. This is how it threatens the industrial economies of its larger trading partners.

Definitions:
-Import: bring (goods or services) into a country from abroad for sale.
-Revenue: income, especially when of an organization and of a substantial nature.

2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?

China's purpose for maintaining the low value of the RMB relative to the currencies of other nations is as follows. By maintaining a relatively low value of RMB, China's exports will be a lot cheaper than if the value of the RMB was relatively higher compared to currencies of other nations. A cheap RMB allows producers within China to keep production costs low. This makes their exports cheaper, and as such increases demand for them in the global market. Other nations, in this situation, will have higher production costs than China, and will be unable to set their exports at a price lower than that of China. This gives China a competitive advantage in the global market and increases the money entering the country. That is China's purpose for maintaining a low value of RMB relative to other nation's currencies.

3. What would be a unilateral protectionist measure the US government may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

A unilateral protectionist measure the US government may advocate if the WTO refuses to take action against China's currency manipulation can be imposing a tariff on Chinese imports entering the US. A tariff is a tax or duty to be paid on a particular class of imports or exports. In the context of the current economic crisis in America, I would advise Obama to impose a tariff on Chinese imports entering the US to improve the US economy. A tariff on Chinese imports would decrease demand for them in the US, and would grant domestic producers a higher market share. What I mean by that is that they will be able to supply more goods at a higher price, which should help improve unemployment. It should help improve unemployment because if more goods are being produced domestically, through reason we can assume that that would require a larger workforce, therefore creating more jobs in the US. Unemployment and growth was one of the issues mentioned in worksheet 23.1, and due to reasons explained previously, a tariff on Chinese imports entering the US would improve the rate of unemployment, and also growth. It would improve growth because more goods are being produced in the US than before.

This situation can be illustrated with the following graph:

Figure 1.3

Without the tariff domestic producers produced Q1 marshmallows at a price of P1. Q1Q5 was imported from China. With the tariff imposed on China, domestic producers now produce Q2 marshmallows at a price of P2. Q2Q4 is now imported from China at a price of P2. Domestic producers receive a larger market share, which benefits the US in ways mentioned previously. While that may be true, welfare loss does occur represented by the triangles between Q1Q2 and Q4Q5. Freedom is not free.

Exchange Rate Regimes Worksheet - Real World Situations

Worksheet-ExchangeRateDeterminants

1.

Determinant: US economic growth

Price of Peso in terms of USD

Supply of Peso from Mexico

Demand for Peso in US

Quantity of Peso in US

Demand line shifts right because more Pesos are demanded from the US

2.

Determinant: Political turmoil in Syria

Price of SP in terms of euros

Supply of SP

Demand for SP

Quantity of SP

Demand line shifts left

3.

Determinant: Investors sweeping in to Romania

Price of RON in terms of euros

Supply of RON

Demand for RON

Quantity of RON

Demand line shifts right because investors are demanding RON

4.

Price of CHE in terms of euros

Supply of CHE

Demand for CHE

Quantity of CHE

Demand line shifts right because europeans will want to save their money in Switzerland to get a higher return on their investment

5.

Price of Indian Rupee in terms of euros

Supply of Indian Rupee

Demand for Indian Rupee

Quantity of Indian Rupee

Demand line shifts left because demand for Indian Rupee falls.

6. 

Price of Krone in terms of Euro

Supply of Krone

Demand for Krone

Quantity of Krone

Demand line shifts left because europeans will demand less Krone due to higher prices in Norway. They will demand less goods/services from Norway, and therefore Krone.

Worksheet-ManagedExchangeRatesinSingapore

1. What are the advantages and disadvantages of a floating exchange rate?

There are a number of disadvantages and advantages of a fixed exchange rate. The following sentences provide advantages of a floating exchange rate. Interest rates can be used to control inflation since the exchange rate does not have to be kept at a certain level. Another advantage is that ff the Marshall-Lerner condition is satisfied, the exchange rate should adjust itself to keep the current account in balance. Another advantage is that high reserves of foreign currency and gold do not need to be stored in order to control the value of the currency. For example, China keeps high amounts of foreign currency, such as USD, in order to keep their currency pegged to the USD. When they need to appreciate their currency, they increase demand for it by exchanging their high amounts of foreign currency into their currency. If they had a floating exchange rate, this hassle would be unnecessary.
Disadvantages

Now let us go over the disadvantages. International markets become uncertain with a floating exchange rate. Businesses will have difficulty predicting their future costs and revenues. For example, the tech company Apple would be unable to accurately predict future costs and revenues with floating exchange rates affecting their endeavors. This could significantly harm the company and would cause many repercussions. Another disadvantage is that a floating exchange rate can make inflation even worse. High inflation will lead to exports becoming more expensive and imports becoming cheaper. The exchange rate will fall to save the current account from a deficit. However, a lower exchange rate will cause imports to become more expensive, which will worsen the inflation.

2. What are the advantages and disadvantages of a fixed exchange rate?

There are a number of disadvantages and advantages of a fixed exchange rate. The following sentences provide advantages of a fixed exchange rate. Businesses will be able to predict future costs and revenues with a fixed exchange rate, because it is more predictable. Another advantage is that a fixed exchange rate ensures reasonable government policies on inflation, because a fixed exchange rate can lead to harmful effects on the demand for exports and imports. Another advantage is that speculation in foreign exchange markets are reduced, however, attempts to destabilize the fixed exchange rate have been made to profit financially.

Now let us go over the disadvantages. The government has to keep the exchange rate fixed. For example, if the exchange rate was in risk of depreciating, the government would increase interest rates to get the currency to appreciate. The issue, however, is that that will lead to increased unemployment. Another disadvantage is that the government has to keep high amounts of foreign currency in order to keep the exchange rate fixed. Another disadvantage is that finding the right value for the exchange rate can be very difficult, and if it is not set correctly firms may feel as if they are not competitive enough in foreign markets.

3. What is the common tool used by many governments to control inflation. Why can’t all countries use the Singapore approach?

The common tool used by many governments to control inflation is the manipulation of exchange rates. An increase in interest rates will lower inflation due to money being less accessible to investors, businesses, and consumers. A decrease in interest rates will have the opposite effect. A decrease in interest rates will lower demand for the currency, since saving in that particular country has become less attractive, which will depreciate the currency. That will make exports cheaper and imports more expensive. Not all countries use the Singapore approach, because not all countries have exports making up over 100% of their GDP. For Singapore this approach is very effective, however, for other countries it may not be.

4. Can a country use both Monetary Policy and a managed exchange rate to control inflation? Do trade-offs exist?

Monetary policy is used to control the amount of money in an economy, interest rates, and the buying/selling of government bonds. As mentioned before, interest rates may be manipulated in order to control demand for a currency. The level of demand for a currency can affect inflation, and therefore we can use monetary policy and a managed exchange rate to control inflation.

5. Evaluate the effects on the Chinese economy of an appreciation of the yuan.

The Chinese economy has a gigantic export industry. The appreciation of the yuan would have devastating consequences on the Chinese economy, and the world. An appreciation of the yuan would make their exports more expensive, and therefore less competitive in foreign markets. This would raise costs for many foreign businesses if they were relying on China as a supplier. Lower sales of exports will lead the current account to a deficit, which will have a major impact on China's economy. In conclusion, the effects of the appreciation of the yuan would be felt all around the world.

Non-price Determinants-Supply & Demand

Non-price determinants of supply and demand:

• These are the following non-price determinants of demand: branding, market size, demographics, seasonality, available income, complementary goods, and future expectations.
• These are the following non-price determinants of supply: costs of production, productivity, government intervention in the form of taxes and subsidies, price of related goods, and supply side shocks.

What would cause a demand or supply shift within a market for currency exchange?
A change in any of the non-price determinants of demand will cause the demand curve to shift either left or right. A change in any of the non-price determinants of supply will cause the supply curve to shift either left or right. If the demand curve shifts to the right, then the equilibrium quantity and price will increase. The producers will supply more and will charge higher prices due to increased demand for their good/service. If the supply curve shifts to the right, then the equilibrium quantity will increase whilst the equilibrium price will decrease. With an increase in supply producers are able to supply more. The price will decrease because the good/service is now more abundant. These non-price determinants of supply and demand can affect supply and demand for goods and services, and thus can cause changes in the exchange rate because countries supply and demand goods/services from one another.

Foreign Exchange Market and Exchange Rate Determination

Definitions:-Exchange rate: the value of one currency for the purpose of conversion to another.
-Inflation: a general increase in prices and fall in the purchasing value of money.

-Prospect: the possibility or likelihood of some future event occurring.

1. Exchange rates are like prices, in that they are determined by supply and demand. But not all exchange rates are allowed to float freely, since the governments or central banks of some countries actively intervene in the market for their currency to manipulate its value. Identify one policy a government or central bank could use to strengthen the value of its currency and one policy that could weaken the value of a currency.
One policy a government or central bank could use to strengthen the value of its currency is the policy in which they use their reserves of foreign currency to purchase its own currency. This will lead to an increase in demand for the currency which will strengthen the value of their currency.

One policy a government or central bank could use to weaken the value of its currency is the policy in which they lower the level of interest rates in their country. By doing so domestic interest rates will be relatively lower than interest rates in other countries, which will lead to less foreign financial investment in the domestic country. This is because financial investment in other countries will be more attractive. Investors that will be investing in other countries will need to exchange the domestic currency for foreign currency, which will increase the supply of the domestic currency in the foreign exchange market. This usually weakens the value of the domestic currency.

2. What are the benefits of having a stronger currency?
The benefits of having a stronger currency are: downward pressure on inflation, more imports can be bought, and improved domestic efficiency. A stronger currency will make imports cheaper, which will increase competition and put pressure on domestic producers to decrease their prices. They can lower prices due to cheaper imports. Cheaper imports reduce their production costs. The increased competitiveness will also lead to increased domestic efficiency so that domestic producers can remain competitive in their industries.

3. What are the benefits of having a weaker currency?
The benefits of having a weaker currency are: increased employment in export and domestic industries. Increased employment in export industries due to a weaker currency occurs because a weaker currency will make exports relatively cheaper. This will increase their competitiveness and will lead to employment in the export industries.

A low exchange rate will make imports more expensive, so domestic producers will be more inclined to purchase goods and services from domestic producers. This will increase demand for domestic good and services, which will lead to an increase in employment.

4. Which determinant of exchange rates presented in the video do you think are most attributable to the fluctuating values of currencies on foreign exchange markets, and why? Relative incomes, relative interest rates, relative inflation rates, speculation or simply the tastes and preferences of global consumers?
I think that the most attributable determinant of exchange rates presented in the video is "relative inflation rates". Inflation rates determine a whole country's price levels, which can have a significant impact on exchange rates. Relatively lower inflation rates than in other countries will increase foreign demand, because the goods/services in the country with the lower inflation rates will be relatively cheaper.

-Lastly, pick one world currency (besides the Euro of the US Dollar). List and explain the factors that might lead to a fall in the supply of the selected currency in relation to the Euro market.

Chosen currency: GBP. In the following text please assume that when I say "other EU countries", I mean all EU countries except: Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and England.

There are several factors that might lead to a fall in the supply of GBP in relation to the Euro market. If British people decrease their demand for goods and services from other EU countries, they will be exchanging less GBP for Euros, which will lead to a decrease in the supply of GBP. British demand for goods/services from the EU can decrease if incomes in England decrease, if British people change their tastes in favor of non-EU goods/services, and if inflation rates in England are lower than in other countries in the EU. Relatively lower inflation rates in England means that goods/services in other EU countries will be more expensive.

Another factor to consider is the following. If investment prospects worsen in EU countries (except England), the supply of GBP will decrease. Worse investment prospects will make British people less inclined to invest in other EU countries.

Another factor to consider is the following. If interest rates in other EU countries decrease, British people will be more attracted to save in England, which will decrease the supply of GBP.

Another factor to consider is the following. If British people speculate that the value of GBP will increase, they won't convert their GBP's into other currencies to make a financial gain. This will reduce the supply of GBP.

Next, draw a diagram to illustrate the fall in the supply of the the Euro and its effect upon the exchange rate of your selected currency in terms of the euro.

A fall in the supply of the Euro will have the following effect on GBP. For every quantity of GBP, less Euros can be bought. The exchange rate will increase from a fall in the supply of the Euro. The euro will appreciate while GBP will depreciate.