Data Response 4.7

$4.3 billion debt hurdle in face of 2011/12 budget

1. Distinguish between ‘internal’ and ‘external’ debt.

External debt exists when the debt is contracted in a foreign currency, and when a country borrows from bankers abroad. On the other hand, internal debt is debt owed to locally owned banks in the local currency – generally, it is immune to changes in international or other foreign rates.

2. Using examples from the article and from your own knowledge, examine the problems associated with a developing country having a significant amount of external debt.

Having a significant amount of external debt may cause some problems, as “debt have pushed domestic interest rates to a higher end and the cost of debt servicing is going up by the day, leaving insufficient funds for basic services provision including fro education, healthcare, safe drinking water and infrastructural and energy projects.” If interest rates are increased, that means that there is a higher demand in money, which would imply that countries with a debt burden would have their budget consumed since they try to service this debt. Therefore, the money to be spent to increase domestic product or investments will be out of use.

3. Explain how inflation affects the external debt of a country such as Uganda.

If there is inflation, that would mean that there is also an increase in external debt. This is because as inflation would increase interest rates, and so the servicing of Uganda’s debt would take over their budget. This may potentially lead to Uganda to borrow money to service its debt, and furthermore Uganda’s debt would become unsustainable because they need to pay more in servicing their debt. In addition, inflation will create a decrease in demand for Uganda’s currency. So therefore inflation will make Uganda to not be able to gain increases in national debt to cover its debt, and the economy will be unable to grow.

4. Evaluate the policies that a developing country, such as Zambia, can use to counter the effects of inflation.

To counter the effects of inflation, Zambia can simply use fiscal policies such as decreasing consumption and government expenditure to increase the aggregate demand curve to the right; however, that will not be an effective policy in pushing the country to further develop. This is because a decrease in government spending, let’s say, in the area of health care and/or education will limit the people’s abilities. Therefore, Zambia should deal with their debt instead of considering how to reduce inflation. There are many ways that Zambia can tackle their debt crisis. Zambia can reschedule their debt to create a longer period in repaying loans, they can swap debts, where a creditor country cancels a debt at its nominal value. Also, Zambia can ask developed countries to write-off debts, which would support developing countries to increase imports and hence increase world trade. Such policies dealing with the debt will be effective, in that the stabilization would lead to reducing the inflation.

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Data Response M4.6

Asian countries fear drop in aid funding from Japan

1. Distinguish between foreign aid and foreign direct investment.

Foreign aid involves official aid and unofficial aid. Official foreign aid is when the aid is administered by the government or government agencies, also called an official development assistance (ODA). Unofficial aid is when it is administered by a non-government body, such as a charity – so called a non-governmental organizations (NGOs). So foreign aid is aid in the form of loans or grants that are administered to a country to allow for further development.  On the other hand, foreign direct investment is an investment abroad, usually where the company being invested in is controlled by the foreign corporation.

2. Explain why the earthquake and tsunami in Japan is likely to affect Japan’s capacity to donate foreign aid.

Japan is not only a regional economic powerhouse and the world’s third-largest economy, but it is also the fifth largest donor of development aid. This aid, however, is likely to be affected because of the earthquake and tsunami because, as the president of the Philippines’ senate says, “they will be using their own money for reconstruction”. So Japan will have to put more money into the recovery of their own country, so they will not have enough money to aid other developing countries.

3. Explain how reductions in Japanese foreign aid might affect the economic development of the recipient nations.

Reductions in Japanese foreign aid will affect the economic development of the recipient nations negatively. This is because as stated before, now that Japan needs to focus more on their recovery of the country, they will not have enough money to aid to other countries. Therefore,

4. Evaluate the arguments for and against foreign aid.

The arguments for foreign aid are many. One of them is that foreign aid enables infrastructure changes to be made to the economy, which contributes to economic growth. Not only are there economic reasons, but sometimes foreign aid is seen as being necessary in order to maintain power. There exists foreign aid in the form of military goods provides the power base that suppresses opposition and maintains the existing government in power. In addition, people within the developing countries and the developed countries consider that the developed countries have a moral responsibility to provide development assistance for the poorer countries.

Arguments against foreign aid would provide funding for production that the private sector might have invested in for commercial reasons. Because NGOs give out a particularly small amount of microcredit loans, it could have been undertaken by commercial banks that might have operated this service on a more commercial and profitable basis, which could create a welfare dependency. In addition, foreign aid may fall into the hands of corrupt officials which will serve the purpose of propping up existing corrupt regimes. Furthermore, dependency theory argues that aid ensures the continuation for the developing countries on the periphery and the dominance of the more developed countries (MDCs) in the core. Developing countries need to build and develop from within their own capabilities rather than relying on transfers of funds from the MDCs.

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Data Response K4.5

Upwardly mobile Africa: key to development lies in their hands

1. Explain how improving infrastructure, like establishing mobile phone networks, can help to improve the rate of economic growth.

Improved infrastructure will help improve the rate of economic growth. Firstly, adequate transportation such as roads and bridges will increase efficiency and productivity. Secondly, energy infrastructure will allow for better sources of energy which are lower in costs. Thirdly, water management infrastructure will give more drinking water supply that will improve health. Infrastructure like establishing mobile phone networks can also help to improve the rate of economic growth because it simply increases the communication efficiency.

 2. Explain how improved phone networks in developing countries in Africa can contribute to reductions in levels of poverty. 

Improved phone networks in developing countries in Africa can contribute to reductions in levels of poverty. As the article states, “Fisherman in Tanzania, meanwhile, use mobiles to get weather reports, and a service has been set up in the Kenyan capital, Nairobi, that alerts jobseekers to potential work via text messages”. Also, “fruit growers can call contacts to determine what is selling well or what is missing from the market. Farmers can check weather reports and market prices for their crops without having to travel”. All these contribute to Africa’s reductions in levels of poverty, as such communication networks to improve allows for productivity and efficiency within employees, so that they can cut down on their transportation costs.

3. Discuss the advantages and disadvantages of foreign direct investment for developing countries.

There are both the advantages and disadvantages of foreign direct investment (FDI) for developing countries. The advantages are that it would increase foreign currency, which can create an increase in exports of foreign currencies. Also, there would be a multiplier effect, which leads on to a higher competition amongst firms, which will eventually lead to transfer of technology and skills in the long-run. However on the other side, there can be the disadvantages. These include the destruction of domestic firms, and also countries that are invested may become over dependent on the FDI.

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Data Response I4.4

Doha Trade Round Faces Risk of Collapse after 10years of Talks

1. Describe the role of the World Trade Organization

The World Trade Organization (WTO) is an international body founded in 1995 to promote international trade and economic development by reducing tariffs and other restrictions. It encourages trade to go smoothly and easily, and there are seven main activities listed in the WTO hompage:

–       Negotiating the reduction/elimination of obstacles to trade

–       Administering and monitoring the application of the WTO’s agreed rules for trade in goods/services and trade-related intellectual property rights

–       Monitoring and reviewing the trade policies of our members, as well as ensuring transparency of regional and bilateral trade agreements

–       Settling disputes among our members regarding the interpretation and application of the agreements

–       Building capacity of developing country government officials in international trade matters

–       Assisting the process of accession of some 30 countries who are not yet members of the organization

–       Conducting economic research and collecting and disseminating trade data

–       Explaining to and educating the puclic about the WTO

Furthermore, the WTO strives for non-discrimination amongst trading partners, lowers trade barriers, increases predictability and transparency, calls for competitiveness, gives beneficiaries for less developed countries, and also protects the environment.

2. Using diagrams to aid your explanation, analyze the impact of imposing a tariff on an imported good.

A tariff will have a comparative advantage to domestic producers by raising the world supply curve from Sw to Sw + tariff, increasing prices from Pw to P1. Because domestic producers they are able to produce their goods at a lower opportunity cost compared to the world, and a comparative disadvantage to foreign suppliers. However there is a dead weight loss which implies that there is a waste of economic resources.

3. Discuss why Brazil, China and India are reluctant to agree to the demands from the US and the EU to reduce the level of protection on their manufactured goods.

Brazil, China and India are reluctant to agree to the demands from the US and the EU, because by decreasing the level of protection, or tariffs, domestic suppliers will have a comparative advantage compared to world suppliers. This increased competition may eliminate sunrise industries, which could increase the productivity of production in Brazil, China, and India. Hence, the imports will increase. In addition, because Brazil, China, and India want their production to be diverse, they will want to avoid overdependence which could lead to volatility.

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International Economics Definitions

Factor endowments are the factors of production that a country has available to produce goods and services.

Specialization exists where a country specializes in the production of goods and services where they have comparative advantage in production. They will then trade to get the goods and services in which they do not specialize.

Absolute advantage for a good exists where a country is able to produce more output than other countries using the same inputs of factors of production.

Comparative advantage for a good exists where a country is able to produce a good at a lower opportunity cost of resources than another country.

Free trade is international trade that takes place without any barriers, such as tariffs, quotas, or subsidies.

tariff is a duty tax that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.

quota is an import barrier that set upper limits on the quantity or value of imports that may be imported into a country.

subsidy is an amount of money paid by the government to a firm, per unit of output, to encourage output, to encourage output an to give the firm an advantage over foreign competitors.

Voluntary Export Restraint (VER) is a voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product/products.

The infant industry argument proposed that new industries should be protected from foreign competition until they are large enough to compete in international markets.

Dumping is the selling of a good in another country at a price below its unit cost of production.

Anti-dumping is legislation to protect an economy against the import of a good at a price below its unit cost of production.

free trade area (FTA) exists when an agreement is made between countries, where the countries agree to trade freely among the members of the group, but are able to trade with countries outside the free trade area in whatever ways they wish, for example, the North  American Free Trade Agreement between the US, Canada and Mexico.

customs union is an agreement made between countries, where these countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the custom union.

Real World Example: The Switzerland-Liechtenstein customs union.

common market is a customs union with common policies on product regulation, and the free movement of goods, services, capital, and labor.

Real World Example: The European Union.

The World Trade Organization, also known as the WTO, is an international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.

The Balance of Payment is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given time period.

The balance of trade is a measure of the revenue received from the exports of goods minus the expenditure on the imports of goods over a given time period.

The currency account is a measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest and dividends) and net transfers of money (foreign aid, grants, and remittance).

The capital account is a measure of the buying and selling from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a time period.

The current account surplus exists where the revenue from the export of goods and services and income flows is greater than expenditure on the import of goods and services and income flows over a given time period.

The current account deficit exists where revenue from the export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given time period.

The Marshall-Lerner condition states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.

The J-Curve theory suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term.

An exchange rate is the value of one currency expressed in terms of another, for example, $1 = 1.60 euros

fixed exchange rate is an exchange rate regime where the value of a currency is fixed to the value of another currency, or to the value of some other commodity like gold.

floating exchange rate is an exchange rate regime where the value of a currency is allowed to be determined fully by the demand and supply of that currency on the foreign market.

depreciation is when the value of a currency decreases in terms of another currency in a floating exchange rate system.

An appreciation is when the value of a currency increases in terms of another currency in a floating exchange rate system.

Purchasing power parity (PPP) theory suggests that under a floating exchange rate system, exchange rates adjust to offset differential rates of inflation between countries that are trading partners in order to restore balance of payments equilibrium.

The terms of trade is an index that illustrates the value of a country’s average export prices relative to their average import prices.

Deteriorating terms of trade, also known as adverse terms of trade, exist when the average price of exports falls relative to the average price of imports.

Elasticity of demand for exports is a measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports.

Elasticity of demand for imports is a measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports.

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Data Response G4.3

Banks Making Big Profits From Tiny Loans


 1.Explain how a microcredit system works.

Microcredit systems are the extension of small loans to poor borrowers. They exist to spur entrepreneurship, increase incomes, and alleviate poverty, which in the end is aimed to encourage economic growth and development.


2. Examine the benefits of using microcredit systems in developing countries to promote economic development.

Microcredit systems will lead to empowering women, which will eventually lead to economic development. If women gain more status that means that there will be more efficiency as women and men will both be involved in the labor force. In addition, microcredit systems will allow for entrepreneurship, which will decrease unemployment, as more jobs will be available for poor people. This will result in both efficiency and productivity within the economy as the labor force has increased.


3. Examine the problems associated with operating microcredit systems and whether these could contribute to a worsening in the levels of poverty.

A problem that is associated with operating microcredit systems are several. One problem involves the debt that may occur due to high interest rates. Usually, microloans are distributed by NGO’s or subsidizing of the government who keep interest rates low, but in few cases there are times when the banks provide it. Because banks are interested in profit, they make the interest rates high, and people aren’t able to pay it back. This results in a larger income distribution. In addition, if the banks are providing microloans, they usually will not give it out to all poor people, but to people who are somewhat poor (people who have a shelter). This is because they want to reduce the risk of them not getting their interest rates back, as severely poor people will most likely not be able to pay them back.

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Data Response E4.2

The Secrets of Cuban Medicine


1.Identify the indicators of development the article identifies as priorities for the Cuban government.

The quality of health care as well as how easy it is to access them.


2. Examine the evidence in the article that suggest the inhabitants of Cuba experience low livings standards.

The article states that “Cubans-living in poverty and cursing the delights of the socialist economy-stand jammed in lines at stores to exchange food stamps for groceries”, which already implies that Cubans are experiencing low living standards. In addition, the fact that “there is no gasoline in Cuba to fill the car up before heading off to work in the morning, and they don’t have meat for lunch everywhere, but at least the people are healthy” also adds on to the fact that Cubans do not have high living standards. Because they cannot afford to buy their own food, the government has to distribute it to them.


3. Analyze the advantages and disadvantages to the Cuban economy as a result of allocating resources to the health sector.

The advantages of allocating resources to the health sector would be that Cuba will be able to export medical goods to the United States, as the article states that “physicians from leading clinics in the united States come her in secret to acquaint themselves with Cuban experience and practices,” and “they illegally buy medications” that is ”produced nowhere else in the world”. Hence, if more medical goods are exported, the Cuban economy will develop.

The disadvantages of allocating resources to the health sector would be that too much allocation to the health sector would cause other sectors to not have proficient amounts of resources. An example is gasoline, as already the article stated that Cubans do not have enough gasoline to make their car work. Other factors could be education, food, or any other factors that makes up the economic development and growth of Cuba. However, because the government decides to allocate so much resources into the heath sector, we understand that they value the Cubans to be healthy, despite their poverty.

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