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.

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.

How Can Fiscal Policies Be Used to Protect the Working Class?

In economics, many economists worry about the protection of the working middle class. This sector of the economy is generally understood to be very sensitive to economic adjustments. Any drastic changes in the aggregate demand or aggregate supply of an economy has been shown to have the most substantial impacts on the middle class. In addition, the middle class generally makes up the majority of the economy, meaning that if it is put under economic stresses, the entire economy suffers.

For this reason economists commonly devise fiscal policies to try and protect the middle class and it’s workers. A fiscal policy is a policy aimed at controlling the AD by increasing or decreasing government spending and taxation. The government can use these policies to protect the middle class by a number of means. By granting them tax deductions, the government is able to increase the real income of the middle class workers. By increasing spending on middle class benefits such as health and safety plans aimed at protecting the unemployed, the government is also able to protect the middle class.

Economic Indicators

In economics, certain indicators can predict economic shifts and changes in AS and AD. These indicators, known as economic indicators, can be grouped into two categories:

Leading indicators are indicators in the economy that can be used to predict economic activity before it occurs. These indicators are important to economists as it allows them to use information from the economy to predict and manipulate aspects of the economy in order to prevent market failure. Certain leading indicators include stock changes, changes in debt and money supply in an economy.

Lagging indicators are indicators in the economy that follow economic activity. While these indicators cannot be used to predict economic activity, it can be used to reflect upon the effect on economic changes. This is important as it allows economists to see the effects of economic changes in order to predict how to prevent these effects in the future. Lagging indicators can include changes in interest rates, changes in consumer price index (CPI) and unemployment.

Section 3.3 and 3.4 Summative Reflection and Wiki

I recently scored a 9/10 on my summative assessment for sections 3.3 and 3.4. I feel this score is appropriate given that I gave real world examples when looking at specific changes in the AS/AD model, which I failed to do in the formative assessment. However, I didn’t reach a 10 as I missed a key definition in the beginning of the question.

Additionally, my economics class has recently started work on a Wiki for the section 3.5 definitions and diagrams. In the wiki we decided that we could cover the definitions while trying to link them to real world examples via articles on the web. In order to do that I was assigned the task of finding articles relevant to certain terms, such as real wage unemployment. This article talks about how real wage unemployment is still stagnant even though there has been a large scale recession in overall unemployment in recent months. Real wage unemployment is a form of unemployment caused by the raising of wages beyond the market capacity, driving the number of those applying for jobs above the number of available positions. This leaves a portion of those applying without available jobs, and therefore unemployed.

Section 3.3 and 3.4 Formative Reflection

In studying Supply-side and Demand-side policies in lessons 3.3 and 3.4, I was able to learn a lot about the effects of government intervention through both fiscal and monetary policies in the economy. A fiscal policy is a policy enacted by the government to alter taxes, spending, and the flow of capital. By raising or lowering taxes while increasing or decreasing government spending, fiscal policies are able to regulate an economy’s demand. Additionally, by controlling the flow of capital in an economy with payouts, a government can regulate an economy’s supply as well. A monetary policy is a policy that alters the interest rates in an economy. This can increase or decrease the consumer’s disposable income, thus regulating the demand within an economy.

Neoclassical economics argues that governments should have limited or no intervention in the economy, and that any intervention only serves to worsen the state of the economy. Contrary to this, Keynesian economics argues that governments should play an active role in regulating an economy’s supply and demand. In the formative examination, I scored myself with an 8/10. I did this feeling I had a strong  understanding of the macroeconomic concepts discussed in class. I was able to identify how demand and supply adjustment were able to create inflation in an economy. In my analysis of the situation however I failed to provide real world examples to link my knowledge of the concepts to the real world. I believe that in the upcoming summative assessment I will provide examples to show how my understand is applicable to the modern world.

Commanding Heights – Battle for the World Economy Impressions

Recently in our IB HL Economics class we watched the video Commanding Heights – Battle for the World Economy. This video detailed the ideas of both Keynesian economists and the more recent development of Hayek’s ideas in the world economy. The video interestingly covered the ideas of market control vs the free market. Both the idea of a free market, supported by Keynes, and a controlled or planned economy, supported by Hayek, have their strengths and weaknesses. People generally disagree with the idea of a controlled government because it is associated with the idea of a government having complete control over economic effects and direction. However, having a government that plans the direction of the economy in order to stimulate development is something that has proved very effective in the more recent world economy  – specifically in the United States and Great Britain. However, a free market is associated with the idea that the market itself will eliminate and ‘cleanse’ itself of the weaker industries that are unable to function without government intervention. A good example of this was the coal industry in Britain in the 1980’s. The industry was huge, but relied on subsidies to operate, at one point exceeding $3 Billion annually to support the 180,000 jobs it provided. Now in Britain, due to the privatization of the coal sector, only 3,000 jobs remain, but the industry is completely free of government subsidies.