2. Developing Countries | |
Advanced Nations | It is a common practice to arrange all nations
according to GDP or income and draw a dividing line between the advanced
and the developing countries.
In the category of advanced nations are included the countries of North America and Western Europe, plus Australia, New Zealand and Japan. |
Developing countries/LDCs (less developed countries) |
Developing countries are located mostly in Africa, Asia, Latin America and the Middle East. (South Korea, Taiwan, Singapore and China are industrial countries at present. Reluctance among economists to define LDCs in terms of per capita GDP. Nevertheless, $10 - $12,000 would be a good reference point. The argument that China should be treated as a developing country is now tenuous. |
World Trade in 2018 | The global economy in one chart Gross World Product = $84 trillion (2018) EU = $16.5 trillion, US = $19.4 trillion, China = $12.2 trillion, Japan = India = $4.7 trillion World Trade $15 trillion (about 20% of GWP = $78 trillion) US trade deficit with China: $419 billion in 2018 US trade deficit with EU: $147 billion, 2016 Imports of Developed countries = $8.6 trillion Exports of Developed countries = $8 trillion (Developed economies have trade balance) Europe's trade = $5.3 trillion North America (NAFTA) Exports = $2.4 trillion Imports = $1.7, Trade deficit = $0.7 trillion (mostly US trade deficit). China exports = $1.6 trillion, imports = $1.4 trillion, trade surplus = $200 billion. |
Newly Industrializing Countries | The terminology was popular in the 1980s, beginning with the Four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan, but now most of them are classified as high income economies (over $30,000.) Current NICs: South Africa, Brazil, Mexico + China,
India, Indonesia, Malaysia, Philippines, Thailand, + Turkey. |
Emerging markets (BRICS) | New Silk Roads binds China to Latin America Originally, they were called BRIC (Brazil, Russia, India and China), BRICS after 2010, including South Africa. These are large and newly industrializing countries (NICs) accounts for 13% of world trade. Population: 3 billion GDP = $14.8 trillion as of 2013. Its growth rate is 9%, compared to 2.6% in advanced nations. Intra-emerging market trade accounts for about 30% of global consumption. Increasingly, emerging markets begin to denominate trade contracts in nondollar currencies. Old guard currencies ($, euro, yen) are likely to depreciate as BRICS grow. Brazil and China are active in Africa. Emerging markets |
Brass plates from Benin City. British Museum. |
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Printing press (c. 1440) accelerated Economic growth in Europe |
What was life like for the middle class in Europe
in the 1600s (before land ownership was established)? It was much worse
than that of a developing country in the world today. The printing press
had been just invented, but newspapers were not widely circulated yet. Economic development did not take place before the printing press (invented c. 1440) became widespread in Europe (c. 1500). Division of labor was practiced in the UK, and Adam Smith observed the efficiency from division of labor. Printed newspapers became popular in the 16th century. Good ideas spread quickly to the rest of Europe. |
4. Trade Characteristics of Developing Nations | |
Dependence on developed economies | Developing nations are highly dependent on the advanced or developed nations. Developing countries excluding Asia account for about 20% of world trade. If Asia is included, their export share of world trade is 40% in 2005. China will soon be exluded from this group. Income dependence: Most of exports of developing nations go to the developed nations, e.g., Kopi Luwak (coffee) dependence on Technology: Most of imports of developing nations originate in the developed countries (medicine, new machines). Trade among developing nations is minor. |
Primary products | Exports of developing nations are primary products (agricultural goods, raw materials, and fuels). Some countries export drugs and low tech military goods to gain international currencies. Shares of manufactured exports tend to be less than 10% among African countries. |
Labor intensive exports | Exports of manufactured goods tend to be labor intensive (such as textiles). The absolute value of manufactured goods produced by the developing nations is low. The rise in the shares of manufactured goods in developing nations is due to a handful of newly industrializing countries (NICs) such as Korea, Taiwan, and Singapore until 1980s. However, these countries have lost their export markets to China, which has emerged as an industrial giant in the 1990s. Exports of advanced economies tend to be capital- and technology-intensive. |
Middle Income Trap | This refers to a situation in which once per capita income reaches about $10,000 - 12,000, many developing countries stop growing. Exceptions are South Korea, Hong Kong, Taiwan, Singapore, and Chile. It is easy to raise gdp at first. As the wage rises, developing countries can no longer depend on their exports of the labor-intensive goods. Investment in R&D must be constantly made to catch up on technology of developed countries. Without investment in technology, there is a limit to growth in the labor-intensive industries. Japan's patent application has been declining (340,000 in 2012 to 318,000 in 2016). This may explain the stagnation of Japanese economy since the 1990s. (It stopped growing for 3 decades.) That is, a stagnant income trap can appear at any income level as innovation stops. |
5. Trade Problems of Developing Nations Excluding BRICs | ||||||||||||||||||||||||||||
Unstable Export Markets | One characteristic of many developing nations is that their exports are concentrated in a small number of primary products. Dependence on primary products, 1992
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Inelastic Demand and Supply | ||||||||||||||||||||||||||||
Kopi Luwak, the most expensive coffee |
6. Revenue and price elasticity of demand (PED) | |
Revenue and PED | There is a straightforward relationship between TR and price elasticity of demand, PED. TR is defined by PQ, and is described by the rectangular area generated by a point on a given demand curve. |
Hat calculus |
Let Z be the product of two variables, X and Y, Z = XY. Let the new value of Z be denoted by Z'. Then Z' = (X+ΔX)(Y+ΔY) = (1 + ^X)X(1 + ^Y)Y = (1 + ^X + ^Y + ^X^Y)XY ^Z = ^X + ^Y + ^X ^Y. When the percentage changes are small, Z = XY => ^Z = ^X + ^Y. Z = 1/X => ^Z = - ^X. ( ^(1/X) + ^X = ^(1) = 0) Z = X/Y => ^Z = ^X - ^Y. |
^R = ^P + ^Q = ^P(1 + ^Q/^P) = ^P(1 - ε). ε = price elasticity of demand = -^Q/^P. |
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Inelastic Demand.
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ε < 1. Thus, ^P and ^R move in the same direction. ex: ε = 0.5. If ^P = -10%, then ^R = - 10%(1 - 0.5) = - 5%. In this situation, farmers are worse off when they harvest a good crop, because ^Q and ^R move in the opposite directions. Implication: A good harvest means low prices and low revenue for farmers. |
Elastic Demand | ε > 1. Thus, ^P and ^R move in the opposite direction. ex: ε = 2. ^P = - 10%. ^R = - 10%(1 - 2) = 10%. |
Unitary Elastic Demand | ε = 1, and hence ^R = 0. |
7. Stabilizing Commodity Prices | ||||||||||||||||||||||
In an attempt to stabilize export earnings, developing countries have pressed for international commodity agreements. ICAs are typically agreements between leading producing and consuming nations about stabilizing commodity prices, assuring adequate supplies to consumers, and promoting economic development of producers. | ||||||||||||||||||||||
Who wants price stability? | Farmers want stable prices. | |||||||||||||||||||||
Gains from price instability | Do Consumers want price stabilization? No.
Consumer gains from a price fall: the apparent red trapezoid (BCC"B") Consumer losses from a price increase: the apparent green trapezoid (BCC'B'). Expected gains from price instability = (1/2)(BCC"B" -BCC'B') > 0. |
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Using positively sloped supply curve, one can also demonstrate that producer surplus is greater when prices are unstable. Thus, producers should also prefer random prices. However, producers are more easily organized than consumers to persuade the government to stabilize farm prices and that the stabilized prices should be higher than the mean prices. They do not mind high prices, but asks the government to gaurantee minimum prices. |
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International Commodity Agreement | Commodity agreements are usually made between producing and consuming nations that want to introduce stability in the otherwise unstable commodity markets. Agreements among producers within a single country are usually outlawed by Antitrust laws, but such laws do not have jurisdiction over the national territory. Thus, it is possible to have agreements on price stabilization schemes with other producing nations.
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8. Producion and Export Control | |
How to face a global recession | Producer revenue can be riased with production control. Specifically, the blue rectangle can be larger than the red rectange, which represents revenue with production control. The area of the blue rectangle is greater than that of the red when demand is price inelastic. |
Example | OPEC raised the price of oil from $20 per barrel to about $50 in 1973 and to over $100 in 1979. However, unity within OPEC did not last long. US oil consumption $20 million barrels per day. production: $10 million barrels per day. US dependence on imported oil is shrinking. Fuel efficiency is increasing, domestic supply is increasing. |
9. Grow Together vs Grow Apart | |
Special Message to the Congress, Jan 25, 1962 | Trade Expansion Act of 1962. (i) asked for authority to reduce tariffs by 50% in reciprocal negotiations. (ii) introduced trade adjustment assistance. |
"The two great Atlantic markets [EEC and the US] will either grow together or they will grow apart. The meaning and range of free economic choice will either be widened for the benefit of free men everywhere--or confused and constricted by new barriers and delays. " | |
Outcome | Kennedy Round reduced tariffs by 30%. |
Grow alone policy vs grow together policy | |
10. Effect of Price Stabilization in Developed Countries | |
Export controls | Producers' associations have adopted export quotas. Export quotas must also be accompanied by production control. e.g., OPEC |
Buffer Stock | A stabilization agency needs to maintain Buffer Stock.
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Maximum price |
Maximum price is a price ceiling which government imposes to protect consumers by releasing surplus grains. Price will not rise above the maximum price. |
Minimum price |
Minimum price is a price floor that government imposes to protect producers by purchasing grains at the minimum price. The price does not fall below the minimum price. |
problems | In principle, the government can make money when it buys grains at low price and sell at high prices. It can be a price support program Governments in LDCs don't have money to support prices. e.g., India's protest against the elimination of a fuel subsidy. |