Data Response – Burkina Faso

Question 1: Explain what is meant by a negative externality.

A negative externality is an effect of production or consumption on a market that has an unseen social cost, as it retracts from society. The result of negative externalities is a market failure, as it causes goods to be overconsumed (in the case of production externalities) or overproduced (in the case of consumption externalities). The result of this overconsumption or overproduction is welfare loss, which can be physically measured using a supply and demand diagram.

Question 2:  Using supply and demand diagrams, explain how negative externalities result in market failure.

To understand how negative externalities cause market failure, we first must address that there are two types of negative externalities: that of supply and that of demand. A negative externality of supply is, taking an example from the article, when forest land exploited for farming destroys other wildlife which could have provided in the economy. This can be demonstrated in Figure A below. Here, the marginal private cost (or MPC), is lower than the marginal social cost (MSC). This means that is cheaper for the firm to produce than the actual cost to society, which can result, again in the example of deforestation, in severe environmental degradation. The marginal benefit in the diagram represents the demand for the firms production. With this we can see that since the firm is producing under the cost to society, quantity increases from Qs to Qp and price drops from Ps to Pp. The result is a market failure, as the firm is overproducing and the produced goods are being consumed in a way that degrades other potential in the economy, hence the greater social cost.

Question 3:  Explain why an increase in the level of poverty within Burkina Faso contributes to environmental degradation.

An increase in the level of poverty in Burkina Faso leads to environmental degradation as there is less concern for sustainability when those involved in the production process view their production as a means of survival instead of market operation. That is, there is a certain level of severity involved when those producing are destitute, as losing sales may result in losing what little they possess. Because of this producers may feel inclined to try and produce more than can be sustained by the environment in order to secure their living. The results is environmental degradation as crop lands are not turned over properly and soil become infertile, making it useless to both human cropping and natural rehabilitation. When this happens the poverty-stricken farmers look to produce new crop land by then deforesting areas to be used in the same, unsustainable manner.

Question 4:  Discuss strategies that the government of Burkina Faso could introduce to reduce the extent of forest degradation.

The number one way for the government of Burkina Faso to reduce forest degradation is to subsidize and promote sustainable farming. Forest degradation occurs as land previously used by farmers becomes infertile due to poor agricultural practice in order to try and produce a larger crop yield than the land is capable of. The reason this is done is because practicing sustainable farming involves both a monetary commitment and time lag that makes sustainable practice more expensive and less practical than producing for a maximum yield. However, if the government of Burkina Faso was to try and subsidize substantial factors required for sustainable farming forest degradation could be averted. This involves addressing the two major factors involved with moving towards sustainable practice. The first of these is the monetary commitment, which involves reorganizing existing farms and providing them with the equipment needed to practice sustainable farming. This can come as a direct subsidization by the government through tax cuts or equipment production subsidization. The second factor that must be addressed is the time lag. The restructuring of the farming market will involve a period when crop yield will drop due to the restructuring. The government will have to look to subsidize crop supply in the market to ensure there is plenty of harvest available for consumption to avoid inflation as the supply from the restructuring farms contracts. This could be done by temporarily increasing crop imports into Burkina Faso to take the place of local produce temporarily or could be done by delaying the restructuring until sufficient crop reserves grown in Burkina Faso could be made and then released during the restructuring period.

Advertisements

Data Response – Nigeria

Question 1:  Explain using supply and demand diagrams why in the last two decades of the 20th century the long term price of commodities such as oil fell.

One explanation for the drop in oil prices in the last two decades of the 20th century is an increase in its supply, or availability. This increase in supply coincides with times of increased drilling for crude oil in the world, specifically in countries such as Saudi Arabia and the United Arab Emirates, making it a valid explanation for the drop in long term commodity prices. This increase in supply be demonstrated on a supply and demand graph, as seen in Figure A. Here the supply of oil increases from S1 to S2, causing a decrease in price. The price here drops across the two decades from USD 37 to USD 17, as shown in Figure A. A subsequent effect of the drop in oil prices is the increase in demand and therefore Real GDP, which is shown as Q1 increases to Q2 in Figure A.

 

Question 2:  Explain how falling commodity prices can impede economic development.

With an increase in global oil supply and a drop in oil prices, oil producers receive less revenue for a static quantity of oil. This means that oil producing countries, such as Nigeria, face reduced revenue as additional producers, such as UAE encroach on market shares. This means that the total GDP for the country decreases as there are less injections from oil exports into the economy. With less liquid currency moving within the Nigerian economy economic development is restricted. This is because economic development depends on the transfer of capital in the economy. As capital moves within the economy it is available for development and expansion of markets within the economy, which in turns provides consumers and producers with more availability. This is a form of economic development, as the economy expands, while it does not necessarily raise the standard of living for everyone in the economy.

 

Question 3:  Using the data above, comment on the economic development process in Nigeria over the period 1997 to 2009.

Economic development took place over the last decade in Nigeria as the price of oil rose. The result of this is an increase in the revenue for Nigeria and therefore the available capital in the economy. With capital available in the economy for spending and purchasing goods both consumers and producers are stimulated, resulting in increases in investment and overall purchases. This inflow of capital can be seen in the data as Nigeria is constantly positive in its current account balance (with the exception of 2001), which means that it is annually exporting more than it is importing, result in an increase in capital for the economy. The result, as shown by the data is an increase in the spending on healthcare in Nigeria, as infant mortality has dropped significantly from 2001 to 2009. Additionally the Nigerian economy has developed in reducing its outstanding debt from 1997 to 2009, which indicates again that the Nigerian economy is looking to secure future development.

 

Question 4:  Examine the factors that might have caused the fall in the economic potential of a country as rich as Nigeria.

Factors that could have potentially caused a drop in the economic potential for a country as rich as Nigeria include, most namely, a drop in potential revenue that fuels the country’s development. As it can be seen in the data above, the drop in oil prices resulted in a drop in revenue for the Nigerian economy, and with less liquid capital in the economy it becomes harder for consumers and producers to expand and develop. This drop of revenue, while a singular factor effecting the economy, can stem from a number of sources. Most likely given the historical context of Nigeria, an increase in supply of oil from other producers has driven down the global price of oil, reducing Nigerian revenue. A drop in the supply of Nigerian oil could be a cause of revenue loss as well, as there is less inflow to the Nigerian economy. Finally, a drop in consumer demand for Nigeria’s exports, both oil based and otherwise, could be a cause for a fall in economic potential for Nigeria. While this is unlikely given the global growing demand for oil since the 1950’s, it is a possible factor to take into consideration.

 

Question 5:  From the early 2000s the price of oil has risen again. Using appropriate diagrams, evaluate the impact of an oil price increase on the economy of Nigeria.

As the price of oil has risen the impact in Nigeria has been an increase in revenue from oil exports. This is apparent in the data given the  drop in outstanding debt (which could only come from revenue in Nigeria being used to pay back the debt), the consistent current account surplus experienced by the Nigerian economy (with the exception of 2001), and the consistent GDP growth in excess of 3% since 2000. This can be attributed to the increase in oil prices globally as the demand for oil increases. This can be represented on a supply and demand diagram, such as in Figure B. Here, demand increases from D1 to D2, which subsequently leads to a rise in price, specifically from 17 USD in 1995 to 104 USD in 2011. The result is a further increase in the Real GDP of Nigeria from Q1 to Q2.

Section 6: Developmental Economics Questions

Below are a set of six questions answered by our economics class in a group discussion format. The purpose of these questions was to provide definitions for certain vocabulary in section 6 as well as cover some of the basic ideas of the section, such as the trade off between economic growth and sustainability. The questions below provide an outline of basic concepts in the section which can (and often are) applied to situations in the real world (e.g. the argument between growth and sustainability in a recently-wealthy Brasil).
Question 1: Explain the importance of human capital in contributing to economic development.

 

Human capital is the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value.
Human capital is vitally important for an organization’s success (Crook et al., 2011); human capital increases through education and experienceStatistical indicator used for human capital = HDI (Human Development Index)

  • Combination of Life Expectancy Index, Education Index, Income Index

Life expectancy reveals health of the population of the country… obviously
Education reveals education standards as well as literacy of the country.

Human Capital = developed through standard of living, health, and education.
HDI is indicator of positive correlation between human capital formation and economic development. If HDI increases, there is higher rate of human capital formation in response to higher standard of education and health. Similarly, if HDI increases, per capita income of the nation also increases.

  • Implicitly, HDI reveals that higher the human capital formation due to good standard of health and education, higher is the per capita income of the nation
Question 2: Explain the difference between economic growth and economic development.
FOR A MORE SPECIFIC AND SOPHISTICATED EXPLANATION CLICK HERE AND HERE
Economic growth occurs when there is an increase in production potential. It is best measured by a country’s real level of output over time; in other words, an increase in real gross domestic product (real GDP) [real GDP is….GDP adjusted for inflation]
WHERE AS….
Economic development occurs when there is improvement in the lives of all people in a country. Improvement of the following:
  1. living standards
    1. greater availability of goods and services
    2. greater ability to purchase goods and services
  2. promotion of —
    1. self-esteem
    2. respect
    3. dignity
    4. freedom of choice and thought

Economic growth may occur in terms of an increase in real output or real GDP, but it does not indicate an improvement in the lives of all people in a country. This can mean that economic growth can sometimes lead to assumptions in the standard of living in a country, when in fact income disparity leaves a sector of the economy in poverty.

Question 3: Discuss the view that the achievement of higher economic growth rates should be the priority of developing economies. 

Biggest problems that all developing economies have

  • Poor level of education & health care
  • Poor politics & corruption → Investors feel insecure to invest
  • Income inequality
  • Unemployment → social problems

Pros of higher economic growth

  • Decrease in level of unemployment
  • Better standard of living for majority

Cons of higher economic growth

  • High inflation → High interest rate → Less productivity → Balance of payment deficit
  • Inequality of wealth and income distribution
Question 4: Explain what is meant by sustainable development. 

In terms of sustainability, it refers to the ability for the environment to survive without changing resources. Therefore, any resources used must be able to be reused and must not have any detrimental effects on to the environment.Aim:

  • improve recycling
  • alternative power
  • maintaining biodiversity
  • admitting to being wrong, if wrong, and accepting any repercussions that entail any act against the environment.

Methods:

  1. extending property rights: giving the society the ability to protect the environment
  2. pollution tax: taxing those who pollute that cause detrimental problems to the environment
  3. polluting permits: allowing for rations and the ability to pollute a certain amount. Also a limit to how much one can pollute.
  4. traffic control: imposing plans to eradicate the pollution of cars

Therefore sustainable development is the ability to sustain development and also protecting the environment at the same time.

Question 5: Explain how extending property rights and land ownership can help bring about more sustainable development. 

Extending property rights / land ownership: Allowing people to own, and therefore be responsible, for the land on which they live or operate a business.

By allowing people to be in control of their own land without support from the governing body, producers must be able to supply their products in a way that ensures the continuity of their property. Property in this sense is commonly thought of as the land the producer operates on, but can also include the local body of water, air, flora and fauna and natural resources, as well. In this sense sustainability can be observed by housing development, agriculture, resource mining and goods production. By allowing people to be in control of the way they produce they are forced to practice sustainable, or else be ousted from the competitive market after exhausting their resources.

Possible alternatives: Governments can also look to subsidize producers who excel in sustainable practice in order to encourage the longevity of sustainable development. Additionally governments can provide capital for those working towards becoming sustainable in order to facilitate a quicker transition.
Question 6: Discuss the view that economic growth will inevitably conflict with sustainable development. 

  • Inequality of income – growth rarely delivers its benefits evenly. It often rewards the strong, but gives little to the economically weak. This will widen the income distribution in the economy. In developing economies, income distribution is frequently unequal and many of the benefits of growth may go to the better-off in society and flow overseas in the form of increased profit for multinational corporations.
  • Pollution (and other negative externalities) – the drive for increased output tends to put more and more pressure on the environment and the result will often be increased pollution and resource degradation. This may be water or air pollution, but growth also creates significantly increased noise pollution. Deforestation and environmental degradation are likely to result from growth. This is particularly true in developing countries as they tend to have little legal protection of the environment.
  • Loss of non-renewable resources – the more we want to produce, the more resources we need to do that. The faster we use these resources, the less time they will last.
  • Loss of land – increased output puts further pressure on the available land. This may gradually erode the available countryside. In many developing economies there will also be additional problems resulting from the movement of people from country to urban areas.
  • Lifestyle changes – the push for growth has in many areas put a great deal of pressure on individuals. This may have costs in terms of family and community life in many economies.

International Economics (Section 4) Review

Definitions
  • Free trade is international trade free from any restrictions like tariffs, quotas or other protections.
  • Exchange rateis the price of one currency in terms of another currency.
    • Fixed – the value of the currency against other currencies remains the same. It’s maintained by gv by intervening in the foreign exchange market using foreign exchange reserves to buy and sell the currency.
    • Floating – the exchange rate is determined by demand and supply in the foreign exchange market only.
    • Managed – Currencies are allowed to fluctuate in a narrow band in the short run, and allowed to be realigned in the long run.
  • Currency movements
    • In floating– appreciation and depreciation
    • In fixed– revaluation and devaluation
  • Balance of payments– a record of all flows of money in and out of a country, current + capital account.
    • Must equal zero.
  • Balance of trade – the difference between the value of exports and imports.
    • trade surplus – greater value of goods and services exported than imported
    • trade deficit – greater value of goods and services imported than exported
  • Capital account – movement of funds and loans for investment to abroad: sales of assets to foreigners and purchases of assets located abroad.
  • Current account – the exports and imports of goods and services between countries and overseas, and net transfers: transfers of money.
    • Deficit – when there are more imports than exports
    • Surplus – when there are more exports than imports
  • Absolute Advantage – The ability to produce a particular good with fewer resources than another country
  • Comparative Advantage – The ability to produce a particular good at a lower opportunity cost than another country
  • Visible Trade
    • Imports and exports of goods (surplus or deficit)
  • Invisible Trade
    • Imports and exports of Services (surplus or deficit)
      • Tourism, Service
  • Foreign exchange market – Where currencies are bought and sold.
  • Protectionism– an economic policy of restraining trade- saves the domestic industries
    • tariffs (taxes on imported goods), quotas (limit on quantity of goods that can be imported), and government regulations
  • Bonds: An IOU from the government
    • Government says it will owe you an x amount of money
      • Bond yields carry interest, and at the end you get how much you bought it for + yield. Yield depends on the demand. Yield is generally greater on longer term bonds.
Diagrams:
J-Curve Diagram: With time, an economy’s exchange rate against a foreign currency depreciates and appreciates. Cash outflows suggest, an economy depreciating it’s currency and having other currencies buy their products, as a result, the economy who is depreciating reaches a point in which they begin to appreciate again because they are selling more than they are buying, a thus a upward shift in the curve. This is all under the assumption and applicable only under the Marshal-Learner conditions that state each economy are trading inelastic goods, which are goods that are not sensitive to price change.