Elective 2 Chapter 1 Extension of Trade Theory

Elective 2 Chapter 1 Extension of Trade Theory
Economics Elective 2 Chapter 1 Extension of Trade Theory

Choice of production Given that Robinson works 8 hours a day.
His ability: To catch a fish: 2 hours To collect a basket of fruit: 1 hour What can he do? No. of fish No. of baskets 4 & 3 0 / 1 / 2 2 0 / 1 / 2 / 3 / 4 1 0 / 1 / 2 / 3 / 4 / 5 / 6 / 5 / 6 / 7 /8

Choice of production Combination that his time can be fully utilized:
4 fish & 0 basket of fruits 3 fish & 2 basket of fruits 2 fish & 4 basket of fruits 1 fish & 6 basket of fruits 0 fish & 8 basket of fruits

Choice of production Data presented in a table and graph: A 8 B 1 6 C
Basket of fruits Fish A B C D E Combination Fish Basket of fruits A 8 B 1 6 C 2 4 D 3 E Can he produce 1 fish and 3 baskets of fruit? Can he produce 5 fish and 6 baskets of fruit?

Production possibilities frontier (PPF)
Given Country A owns 6 units of resource to produce Good X ( 2 units of resources required) Good Y (1 unit of resources required). Table to show maximum output combinations Production point Good X Good Y A 6 B 1 4 C 2 D 3

Production possibilities frontiers shows the locus of the maximum output combination of two goods given the existing resources endowment and technological level Good Y A 6 F B 4 Unattainable E C 2 Attainable, but resources are not fully used Production Possibilities Frontier (PPF) D Good X 1 2 3

The limitation of production choice Country A has limited resources  not able to choose combination F (any point beyond the PPF) Country A will maximize the production  not produce at combination E (any point within the PPF) at any point within the PPF, producing more of any one good without reducing the quantity of another. Conclusion At any point on the PPF Resources are fully utilized Production efficiency is attained  Production decision will be on the PPF only

The opportunity cost of production Downward sloping PPF Assume there’s only 2 products Under scarcity, producing more Good X means less Good Y Therefore The opportunity cost of producing X is “Y”. The opportunity cost of producing Y is “X”.

The opportunity cost of production Sloping of PPF = Opportunity cost Suppose original production is at point B If production moves from point B to C Produce 1 more unit of Good X Give up producing 2 units of Good Y That is, marginal cost of 1X = 2Y

The opportunity cost of production Sloping of PPF = Opportunity cost From the graph: Slope of PPF = ∆𝑌 ∆𝑋 = −2 1 = -2 Meaning that 2Y will be given up for producing 1X. So, the opportunity cost of 1X is 2Y. -2Y +1X

The opportunity cost of production Sloping of PPF = Opportunity cost As the opportunity cost of producing 1X = 2Y Then, the cost of producing 1Y = X Meaning that X will be given up for producing 1Y. Reciprocal of slope of PPF = ∆𝑋 ∆𝑌 = −1 +2 = Reciprocal of cost of Good X

The opportunity cost of production Sloping of PPF = Opportunity cost Conclusion Given a straight PPF with constant slope where x-axis is Good X and y-axis is Good Y Marginal cost = Average cost The slope of PPF is the MC of Good X The reciprocal of the slope is the MC of Good Y

Try it Given the following PPFA of Country A. The slope of PPF = − = - 4 The marginal cost of producing 1X = 4Y And the marginal cost of producing 1Y = The reciprocal of the slope of PPF = 1 −4 = The marginal cost of producing 1Y = X ( or 0.25X )

Try it Given the following PPFB of Country B. The slope of PPF = − = - 0.1 The marginal cost of producing 1X = 0.1Y And the marginal cost of producing 1Y = The reciprocal of the slope of PPF = 1 −0.1 = - 10 The marginal cost of producing 1Y = 10 X

Change in PPF Increase in resources  Parallel outward shift Assume technology remains unchanged. Resources increase from 6 to 12 units. Double the resources  Double the outputs PPF shift outward (from PPF1 to PPF2) Slope of PPF remains unchanged. Good Y 12 6 PPF2 PPF1 Good X 3 6

Change in PPF Advancement in technology  Tilt outward Assume resources remains unchanged Assume technology in producing Good Y remains unchanged Technology in producing Good X is improved Less resources are needed to producing the same output i.e. resources to produce Good X drop from 2 units to 1 unit PPF tilts outward (from PPF1 to PPF3) Slope of PPF  (from 2 to 1) i.e. marginal cost of producing Good X decreases. Good Y 6 PPF3 PPF1 Good X 3 6

Case study (Textbook p.8)
Given resources = 90 units X requires 9 units and Y requires 3 units to produce. 1. Slope of PPF = -30  10 = -3 Marginal cost of producing X = 3Y Marginal cost of producing Y = X Good Y 30 PPF1 Good X 10

2. (a) The economy ‘s resources have increased by 60%. Total resources = 90 units x (1+60%) = 144units The PPF has a parallel outward shift from PPF1 to PPF2. Slope of PPF remains unchanged, i.e. marginal cost remains constant. Good Y 48 30 PPF2 PPF1 Good X 10 16

2. (b) With technology improvement, production of X requires only 3 units of resources Total resources = 90 units PPF tilts outward with the x-intercept increases to 30 and the y-intercept remains constant. Slope of PPF3 = -30  30 = -1 Marginal cost of producing X = 1Y (decrease) Marginal cost of producing Y = X = 1X (increase) Good Y 30 PPF3 PPF1 Good X 10 30

PPF is concave to the origin Marginal cost = Slope of PPF The law of diminishing marginal return  Marginal cost will finally rise  Slope of PPF will increase when X increases  i.e. more X , steeper the PPF Good X From 2 to 3 units, MC of X = 0.5Y From 5 to 6 units, MC of X = 1.4Y

PPF is concave to the origin Good Y From 2 to 3 units, MC of Y = X = 0.5 X From 4 to 5 units, MC of Y = X = 1.4 X Higher the production of Y, higher the MC

Trade theory Using the PPF to illustrate Assumption
The principle of comparative advantage The advantages of international trade Assumption Marginal cost is constant PPF is a downward sloping straight line

Trade theory Consumption choice in an autarkic economy
The consumption possibilities frontier shows the locus of the maximum combinations of consumption of an economy Without international trade, consumption is restricted by its production So, PPF = consumption possibility frontier Given the PPF of Country A Under autarky, if production at point C the max. consumption combination is 2X and 2Y So, consumption can’t exceed PPF. Points inside are attainable consumption combinations.

Trade theory Trade line (Price line)
A straight line passing through the production point, which shows the consumption opportunities brought by trade. Suppose Country A produces 2X and 2Y (point C) Under autarky, it’s max. consumption combination. If trade with other country with international price 1X = 1Y Good Y 6 PPFA 5 P 4 3 Q C 2 R 1 Trade line S Good X 1 2 3 4

Trade theory Trade line (Price line)
For international trading, Country A Exchanges X for Y, it can move from point C to P or Q or Exchanges Y for X, it can move from point C to R or S Country A can consume at any point along the trade line Slope of trade line = 1 MC of X = 1Y

Trade theory Changes in consumption possibilities
Without trade With trade With trade, the consumption possibilities will be increased by the blue part.

Trade theory Changes in consumption possibilities From given data
Opportunity cost of producing 1X = 2Y Opportunity cost of producing 1Y = 0.5X Terms of trade (International price): 1X =1Y Production cost of 1Y is less than the international price Country A has a comparative advantage in producing Good Y, because its production cost of Good Y is lower. Therefore, Country A should specialize in producing Good Y. Then, trade Good Y for Good X.

Production of Y (units) Maximum consumption combination (Trade line)
Trade theory Changes in consumption possibilities After specialization and trade: Production of Y (units) International price 1X = 1Y Maximum consumption combination (Trade line) Export Y (units) Import X Y X (Units) 6 1 5 2 4 3

After specialization and trade: Good Y Without trade, possible consumption combinations are bounded by PPFA. 6 5 After trade, possible consumption combinations are beyond PPFA. Increased by the blue part. 4 3 2 1 Trade line PPFA Good X 1 2 3 4 5 6

After specialization and trade: Under autarky, max. production/consumption is 2X and 2Y. After trade, max. production/consumption is 3X and 3Y. Gain from specialization and trade: 1X and 1Y Good Y 6 5 4 3 2 1 Trade line PPFA Good X 1 2 3 4 5 6

Two-country model The PPF and comparative advantage
Suppose Country A and Country B both produce Good X and Y The PPFs show their production combination. Under autarky, Country A: 2X and 2Y Country B: 2X and 2Y World total output: 4X and 4Y Good Y 6 PPFA 3 2 PPFB Good X 2 3 6

Two-country model Specialization and trade according to comparative advantage From PPFs, Slope of PPFA = −6 3 = - 2 mean that the opportunity cost producing 1X is 2Y Slope of PPFB = −3 6 = mean that the opportunity cost producing 1X is 0.5Y  Country B has lower cost in producing Good X (given up less Y) i.e. Country B has comparative advantage in producing Good X and Country A has comparative advantage in producing Good Y Mutual beneficial term of trade: 2Y > 1X > 0.5Y [ International price 1X=1Y is mutually beneficial ]

Two-country model Gain from trade For Country A
PPFA: Before specialization Trade line: Specialization in Good Y (6 units) and then trade for 1Y=1X Original choice Point A (2X and 2Y) Choice made by trade: Point B (3X and 3Y) Gain from trade: 1X and 1Y Good Y 6 5 4 B 3 A 2 1 Trade line PPFA Good X 1 2 3 4 5 6

Two-country model Gain from trade For Country B
PPFB: Before specialization Trade line: Specialization in Good X (6 units) and then trade for 1Y=1X Original choice Point A (2X and 2Y) Choice made by trade: Point B (3X and 3Y) Gain from trade: 1X and 1Y Good Y 6 5 4 B 3 A 2 1 Trade line PPFB Good X 1 2 3 4 5 6

Two-country model Gain from trade In conclusion Without trade:
Country A produces 2X and 2Y Country B produces 2X and 2Y World total output = 4X and 4Y After trade Country A produces 6Y Country B produces 6X World total output = 6X and 6Y Overall gain = 2X and 2Y, which are equally shared by Country A and Country B in previous example

Two-country model From PPF of 2 countries to the PPF of the world
If Country A & B produce Good Y only, Country A produces 6Y and Country B produces 3Y World total output = 0X and 9Y (Combination P) Base on the principle of comparative advantage, with trade World total output = 6X and 6Y (Combination Q) If Country A & B produce Good X only, Country A produces 3X and Country B produces 6X World total output = 9X and 0Y (Combination R)

Production combination
Two-country model From PPF of 2 countries to the PPF of the world Production combination Good X Good Y Both Country A & B produce only Good Y with all the resources P 9 Specialization and trade based on comparative advantage Q 6 Both Country A & B produce only Good X with all the resources R Good Y P 9 PPFW Q 6 PPFA Combination in autarkic economy 3 2 PPFB R Good X 2 3 6 9

Two-country model (Higher level)
With concave PPF Given the consumption choice under autarky Slope of PPFA at point P = -2, i.e. MC of 1X = 2Y

With concave PPF Assume the international price: 1X = 0.5Y Trade opportunities expand consumption combination

With concave PPF Assume the international price: 1X = 0.5Y Compare the opportunity cost: Country A has comparative advantage in producing Good Y Therefore, Country A will produce more Good Y and less Good X Country A Opportunity cost Marginal cost at P 1X = 2Y 1Y = 0.5X International price 1X = 0.5Y 1Y = 2X

Gain from trade Assume the international price: 1X = 0.5Y Expanded consumption possibilities benefit Country A With production combination at point Q, Country A can adjust the consumption to R by exporting Y and importing X. Compare with consumption combination under autarky (point P), Country A is better off at point R with more Good X and Y.

Comparative advantage and its relationship with globalization
Economic globalization The process of which international trade and production activities across countries or regions become more frequent Integration of worldwide markets Main features of economic globalization International economic cooperation Globalization of production activities

1. Integration of worldwide markets Goods markets Financial and investment markets Labour markets

Goods markets Expanding international trade Total value of merchandise trade to GDP  International trade is growing faster than GDP More circulation of goods worldwide From individual goods markets to global market

Goods markets International cooperation Expansion of free trade Breaking trade barriers, e.g. quota restrictions on garments World Trade Organisation (WTO) Bilateral or multilateral agreements Closer Economic Partnership Agreement (CEPA) European Economic Area (EEA) North America Free Trade Area (NAFTA) ASEAN Free Trade Area (AFTA)

Goods markets Firms and customers under globalization Firms More competitions from the entry of overseas firms HK: Traditional restaurants vs. McDonald’s (from USA) Japan: SONY vs. Samsung (from Korea) USE: General Motor vs. Toyota (from Japan) Customers More information, more choices More chances to buy goods from different parts of the world, e.g. ebay, Taobao…

b. Financial markets Capital flow across countries Rapid development of information technology Integration of financial market Enhance capital flow across countries Capital raising is no longer restricted to local sources. E.g. China investors can purchase financial assets overseas through electronic transaction channels.

b. Financial markets Global expansion of financial markets As restrictions on capital flow have been relaxed, QFII (Qualified Foreign Institutional Investor) – foreign investors can do the mainland security trading QDII (Qualified Domestic Institutional Investor) – mainland investors can invest in HK and overseas stock market on a limited basis

b. Financial markets An increase in foreign direct investment (FDI) Free capital flow allows foreign direct investment More FDI a region has, the closer its relationship is with the economic development of other regions. E.g. the rapid growth of some towns in Guangdong and Sichuan

c. Labour markets An increase in immigrants and imported labour Globalization leads to relaxation of restriction on immigration and import of labour Immigrants with professional talents to enhance economic development E.g. 80% of the residents in Dubai are foreigners.

c. Labour markets The extension of outsourcing or relocation of tasks Set production lines in countries with low production cost Outsourcing and relocation to countries with comparative advantage lead to more profit E.g. the mainland China and Vietnam

c. Labour markets Increasingly networked labour market Use of the Internet Allow overseas employment Beyond the restriction of national boundaries and immigration policies E.g. home office programme designers, overseas medical consultant Advantages To workers: more job opportunities To boss: more able to hire suitable workers Disadvantage To workers: greater competition

2. Globalization of production activities Changes in the nature of international division of labour Dynamic comparative advantage The expansion of the organization and scale of enterprises The increasingly networked business models

2. Globalization of production activities Changes in the nature of international division of labour Relocation of production tasks based on Technology Resources To minimize cost and maximized profits Typical example American Boeing aeroplanes Mechanical parts: from different countries Assembly: USA

2. Globalization of production activities Changes in the nature of international division of labour Definition of international division of labour In the past specialize in producing goods which they have comparative advantage a country specialized in producing whole products e.g. US produced a whole car locally. Nowadays specialization of the part of goods which comparative advantage different countries specialize in producing different parts of the same product e.g. Tablet computer Hardware from China and software from Japan or Korea

2. Globalization of production activities Dynamic comparative advantage the comparative advantage in a good or component part will shift from one region to another with changes in economic development. For example In the past years, HK imported Japanese automobiles Recently, HK imports Korean and European automobiles Less comparative advantage due to: High production cost and exchange rate in Japan Technology of automobile outflow and modified by other countries Lower production cost in other countries due to economic growth FDI helps bringing new technologies from developed countries to developing countries Production is relocated to countries with lower production cost

2. Globalization of production activities The expansion of the organisation and scale of enterprises Globalization allows integration and expansion across countries Foreign direct investment Setting up of selling points Setting up of production lines Procurement Distribution network Supporting service centres The rise of emerging market Asia: China, India, Vietnam, and Russia The Middle East Central and South America: Brazil, Maxico, Chile South AfricaCentral For example Typical example: HSBC

2. Globalization of production activities The increasingly networked business models Online platforms make the world more closely interconnected. Elimination of geographical barriers such as Online banking (e.g. HSBC, Citibank) Online investment (e.g. Scottrade, ShareBuilder) Online wealth management (e.g. E*Trade Finance) Online marketing and promotions (e.g. Alibaba) Online auctions (e.g. ebay, Yahoo! Auction) Online sales and payments (e.g. Amazon, Paypal) Online courses (e.g. Harvard University) Obvious changes can be found in Logistic Procurement Distribution Product life cycle

3. International economic cooperation International organizations that promote global trade / economic cooperation WTO – World Trade Organization IMF – International Monetary Fund World Bank

3. International economic cooperation Regional economic cooperation EEA – European Economic Area NAFTA – North American Free Trade Area AFTA – ASEAN Free Trade Area CEPA – Closer Economic Partnership Arrangement

3. International economic cooperation International political union BRICS – Brazil, Russia, India, the People's Republic of China and South Africa (5 emerging markets) EU – European Union (27 member states in Europe) APEC – Asia-Pacific Economic Cooperation (21 countries/regions) ASEAN – The Association of Southeast Asian Nations (10 member states in Southeast Asia)

The effects of globalization
Gain from trade An increase in employment opportunities and income A change in income distribution Effects of capital flow across countries The increase in market competition The issue of environmental conservation

Gain from trade Globalization enhances economic growth Free trade is beneficial to both rich and poor countries According to the principle of comparative advantage, specialization and trade lower the production cost and greater world output. Higher output and lower costs lead to lower prices Consumers have more choices

An increase in employment opportunities and income Economic growth  increase in global demand of goods and services  increase in demand of labour  more job opportunities  higher income for workers

Change in income distribution i. Economic restructuring Industries with comparative advantage: Workers have more job opportunities and higher income. Industries with comparative disadvantage: Firms are forced to close down. Workers will become unemployed Income distribution changes: From people working in industries with comparative disadvantage to people working in industries with comparative advantage

Change in income distribution ii. Increase in labour demand and supply Integration of world market leads to both Increase in demand of labour (higher demand of professionals) Increase in labour supply (mostly low-skilled workers) A greater income gap

Change in income distribution iii. Differences in the mobility of production resources High income earner More educated  easy to learn new skills  higher occupational mobility More chances to invest their income in worldwide financial market Low income group Less educated  Lower occupational mobility Easy to be unemployed if their bosses decide to shift production lines overseas

Effects of capital flow across countries i. Enhance global economic growth Free flow of capital across countries Enable enterprises and consumers to get money easier More investment opportunities Capital can be invested for greater returns in overseas market Free flow of capital into developing countries Speed up the economic growth Improve living standard

Effects of capital flow across countries ii. Increasing financial risks Rapid inflow or outflow of capital fluctuations to the price of assets, e.g. shares and real estate, Financial crisis Global speculation of hedge funds Rapid depreciation of South East Asian currencies The Asian financial crisis in 1997 Crisis from other countries Sub-prime mortgage crisis broke out in the US Derivatives products worldwide (Lehman Brothers bonds) are linked to such mortgage Global financial tsunami in 2008

The increase in market competition Expansion of multinational cooperation (MNC) Advantages Lower product/service prices and better product/service Higher incentive for improving quality of product/service More competitions lead to more consumer benefits Disadvantages Small / Medium local firms are unable to compete with MNC Increase in monopoly power by MNC

The issue of environmental conservation International investment lead to rapid consumption of natural resources worsen pollution and green house effect Poor conservation policies / Lenient environmental standards cause ecological damages Economic growth vs. Environmental protection

Elective 2 Chapter 2 Economic Growth and Development
Economics Elective 2 Chapter 2 Economic Growth and Development

Economic growth and development
Economic growth and development means an increase in the _____________________ or a rise in the general ______________________ In a broader sense, it means an increase in economic welfare with improvements in _________________________

Indicators used to measure economic growth and development
__________________________________

Real GDP Commonly measure: _________________ of real GDP Higher the growth rate of real GDP  ______________________________________

Per capita real GDP Better measurement of ___________________________________ Per capital real GDP growth rate +ve : ___________ living standard -ve : ____________ living standard

Human Development Index (HDI) Aspects covered in HDI Takes into account socio-economic factors in different dimensions of human development ___________________________ Increase in HDI represents a ___________ level of economic development

Human Development Index (HDI) Aspects covered in HDI Examples of measurement indicators __________________________________ : the average number of years a newborn baby is expected to live ___________________ attainment Adult literacy rate: the % of adults who can read and write Enrolment ratio: % of school age people enrolled in primary/secondary/tertiary schools Per capital GDP at __________________________________ (PPP)

Purchasing power parity (PPP) a condition between countries where an amount of money has the _________________________ in different countries. differences in purchasing power of a "basket of goods" across countries _________________________ If a Big Mac price = US$4 in US and HK$10 in HK Real exchange rate = Nominal exchange rate = HKD 7.8 / USD 1 Given Per capita real GDP US$1000 in US and HK$7800 in HK With nominal exchange rate, real GDP of 2 regions are the same (US$1000) With PPP adjustment, the figure in HK is equivalent to ________________ So, HK has ___________ per capita real GDP

Human Development Index (HDI) (Source:

Why using Human Development Index (HDI) Merits of the HDI Income _________________ Per capita real GDP: can’t reflect the problem HDI: can reflect people’s overall development ___________________________ (e.g. air pollution) HDI: can reflect the adverse effects of pollution on economic welfare Therefore, the HDI is a more comprehensive measure.

Give two reasons why the HDI can better reflect the overall development of a region than per capita GDP. Per capita GDP cannot reflect _________________________, but the HDI includes such as ________________________________ _____________________________________________________, so it can reflect the overall development of the population truthfully. Per capita real GDP cannot reflect _________________________, but the HDI covers ___________, so it can reflect the adverse effects of pollution on economic welfare.

The keys to economic growth
Productivity is the key to determining a country’s general living standard and promoting economic growth. Factors affecting economic growth: ___________________________________________ ____________________________________________

Inputs _________________________ Gift from the nature
Having rich resources is favourable to economic development, but it’s not a necessary condition for economic growth _________________ resources Forest Water Oil Coal Demand of production ___  Demand of natural resources ___  ___________ price of natural resources  More ___________to save energy and explore new resources

Inputs __________________
__________ and ____________ that are used to produce goods or services For example Factories Machines Infrastructure such as telecommunication and transportation Saving and investment can accumulate physical capital. More (advanced) capital  _________ productivity  ___________ aggregate output

Inputs ______________________
It refers to the productivity workers acquire through _________, _________ and _________. It also includes _________, _________and the _________of workers. Investment helps accumulate human capital, e.g. Education expenditure Medical services Higher the level of human capital  _________the productivity  _________aggregate output

Inputs _______________________________
Production technology refers to the knowledge about _______________________________________________________. Agricultural technology: 16th – 19th vs. 20th century Technology change makes it possible for the majority of people to produce other goods and services engage in various kinds of research so, raise the standard of living Learning production technology  human capital _____ If education or training is __________ unable to master technology

Policies _____________________________
Market economy  respect private property rights Law to protect, ensure buyers and sellers benefits through contacts Better protection  _____ incentives to save, invest or start business Protecting private property rights is one of the gov’t most basic tasks in raising productivity and living standard _______________________ environment ________________ government __________________________________

Policies ____________________________________
Increase in saving and investment  capital ____ Investment expenditure in GDP  ___________ economic growth Researches found that: higher the investment  ____________ the economic growth Gov’t policies might affect the saving behaviour E.g.UK: Tax on the interest received from savings and dividends  _______________ people’s incentive to save money or invest E.g. Singapore: implement forced national saving  _______________ economic growth

Policies Foreign direct investment (FDI)
FDI refers to investment projects owned and operated by a _________________________. More FDI  ______________ in domestic capital  ___________ wage / ____________ productivity Gov’t policies Tax _____________________ Providing _________________ land ________________ foreign exchange controls

Policies Foreign direct investment (FDI)
FDI of some countries and regions in 2006 Source: World Investment Report 2007, UN Conference on Trade and Development, 2007

Policies Trade ____________________ can promote economic development.
Esp. important to small economies, such as HK and Taiwan _____________ in China (Reform and opening up policy) has brought to China a miracle growth in economic history.

Policies Trade

Policies Education Education is an investment in _______________________. Education helps inspire people’s creativity  _____________ and ____________ are beneficial to the society Higher education level  __________ income Brings huge ____________ externalities

Policies Population Greater the population
Pros greater the __________________ larger the ___________ force  increase output faster the accumulation of knowledge and the progress of technology  promote economic growth Cons Reduce the average quantity of capital available to each worker  _______ productivity  _______marginal cost  ______economic growth With pros and cons, it’s difficult which population policy is the best to a country.

Policies Research and development (R&D)
Technological progress is a key to raising _______________ and _____________________. More advanced technology  ___________ productivity  economic growth  ____________ living standard The gov’t can ____________ academic institutes to work on scientific researches _______________________ to private companies to do more R&D provide _____________ system to protect investors’ property rights

Comparing the economic growth and development of different regions
The HDI and population in poverty

Differences in the growth of national income Growth rates of real GDP around the world in 2007.

Differences in the growth of national income Developing countries with slow economic growth ( ) Slow economic growth  difficult to reduce poverty Population living in extreme poverty in Sub-Saharan Africa had increased from 11% in 1981 to 30% now. For reference: China: Growth rate = 9.5%, PPP per capita GDP = US$8,394 HK: Growth rate = 6%, PPP per capita GDP = US$45,736 Avg. growth rate Est. growth rate in 2011 PPP per capita GDP Guinea 2.7% 4% $1046 Zimbabwe - 5.4% 6% $395 Nepal 3.2% 3.5% $1270 Niger 4.6% 5.5% $755 Haiti 0.3% 6.1% $1164 Eritrea 3.4% 8.2% $681

Reasons for the differences in development
Faster growth in developing countries Catch-up effect: Poorer economies' per capita incomes will tend to grow at faster rates than richer economies. Developing countries have the ____________ to grow at a faster rate than developed countries because ___________________ (in particular, to capital) aren't as strong as in capital rich countries. Furthermore, poorer countries can ___________ production methods, technologies and institutions currently used in developed countries. Developing countries can speed up their economic growth by bringing in _____________ and ________________. For example, China has brought in market economy, FDI and production technology from other countries.

Some regions cannot be rich Political _____________ Seriously ____________ economic growth Lead to persistent ______________ _____________ institution and ___________ gov’t policies A corrupt gov’t and inefficient administration cause stagnation Inability of the institution and gov’t can’t attract production, investment and saving slower the technological improvement Lack of _______________________ Poor working environment  emigration of professionals and talented people Low return on investment in human capital  low incentive for labour to learn new technology  unable to accumulate human capital vicious cycle of long-term poverty

To promote economic growth in developing countries Sound institution is the key to strengthen the ______________________ protect __________________________ control __________________________ increase ______________ directly and indirectly reduce unnecessary government ___________________ maintain political ___________________

The desirability and costs of economic growth
1. Living standards Economic growth  better material life Wealthy life More ________________________ More ________________ enhancement of humanity

2. Reducing poverty According to World Bank estimates 1% increase in per capita GDP of low-income countries  1.3% decrease in population in extreme poverty Less poverty Less ________________________ Less _________________________, e.g. HIV infections in Africa More ___________ for education With more working power More resources can be ___________________ _____________ economic growth

3. Income distribution Economic growth does not necessarily benefit all If benefit goes to only ____________________ These rich people have higher real income and better living standard The poor continues to ___________ With a widen wealth gap More ______________________ In the world, Rich countries _____________ the resources from poor countries Poor countries suffer from ______________________________

The trade-off between current and future consumption Economic growth involves a trade-off between current and future consumption Saving and investment can accumulate capital  raises _________________  promotes ____________________  increases ____________________ however, implies a decrease in current consumption So, one of the costs of economic growth is a decrease in current consumption

1. Resources exhaustion and environmental pollution Production activities result in resource consumption More economic activities  faster the resources are consumed

1. Resources exhaustion and environmental pollution Production activities bring about pollution More economic grows  more the serious the pollution Increase in the global CO2 emission in the past few decades

2. Sustainable development Development that meets our own needs without doing damage to the prospects of future generations 3 inseparable dimensions to the sustainability of the ________________________ It also means finding ways to increase ________________________ improve the ________________________ While at the same time reduce _________________ narrow the ______________________ lower overall ____________ and ______________

3. Economic growth and sustainable development Although production activities consume resources and cause pollution, Economic growth may benefit sustainable development i. Wipe out ______________ Prevent the social problems which poverty brings ii. Raise _______________ people become more aware of health and environment conservation iii. Raise society’s __________ to bear the cost of environmental protection iv. ____________________ progress Raise productivity Help reduce consumption of resources Development of environmental friendly technology

Conclusion Under the principle of sustainable development, human development requires _____________________, _____________________ and __________________________. It aims at the common development of all __________and their ___________________________.

Elective 2 Chapter 1 Extension of Trade Theory

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