- Antonio Ginés - IES Hnos. Machado - Dos Hermanas - Seville -
TOPIC 1.- ECONOMIC ACTIVITY AND ECONOMIC SYSTEMS. PRODUCTION AND ECONOMIC INTERDEPENDENCE
PART A.- ECONOMIC ACTIVITY AND ECONOMIC SYSTEMS
ECONOMY AND SCARCITY.-
Definition of economy.- It’s a science that studies human behavior in society as the relationship between aims and limited means that have alternative applications. Scarcity implies that there aren’t enough resources to produce enough to cover all needs. Scarcity also implies that all the objectives of society can’t be satisfied at the same time, therefore it’s necessary to follow a policy of priorities.
Utility.- The concept of scarcity is applied to everything that is useful. And useful means everything that has the capacity to satisfy human needs. Human societies have developed policies to decide priorities and how to satisfy them
OBSERVATION OF THE ECONOMIC CONTENT OF SOCIAL RELATIONS.THE ECONOMIC AGENTS.-
Definition of economic agents.- They’re the people or groups that do an economic activity
Types of economic agents.-
Families or households.- They make the decisions about what to consume and are the owners, they have most of the rest of the production factors (K and T)
Companies.- They make decisions about what to produce, how to produce and distribution
Public sector.- It’s made up of different public administrations and other public entities (including public-owned companies). It takes part in the economy in three ways:
Creating laws that regulate the way in which other economic agents act when they go to the market
Redistributing income from those who have the most to those who have the least
Offering, at a lower price or for free, goods and services that society thinks the entire population should receive (education and health)
THE NEED TO CHOOSE AND THE RECOGNITION OF THE OPPORTUNITY COST OF A DECISION.-
The opportunity cost.-
Definition.- It’s what an agent loses when making a decision
Cannons-butter.- When individuals are grouped together in societies, they face different types of dilemmas. The classic is the dilemma between "cannons and butter." The more we spend on national security to protect our coasts from foreign aggressors (cannons), the less we will spend on personal property to improve the standard of living in our country (butter)
Pollution-income.- In modern society, the dilemma between a clean environment and a high level of income is also important. Legislation that forces companies to reduce pollution raises the cost of producing goods and services. Higher costs can create lower company profits, lower wages, higher prices, or all three at the same time.
The Production Possibilities Frontier (PPF).-
Definition.- It’s the group of productive factors or combinations of technologies that reach maximum production. It reflects the maximum quantities of goods and services that a society can produce in a given period of time and with given production factors and technological knowledge.
Situations that can occur in the productive structure of a country.-
Inefficient productive structure.- Being under the PPF means that either not all resources are used (idle resources) or the technology isn’t adequate (technology that can be improved). A country with an unemployment rate above 5% will always find itself in this productive structure, because there is unused labor available.
Efficient production structure.- It’s located on the border or very close to it. There are no idle resources and the best technology is used.
Unattainable productive structure.- It’s located above the Production Possibilities. It’s theoretical because no country can produce more than is possible, indefinitely (overtime could temporarily reach higher production levels)
Shape of the PPF.- It’s concave and decreasing. This form is due to two reasons:
Decreasing.- To produce more of one good it is necessary to produce less of another
Concave.- The opportunity cost is increasing
All the economies of the world can be represented with a diagram of these characteristics. Thus, we can simplify and assume that the production of world economies can be divided between civilian goods and military goods. For example, North Korea has an economy highly geared towards the production of military goods at the cost of reducing the production of civilian goods and, consequently, the needs of citizens are partly neglected. The graph would be similar to the previous one
Displacement of the PPF.- It’s movable, that is, unreachable points can be reached. Displacement may be due to technological improvements, an increase in capital, an increase in workers, or the discovery of new natural resources.
In this case, displacement affects the production of both goods equally. However, different cases can arise. For example, if the displacement is due to the immigration of untrained individuals, they can be expected to join companies that engage in low-skilled manual activities such as those related to agriculture. If the displacement is due to a new technology, it could also be thought that it affects some sectors more and others less. Therefore, the expansion of production possibilities aren’t the same in all cases. We can reflect on a graph like the previous one how the displacements would be.
EXCHANGE RELATIONSHIPS AND HISTORICAL EVOLUTION.-
Barter or exchange.-
Definition.- Buy or sell using a product or service instead of money, that is, buying or selling without using cash.
Origins.- Its beginnings go back to the first sedentary communities of human beings. These colonizers knew agriculture and herding, lived longer than their nomadic ancestors, and enjoyed better security. In addition, the first works, such as pottery or metallurgy, began to develop.
Appearance of the coins.- New products brought new needs that were impossible to satisfy in an autocratic society (political concept that means an undemocratic government and, normally, entails an economy closed to the outside). Therefore began bartering: with the need to exchange what was owned for what was necessary. Although, at times, many intermediate exchanges were necessary to satisfy needs. This, combined with the growth of settlements and the expansion of commercial networks, facilitated the appearance of the concept of "coins" (which were initially sacks of salt).
Disappearance of barter.- In spite of everything, barter didn’t disappear with the arrival of coins. In ancient Egypt, the monetary system and exchange lived together throughout history, the Phoenicians used it as the basis of their trading system and the native people of Latin America also exchanged their products in markets.
Explanation of the appearance of money.- When exchange is frequent, barter systems quickly find the need to have some merchandise with monetary properties. This greatly facilitates trade and the permanence of families in the area, building the wealth of the place and demographic growth and giving rise to the natural process of free trade and the development of the economy.
Money-merchandise.- Civilizations have adopted over the centuries various goods such as money (gold, silver, other metals or minerals, wheat, tea tablets in China, etc.) that have monetary properties, such as divisibility. , durability, etc.
First money in the West.- The first historical signs that we have of money in the form of currency in the West are those of the Phoenicians.
Intrinsic value.- Money in this phase had an intrinsic value. Gold and silver themselves had a value, and that is why they were exchanged. However, today, money has only value as an instrument of exchange (the paper of which a banknote is composed has no value).
Issuance of money.- The states began to issue notes and coins that gave the bearer the right to exchange them for gold or silver from the country's reserves. Then fiat money appeared, which has no intrinsic value
Evolution of the backing of paper money.-
18th and 19th centuries.- Many countries had a bimetallic pattern, based on gold and silver.
Between 1870 and the First World War.- The Gold Standard was mainly adopted. Any citizen could convert paper money into an equivalent amount of gold.
Between the two World Wars. - Countries tried to return to the Gold Standard, but the economic situation and the crisis of 1929 ended the ability for an individual to convert banknotes into gold.
At the end of World War II.- The allies established a new financial system in the Bretton Woods Agreements (in July 1944 in the United States). Here it was established that all currencies would be converted into US dollars and only the US dollar would be convertible into gold bars at $35 per ounce for foreign governments.
In 1971.- The expansive fiscal policies of the United States, motivated mainly by the military spending in Vietnam, cause the abundance of dollars, which created doubts about their convertibility into gold. This is why European central banks tried to convert their dollar reserves into gold, creating an unsustainable situation for the United States. Because of this, in December 1971, the President of the United States, Richard Nixon, unilaterally suspended the conversion of the dollar to gold and devalued the dollar by 10%. In 1973, the dollar was devalued another 10%, until, finally, the conversion of the dollar to gold ended.
From 1973 to today.- The money that we use today has a value in the subjective belief and legal obligation that will be accepted by the rest of the inhabitants of a country, or economic area, as an instrument of exchange. The monetary authorities and central banks of developed countries don’t attempt to defend any particular exchange rate level, but intervene in the foreign exchange market to calm speculative fluctuations in the short term, with the aim of maintaining price stability in the short term. term and avoid situations such as hyperinflation, which destroys the value of money leading to a decrease in confidence or, on the contrary, the opposite can also occur, that is, deflation (generalized and sustained fall in prices or loss of money value).
THE ECONOMIC SYSTEMS. KEY FEATURES. VALUATION AND COMPARISON. PECULIARITIES OF THE ANDALUSIAN ECONOMY.-
Capitalism (emerged in Europe in the 16th century) .-
Capital over labor.- Capital dominates over labor as an element of wealth production
Priority of profit.- Profit is the guide of economic action for capital accumulation
Private ownership.- Ownership of the means of production is in the hands of the families
Economy determined by the free market.- The distribution, production and prices of goods and services are usually determined by the interaction of supply and demand
Free enterprise.- Each company freely dedicates itself to what it decides to produce with no limitations other than the qualification requirements necessary to carry out that activity
Non-intervention.- The State limits itself to intervening in very specific cases that are developed in the following section
Liberalism and neoliberalism.- The political doctrine that has historically led the defense and implementation of this economic and political system has been economic and classical liberalism whose founding fathers are considered to be John Locke, Juan de Mariana, Adam Smith and Benjamin Franklin. Classical liberal thinking holds that the role of government should be reduced as much as possible. It should only be in charge of the legal code that guarantees respect for private property, the defense of what are called “negative freedoms”: civil and political rights, the control of internal and external security through the Armed Forces and the police, and possibly the establishment of policies that were considered essential for the functioning of the market, because a greater presence of the State in the economy would disturb its functioning. The most prominent contemporary representatives are Ludwing von Mises and Friedrich Hayek for the Austrian school of economics; George Stigler and Milton Friedman from the Chicago School of Economics. Both are in the controversial categorization of neoliberalism.
Other trends.- There are other trends in economic thought that assign different functions to the State. John Maynard Keynes argues that the state can increase effective demand by spending on goods and services avoiding cyclical crises.
The centralized planned economy.-
The state organization.- The factors of production are in the hands of the State, which is the only important economic agent. The market doesn’t allocate resources, because it’s manipulated by the State. These manipulations are made with multi-year economic plans (five-year plans), which explain in great detail the supply, production methods, salaries, investments in infrastructure, etc.
Forecast errors.- The market doesn’t send signals because it doesn’t exist (false market). Without signals, the planners weren’t always correct in their forecasts and this caused a lack of adaptation to reality and a poor reaction capacity
Low motivation.- Because wages and prices were set by the State, companies didn’t need to be competitive and workers were unmotivated, because they earned the same if they did their job well or badly.
Excessive bureaucracy.- Planning required a huge bureaucracy at the service of the State, so decisions and reaction capacity were slower.
Appearance and expansion.- This system, inspired by Marxist theory, appeared in the Russian Soviet Federative Socialist Republic after the First World War, due to the state of emergency and the war economy due to the war against the White Army and the Triple Entente during the Russian Civil War, which occurred in the first months after the October Revolution and the emergence of the first Soviet Republics, worsened with Stalin and his followers, when the Soviet Union was born, with the so-called one-country policy; models that spread after the Second World War throughout Eastern Europe and many Asian countries, under the Soviet Union and the Komintern. Although at firts it was more productive than capitalism, companies soon ceased to be productive and the State became continually in debt to maintain full employment. Also, in the case of the USSR, it had to allocate a huge amount of its budget to maintain the army and war technology in its Cold War with the United States.
Self destruction.- Finally, at the end of the 20th century, the USSR fell with its economic system and today Russia and the Eastern countries are moving towards a market economy. China is looking for a balance, Cuba is trying to defend the centralized economy system by making some reforms or concessions in strategic sectors, such as tourism, to the market economy, prevailing abroad. Currently, only North Korea follows a centralized economy model, with almost no capitalist or other reforms.
Mixed economy.- In reality, there is no country with a totally market or centralized economy, but more or less a combination of both is increasing or decreasing degree.
Particularities of the Andalusian economy.- The Andalusian economy, like the Spanish economy, has a mixed economy system with great importance placed on the market economy.
PART B.- PRODUCTION AND ECONOMIC INTERDEPENDENCE
Definition.- A production process converts inputs (physical, technological, human and other resources) into outputs (goods and services).
Planning.- A production process includes actions that occur in a planned way and produce a change or transformation of materials, objects or systems, at the end of which we obtain a material or immaterial product.
Definition.- They’re resources, materials or not, that when combined in the production process add value in the production of goods and services
Evolution of the concept.-
Classical economists.- They use the three factors that Adam Smith defined, each factor participates in the result of production through a reward set by the market:
Land (which is rewarded with rent)
Work (which is rewarded with wages)
Capital (which is rewarded with interest)
Neoclassical economists.- They only use capital and labor because they simplify their economic analyzes. The land is considered included within the capital
Current economy.New factors of production.-
Natural capital (land).- More and more changed by human intervention. Today land is considered a component of capital or a component of a broader natural factor (natural resources or natural capital).
Physical capital.- Understood as tools and machinery
Material work.- Non-intellectual work
Intangible capital (know-how, organization, non-physical but computable assets, intangible work, knowledge economy) .- Fourth factor of production. In the knowledge economy and business development produced since the end of the 20th century, people consider that technology and science (what has been called R + D - Research and Development - or even R + D + i - Research, Development and Innovation -) is a fourth factor of production that characterizes more and more production in industrialized countries. At the same time, the concept of physical capital or financial capital is added to the concept of human capital or intellectual capital, even social capital, as a way of explaining the improvement in productivity that is not due to the other factors.
Training.- Investment allows the volume of production factors to increase. Training can be considered an investment, and not an expense, because it increases the skills of workers.
Definition.- The added value is the increase in the value that is produced in a good in each phase of the production process. Profit is a part of the added value.
Double accounting.- To avoid double accounting, the added value is calculated at each stage of the production process
Cost of intermediate products
DIVISION OF LABOUR.-
Definition.- The division of labor, generally speaking, deals with the specialization and cooperation of labor forces in tasks and roles, with the aim of improving efficiency. When a worker performs all the different tasks necessary to make a product, performance is slow, so it’s necessary to divide the tasks.
Industrial division.- The industrial division deals with the division of tasks in an industry or company
Vertical division.- The vertical division is a group of jobs that a person performed before but over time they have been divided into different professions
Collateral division.- The collateral division is the division that separates different professions.
Example.- Adam Smith in his book "The Wealth of Nations" says that where a single blacksmith could not produce more than ten pins per day, the factory uses the workers in several different tasks (stretching the wire, cutting it, sharpening it, etc. ), and thus comes to produce about 5,000 pins per worker employed. Along with this large increase in the quantities produced, there is an equally extraordinary decrease in the price of pins.
Advantages of the division of labor.-
Save capital.- Each worker doesn’t need to have all the tools they would need for the different functions.
Save time.- The worker doesn’t need to constantly change tools
Reduce errors.- The tasks that each worker executes are easier, that is why errors decrease. When the worker has a small and easy task, he will pay more attention than if he executes a task where he must constantly rotate with his colleagues; that is, when a worker executes a more difficult task, he will lose his concentration when he waits for it. Adam Smith's text "Investigation into the Nature and Causes of the Wealth of Nations" also talks about the importance of machinery (which craftsmen build to speed up work). They bring simplicity to the task.
Invention of machines and/or tools.- To simplify their work, workers create new tools or suggest ideas to improve the production process
Definition of total, marginal and average product.-
Total product.- The total product is the total amount in physical units that is obtained for the total amount of factor used
Marginal product.- The marginal product is the variation that total production experiences when it uses an additional unit of factor.
Average product or productivity.- The average product is the amount of product units obtained for each unit of factor used
ther definitions of productivity.-
Production/resources.- It’s the relationship between the production obtained by a production or services system and the resources used to obtain it.
Results/time.- It can also be defined as the relationship between the results and the time used to obtain it: the less time used to obtain the desired result, the more productive the system.
Outputs/inputs.- It’s the relationship between the outputs and the inputs of a system
Production capacity and added value.- Productivity assesses the ability of a system to create the products that people want and, at the same time, the degree to which they make use of the resources used, that is, the added value.
Productivity-profitability.- Greater productivity using the same resources or producing the same goods or services results in greater profitability for the company. Therefore, the quality management system tries to increase productivity.
Quality management.- Productivity is connected with the continuous improvement of quality management systems and thanks to this quality system people can prevent quality defects by preventing them from reaching the end user. Productivity is connected with production standards, if people improve these standards then they will save resources and this will be reflected in the increase of their utility.
Types of productivity.-
Factor productivity.- It’s the relationship between the amount obtained from a product and the amount of factor that has been used for its production
Global productivity.-It’s the relationship between the monetary value of the production of a period and the monetary value of the amount of resources used to achieve it.
Productivity improvement.- It’s obtained by innovating in:
Technology (for example, the Internet)
Organization (for example the assembly line)
Human resources (through training)
Labor relations (improvement of labor legislation)
Labor conditions (for example, labor health)
Globalization.- All countries (nation-states) are dependent to different degrees, in each of the following areas: trade, technology, communications, finance and migration, among others. All this, in the context of globalization, forces countries to be in constant interdependence because they’re connected in different areas, such as those mentioned above.
Specialization.- Economic interdependence is a result of the specialization of production systems (for example, Spain has specialized in tourism and construction)
Variation.- Interdependence isn’t inflexible, because organizations, individuals and countries can change their production from one group of products to another.
Mutual dependence.- On the other hand, the relations between the imperialist nations and their colonies aren’t unilateral, that is, not only do the colonies need foreign powers for their development, but powerful countries also need the colonies to obtain raw materials. and as markets to sell their goods and/or export their capital.
DEFINITION OF THE COMPANY.- The company is the basic economic unit that is responsible for satisfying the needs of the market using material and human resources. It’s responsible, therefore, for organizing the production factors, capital and labor.
FUNCTIONAL AREAS OF THE COMPANY (a possible division) .-
Production and Logistics.- Business logistics manages and plans the activities of purchase, production, transport, storage, maintenance and distribution
Management and Human Resources.- Select, hire, train, employ and maintain the organization's collaborators. A person or a department (the professionals of the Human Resources and the directors of the organization) can do these tasks.
Marketing.- Design the products, assign the prices and choose the most appropriate distribution channels and communication techniques to launch a product that will really satisfy the needs of the clients. These tools are also known as the Grundy’s Four Ps: product, price, distribution or place and advertising or promotion.
Finance and administration.- Study how the company can obtain and manage the money it needs to achieve its objectives and how it organizes its assets.
Sales.- It’s in charge of the sales of the company's products and customer service.
CLASSIFICATION OF COMPANIES.-
According to their economic activity.-
The primary sector.- They’re mainly extractive and create utility of the goods when they obtain the resources of nature (agriculture, livestock, fishing, mining, etc.)
The secondary sector. - Physically they convert some goods into more useful ones. Industrial companies and construction companies are in this group.
The tertiary sector.- (Services and commerce), with activities such as transportation, tourism, consulting, etc.
According to the legal form.-
Companies that only belong to one person.-This person has unlimited liability (with everything he owns). It’s the simplest way to start a business. They’re usually small and family businesses.
Companies that belong to a group of people.-
Societies.- Such as public limited company, the partnership company, the limited partnership and the limited liability company
Social economy.- Cooperatives, labor companies and others.
According to the size.- There is no unanimity among economists in defining small and large companies because there is no established criterion to measure them. The main criteria are: sales volume, equity capital, number of workers, profits, etc. The most used is the number of workers:
Microenterprise.- From one to five workers
Small business.- From six to fifty workers
Medium-sized company.- From fifty-one to five hundred
Large company.- More than five hundred
According to the area of activities.-
According to who is the owner.-
Private-owned company.- The owners are individuals
Public-owned company.- The owner is the State
Mixed company.- The owners are individuals and the State
Self-management company.- The owners are the workers
According to the market share (the relationship between the sales of the company and the total sales of the sector) .-
Aspiring company.- Wants to have more market share
Specialist company.- Focuses on a market segment (set of clients with similar characteristics). This segment must be large enough to be profitable, but not large enough to attract leader companies.
Leader company.- It’s the most important company and is imitated by the others.
Follower company.- It doesn’t have a significant market share and it isn’t a problem for the leader company.
OBTAINING AND ANALYSIS OF THE COST OF PRODUCTION AND PROFIT.-
Total costs.- Are those that a company has in a production process or activity. They are the sum of the fixed costs and the variable costs: TC = FC + VC
Fixed costs.- They’re invariable if the quantity produced has small changes. Fixed costs are connected with the production structure and that is why they are called structural costs, and they are used to make reports on the degree of use of that structure. Example: If we make more bread, we won’t pay more rent for our industrial unit.
Variable costs.- They change if the activity level changes. That is, if the level of activity decreases, these costs decrease, and if the level of activity increases, these costs increase. Example: If we make more bread we need more flour. Except when there are structural changes, in the economic units - or productive units - the variable costs have a linear behavior, because the average value per unit tends to be constant. In Microeconomic Theory, variable costs aren’t linear, at first they grow at a more than proportional rate but after the inflection point they grow at a less than proportional rate.
Profit.- It’s the wealth that a person obtains from an economic process. Profit equals total revenue minus production and distribution costs. It’s the value of the outputs minus the value of the inputs. Economic profit indicates wealth creation. The negative profit is called a loss. In a free market, the more profit a company has, the more successful it is.
IDENTIFICATION OF THE MAIN ECONOMIC SECTORS IN ANDALUSIA.-
Primary Sector.- It has the lowest percentage of total production but it has a great relative importance with the other productive sectors. This importance is greater if we compare it with the primary sector of other Western economies, where it has been reduced to a minimum. The primary sector produces 8.26% of the total and employs 8.19% of the working population. It’s an uncompetitive sector since other economies with a much smaller working population produce much more. To this relative importance of the Andalusian primary sector must be added its long tradition in Andalusia, where it’s deeply rooted. The primary sector can be divided into a series of subsectors: agriculture, fishing, livestock, hunting, forest resources, mining and energy.
Agriculture.- Traditionally the main products have been wheat, olive trees and vine. In recent decades, as a consequence of the Common Agricultural Policy, traditional crops have decreased and the cultivation of wheat, rice, beet, cotton and sunflower has increased, however, the continuous reforms of the CAP have led to successive changes in agricultural productions. Greenhouses, mainly in Almería, have also increased, a striking case is El Ejido that can be seen from the International Space Station (ISS).
Fishing.- It’s a traditional activity in Andalusia and its importance is seen in the Andalusian diet. The Andalusian fishing fleet is the second largest in Spain, with a large fishing area that includes waters that don’t belong to Andalusia. Overexploitation problems exist today due to new fishing techniques and new fishing ships with heavy dredging and powerful freezers that can fish for several weeks. This modern fishing is associated with deep-sea fishing, while coastal fishing, except for the motorization of boats, continues to be a very traditional activity. All of the previously mentioned problems have led to rapid improvement in aquaculture, both on the coasts and in inland fish farms. For example, the Riofrío fish farm in Granada exports 40% of its caviar production, and competes in international markets with Russian and Iranian caviar.
Livestock.- Andalusian livestock is 10% of national livestock, while Andalusian agriculture is 30% of national agriculture, therefore, only 70% of Andalusian needs for meat and milk are supplied by Andalusian livestock. This situation is due to the water but also to historical reasons.
Hunting.- The most important in big game hunt are deer, wild boar, but also mountain goat, mouflon, fallow deer, roe deer, etc. The most important in small game hunt are the partridge, rabbit, hare, quail, thrush, pigeon, etc.
Forest resources.- Forest resources are very important due to their extension and diversification: pastures, fruits, wood, etc. and due to other aspects such as soil fixation, water regulation and maintenance of flora and fauna. In total, the forest area is 50% of the Andalusian surface, and half of this area is forests (more than ten trees per ha) the rest of the area without trees is pastures, bushes and rocky areas. The production value of forest areas is only 2% of agricultural production. Hunting, wood, fruits (pine nuts), cork and the use of pastures are the most important subsectors.
Mining and energy.- The exploitation of mining resources was done without taking into account that this is an exhaustible resource. Consequently, most of the mining areas (Linares-La Carolina, Riotinto and the Guadiato Basin) are now in decline due to the high cost of extraction and the lower calorific value in the case of coal. Despite this low profitability and the general crisis in the sector, it still has some importance. If we compare the value of extractions with the rest of Spain, we can see that Andalusia has 59% of metal extractions, especially pyrite and iron, Andalusia has 98% of the gold and silver extraction and 100% of the strontium.
Industry.- The development, in the 19th century, of the industries linked to mining extraction (Garrucha and Carboneras, Riotinto, El Pedroso, Peñarroya and Linares - La Carolina) failed. At the beginning of the 21st century, although there is a greater integration between mining extraction and industrial transformation, this is still insufficient and incomplete. The shortage of energy products causes a strong dependence on imported petroleum, although Andalusia has great potential for the development of renewable energy, especially solar energy and wind energy. There are other less important industries such as automotive, aeronautics, etc.
Building.- At the beginning of 2008 the international financial crisis got much worse, banks had a fall in their profits, and the stock market had sharp falls. In this context, the construction industry begins to show obvious signs of crisis: a sharp drop in sales, a drop in housing prices, a rise in non-performing loans or an increase in unemployment in the sector (for example, the half of real estate agencies close). In February 2008, the Spanish economy showed obvious symptoms of an economic crisis, because unemployment had the highest growth in the last 25 years.
Tertiary sector. - This sector has had a very important growth in the last decades. It was a minority and is now a majority in Western economies. This process has been called outsourcing of the economy and has been very important in the Andalusian economy. In 1975 the tertiary sector produced 51.1 of Andalusian gross added value (GVA) and employed 40.8%, while in 2007 it produced 67.9% of GVA and 66.42% of jobs. However, this growth in the tertiary sector was earlier than in other developed economies and was independent of the industrial sector.
Commerce.- It’s focused on the export of agri-food products and the import of energy products. The three main countries that buy Andalusian products are Germany, France and Italy with 33% of total exports. The economies of these countries buy the majority of Andalusian agri-food products. On the other hand, Algeria, Nigeria and Russia mainly sell petroleum to Andalusia with 24.2% of imports. The challenge for Andalusia in the future is to diversify its exports to other more elaborate products with greater added value and to reduce its dependence on exports of energy products.
Tourism.- Andalusia is the first Spanish community in tourism with almost 30 million visitors a year. The main sites are the Costa del Sol and Sierra Nevada. The Andalusian situation, in the South of the Iberian Peninsula, makes it one of the warmest places in Europe. The Mediterranean climate predominates throughout the territory, which gives a large number of hours of sunshine, and together with the existence of a large number of large beaches, it’s ideal for developing sun and beach tourism.
TOPIC 2.- EXCHANGE AND MARKET. NATIONAL MAGNITUDES AND INDICATORS OF AN ECONOMY
PART A.- EXCHANGE AND MARKET
Definition.-It’s the amount of goods and services that buyers are willing and able to buy at different prices and conditions given at a given time.
eterminants of individual demand.-
The price of the good.- The higher the price, the lower the demand
The level of income.- The higher the level of income, the higher the demand (for normal goods and on the contrary if the goods are inferior-chicory, or services such as that of the shoemaker-)
Personal tastes.- If a product is fashionable, its demand increases
Government policies.- The government can cause the demand for a product to increase (for example, certain regulations may force to increase the demand for a certain good)
The price of substitute goods and the price of complementary goods.-
Substitute goods (goods that aren’t consumed at the same time and satisfy the same need).- If the products are substitutes, the higher the price of one of them, the greater the demand for the other (if the rest of the circumstances are kept constant). For example, butter and margarine.
Complementary goods (goods that are consumed at the same time and satisfy the same need).- If the products are complementary, the higher the price of one of them, the lower the demand for the other (if the rest of the circumstances are kept constant). For example, the car and fuel.
Movement along the demand curve.- There is movement along the demand curve when a change in price causes the quantity demanded to change. It’s important to distinguish between movement along the demand curve and a shift in the demand curve.
Shift on the demand curve.- The shift of the demand curve takes place when there is a change in the relationship between quantity and price that is brought about by a change in any of the factors that influence demand except price. A shift in demand results in a new demand curve. When income increases, the demand curve for normal goods shifts to the right.
Shape of the Demand Curve.- The demand curve usually slopes downward from left to right; that is, it has a negative slope (with two theoretical exceptions: the Veblen goods and the Giffen goods).
Veblen goods.- It’s stated that some types of high-end goods, such as diamonds, or luxurious cars, are Veblen goods, decreasing their prices decreases the preference of people to buy them because they are no longer perceived as exclusive or high standing products. Similarly, an increase in the price can increase that high standing and the perception of exclusivity, therefore it is the most preferable good.
Giffen goods.- A Giffen good, for example rice (or bread), is one that people consume more if the price rises, violating the law of demand. In normal situations, when the price of a good rises, the substitution effect causes people to buy less of it and more of substitute goods. In the Giffen good situation, there are no cheaper and closer substitutes available. Due to the lack of substitutes, the income effect dominates, guiding people to buy more of the good, even if its price rises. Consumers get poorer so they concentrate their spending on these goods
Definition.- It’s the quantity of goods and services that producers are willing and able to offer at different prices and conditions given at a given moment.
Shape of the curve.- In a Cartesian diagram of ordered price and abscissa quantity, the supply curve usually slopes upward from left to right; that is, it has a positive association. The positive bias is often referred to as the "law of supply" which means that producers will offer more of the goods and services if their price increases.
Determinants of individual supply.-
The price of the product.- The higher the price, the higher the supply
The cost of the production factors.- The higher the cost, the lower the supply
The availability of the production factors.- The greater the availability, the greater the supply.
The quantity of goods produced.- The greater the quantity, the greater the supply.
The expectations or objectives of the companies.- The strategy of the company also conditions the quantity offered
Definition.- It’s the measure of the way in which the quantity supplied reacts to a change in price.
Formula.- Elasticity of supply is the percentage of change in the quantity supplied over the percentage of change in the price
Example.- If, in response to a 10% increase in the price of a good, the quantity supplied increases by 20%, the elasticity of supply would be 20%: 10% = 2
Inelastic-elastic.- The elasticity of supply is always positive because when the price changes, the quantity also changes in the same direction. By agreement it was established that when its value is between zero and one it is said to be inelastic and when it exceeds this value it is said to be elastic. Supply is normally more elastic in the long term than in the short term because in the latter case we can only vary the amount of labor and raw materials in the production process, while capital remains fixed. In the event that there is production capacity without also using the elasticity would be greater since it could be used to increase production.
Stocks.- The quantity of goods offered may, in the short term, be different from the quantity produced, and producers will have stocks that they can increase or spend.
Determinants of the price elasticity of supply.-
The existence of raw materials available for the production process.- The case of petroleum is a good example. If this raw material isn’t available, the production process isn’t possible.
The duration of the production process.- A long production process limits the possibility of increasing the quantity supplied. For example, the supply of new housing is very inelastic.
Underutilized capacity.- The greater the spare capacity in an industry, the easier it would be to increase production if prices rise
The ease of resources to move within the industry.-
The storage capacity of companies.- If they have more goods in stock, they will be able to respond to a change in price more quickly)
Supply curves that change its slope.- The labor supply curve will slope upwards and to the right (positive slope), as it does up to point E, for example. This individual will continue to increase his labor supply services as the salary increases to point F where he is working HF hours (each time period). Beyond this point you will begin to reduce the amount of work hours you offer (for example, at point G you have reduced your work hours to HG). Where the supply curve has a positive slope (positive elasticity of labor supply versus wages), the substitution effect is greater than the income effect, that is, it substitutes leisure for wages. Where it slopes upwards and to the left (negative elasticity), the income effect, that is, wages is substituted for leisure, is greater than the substitution effect. The direction of the incline may change more than once for some individuals, and the labor supply curve is likely to be different for different individuals. The job supply curve must start at the Minimum wage/hour (MW/hour).
Definition.- An economic equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the equilibrium of economic variables will not change. It’s the point at which the quantity demanded and the quantity supplied are equal. Market equilibrium, for example, refers to a condition where a market price is established through competition such that the quantity of goods or services sought by buyers is equal to the quantity of goods or services produced by sellers. This price is often called the equilibrium price and will tend not to change unless demand or supply changes.
Interpretations.- In most interpretations, classical economists such as Adam Smith held that the free market would tend toward economic equilibrium through the price mechanism. That is, any excess supply (zone B) for a price higher than the equilibrium price (market excess or glut) would lead to price cuts (for example 2x1), which decrease the quantity supplied (reducing the incentive to produce and sell the product) an increase in the quantity demanded (offering consumers bargains), automatically disappearing the glut. Similarly, in an unconstrained market, any excess demand (or shortage) (zone A) would lead to the price increasing, reducing the quantity demanded and increasing the quantity supplied (since the incentive to produce and sell increases). As before, the imbalance (here, the scarcity) disappears. This automatic disappearance of non-equilibrium price situations distinguishes markets from centrally planned economies, which often have difficult times to achieve equilibrium prices and suffer from persistent shortages of goods and services.
Definition.- Induced demand is the phenomenon that occurs when supply increases and more than one good is consumed, that is, supply pulls consumption. This is entirely consistent with the economic theory of supply and demand; however, this idea has become important in the debate on the expansion of transport systems, and is often used as an argument against the expansion of highways (the more lanes there are, the more cars circulate), such as main roads to get to work. This is considered by some as a factor that contributes to urban expansion.
Road trip price.- A road trip can be considered to have an associated cost or price (the general cost -monetary and non-monetary-) that includes miscellaneous expenses (for example, fuel and tolls) and the opportunity cost of the time spent traveling, which is usually calculated as the product of the travel time and the value of the travelers' time. When road capacity increases, initially there is more space on the road per vehicle than there was before, so congestion is reduced, and consequently the time spent traveling is reduced - reducing the overall cost of each trip (affecting at the second cost mentioned in the previous paragraph). In fact, this is one of the keys to building new capacity on the highway (the reduction in travel time). A change in the cost (or price) of the trip results in a change in the amount consumed.
In neoclassical economics and microeconomics, perfect competition describes the perfect form of a market in which there are many small firms, all producing homogeneous goods and many consumers.
In general, a perfectly competitive market is characterized by the fact that no single company has an influence on the price of the product it sells. Because the conditions for perfect competition are very strict, there are few perfectly competitive markets.
In the short term.
In perfect competition, in the short term, inefficient situations can arise (we could manufacture the given production at a lower cost or we could manufacture more production at the given cost) since production doesn’t have to occur when the marginal cost (the cost added by the last unit produced -mc-) is equal to the average cost (ac), although the distribution may be efficient (the distribution of resources among alternatives coincides with the consumer's taste).
Production under perfect competition will always tend to have marginal costs (mc) equal to marginal revenue (mr). However, in the long run, such markets are both: productively efficient and efficient in the allocation of scarce productive resources.
Extraordinary profit.- In the short term, it’s possible for an isolated company to obtain extraordinary profit. This situation is shown in the graph. If the average price or income, indicated by P, is above the average cost indicated by C, we would obtain an extraordinary profit P - C per unit sold. The opposite situation could also occur.
In the long term.- However, in the long term, the positive benefit can’t be maintained. The arrival of new companies or the expansion of existing ones in the market causes the (horizontal) demand curve of each company to shift downwards, bringing down at the same time the price, the average income curve, and the marginal income curve. The bottom line is that, in the long run, the company will only make a normal profit (zero extra profit). Its horizontal demand curve will touch its average total cost curve at its lowest point.
Many buyers/many sellers.- Many consumers with the willingness and ability to buy the product at a certain price. Many producers with the willingness and ability to offer the product at a certain price. And in no case with the ability to individually influence the price
Low entry/exit barriers.- It’s relatively easy to enter or exit the market as a company. There are no limitations on the number of companies that can participate, and no administrative authorization or licenses are required.
Perfect information.- For both consumers and producers knowing the price and the quantity offered
The objective of companies is to maximize profits.- The objective of companies is to sell when marginal cost meets marginal revenue, where they generate the maximum profit
Homogeneous products.- The characteristics of any given market good or service don’t vary across the suppliers (there are no brands, no designations of origin or other elements that distinguish the products)
Perfect mobility of factors.- Companies can allocate their resources to produce the goods and services that provide them with greater profitability, without any limitation
Definition.- A monopoly (from the Greek “monos”, only + “polein”, to sell) exists when an individual or a specific company has sufficient control over a particular product or service to significantly determine the terms in which other individuals will have access to it. Monopolies are characterized, therefore, by a lack of economic competition for the good or service they provide and a lack of viable substitute goods.
Competition Laws.- In many jurisdictions, competition laws place specific restrictions on monopolies. The maintenance of a dominant position or a monopoly in the market isn’t illegal in itself, however certain categories of behavior can, when a company is dominant, be considered abusive and therefore be met with legal sanctions.
Legal Monopoly.- A government-granted monopoly or legal monopoly, by contrast, is approved by the State, often to provide an incentive to invest in risky ventures.
Government monopoly.- The government can also reserve the company for itself, thus forming a government monopoly.
Monopoly Revolution Theory.- If one company raises prices too high, then others can enter the market if they can provide the same good, or a substitute, at a lower price. The idea that monopolies in markets with easy entry don’t need to be regulated is known as the "theory of monopoly revolution."
Altering the market.- A monopolist can - unlike a competing company - alter the market price for his own convenience; a decrease in the level of production results in a higher price. Pure monopolies are said to "face downward sloping demand." An important consequence of such behavior is clear: a monopoly selects a higher price and a smaller quantity of production than a price-accepting company; that is, less is available at a higher price.
Monopoly and efficiency.- It’s often argued that monopolies tend to become less efficient and innovative over time, becoming “satisfied giants”, because they don’t have to be efficient or innovative to compete in the market. Sometimes this loss of efficiency can increase the ability of a potential competitor to overcome barriers to entry, or provide incentives for research and investment in new alternatives. This theory holds that, in some circumstances, (private) monopolies are forced to behave as if they were competitive at the risk of losing their monopoly to new entrants. This is likely to occur when the barriers to entering a market are low.
Short term.- In the short term it may be good to allow a company to try to monopolize a market. When monopolies aren’t broken through the open market, sometimes a government will intervene, either regulating the monopoly, or transforming it into a publicly regulated monopoly environment or even including the division of the monopoly (see antitrust law). Public utility companies are often efficient with a single operator and therefore less susceptible to efficient division, but are often heavily regulated (example: Spain's deregulation of telecommunications)
Forms for the emergence of a monopoly.-
United States.- A special trust or business trust is a business entity formed to try to monopolize business, dominate trade, or set prices. Trusts gained economic power in the United States in the late 19th and early 20th centuries. Some, but not all, were organized as trusts in the legal sense. They were often created when company bosses convinced (or forced) shareholders of all companies in an industry to bring their shares to a Board of Directors, in exchange for dividends. The Board would then manage all the companies in "trust" by the shareholders (and minimizes competition in the production process).
Vertical integration.- A trust is a vertical integration of companies so that an entire production process is under the control of a single company
Cartel.- Through this figure, oligopolies can become monopolies when several suppliers from the same sector act together to coordinate services, prices or sale of goods. It would be a horizontal integration of companies located in the same sector of activity.
Mergers and acquisitions.-
Merger.- A merger is a combination of two companies into a larger one. Such actions are commonly voluntary and involve an exchange of shares. The stock exchange is often used because it allows the shareholders of the two companies to share the risk involved in the deal. A merger may look like a takeover but, in the former case, it results in a new name for the company (often combining the names of the original companies) and a new brand; in some cases, qualifying the combination as a merger rather than an acquisition is done purely for political or marketing reasons.
Acquisition or absorption.- In this case, it means the disappearance of the acquired company. An acquisition can be friendly or hostile (public offer). In the first case, the companies cooperate in the negotiations; in the second case, the target company to be absorbed isn’t willing to be bought or the Board of Directors of the company to be absorbed has no prior knowledge of the offer. Acquisition usually refers to the purchase of a smaller company by a larger one. It’s known as reverse takeover when a smaller company will acquire management control of a larger or older company and retain its name for the combined entity. Reverse takeover also occurs when a private company has strong propects and its eager grow financially buys a company listed on a stock market. Achieving successful acquisition has proven to be very difficult, statistics show that 50% of acquisitions were unsuccessful.
TYPES OF MONOPOLY.-
Pure monopoly.- If there is a single seller in a certain industry and there are no close substitutes for the good that is produced by it, then the market structure is that of a pure monopoly.
Artificial monopoly.- It’s a monopoly created by the government through artificial barriers to entry such as patents, (for example, the pharmaceutical industry) and copyrights, (for example, the audiovisual industry).
Natural monopoly.- A natural monopoly occurs when, due to economies of scale of a particular industry, maximum efficiency of production and distribution is carried ouy through a single supplier. Traditional examples include water and electricity services. In recent years, technological advances have allowed productive sectors that traditionally have functioned as natural monopolies, now no longer justified. It may also depend on the control of a natural resource
Monopolistic competition.- It’s a very common market structure where many competitive producers sell very similar products that are differentiated from each other by some variable (that is, the products are close substitutes, but not exactly the same). Common examples include markets for restaurants, cereal, clothing, shoes, and service companies in large cities.
Monopsony.- A monopsony (from ancient Greek (monos) "only" + (opsonia) "buy") is a form of market in which only one buyer faces many sellers.
Bilateral monopoly.- In a bilateral monopoly there are both a monopoly (a single seller) and a monopsony (a single buyer) in the same market. In such a market price and output will be determined by non-economic forces such as the bargaining power of both buyer and seller.
Definition.- It’s a form of market in which a market or industry is dominated by a small number of sellers (oligopolists). The word derives from the Greek "oligo" (few) and "opoly" (sale). Because there are few participants in this type of market, each oligopolist knows the actions of the others. The decisions of a company influence, and are influenced by the decisions of other companies. Oligopolists' strategic planning always involves taking into account the likely responses of other market participants. This causes oligopolistic markets and industries to be at high risk of collusion.
Collusion.- Oligopolistic competition can lead to a wide range of different outcomes. In some situations, companies may employ restrictive trade practices (market division, pricing, etc.) to restrict or limit competition, raise prices and restrict production mainly in the same way as a monopoly. When there is a formal collusion agreement, it is known as a cartel. A good example of a cartel can be OPEC, which has a profound influence on the international price of petroleum.
Price Leadership.- Companies sometimes operate in secret in an attempt to stabilize unstable markets, to reduce the inherent risks (economic losses) in these markets to make investments and even significant outlays for product development. There are legal restrictions for such collusions in most countries. There doesn’t have to be a formal agreement for collusion to take place (although for the act to be illegal there would have to be actual communication between the companies) - for example, in some industries, there might be a known market leader who informally sets prices for the other producers to respond, known as price leadership.
Approaching Perfect Competition - In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient result approaching perfect competition. Competition in an oligopoly may be greater than when there are more companies in an industry but they are regionally located and don’t compete directly against each other.
MARKET FOR GOODS AND SERVICES IN PERFECT COMPETITION.-
Functioning.- The supply and demand of a product determine an equilibrium price, and at this price the companies freely decide the quantity they’re going to produce. Consequently, the market determines the price and each company accepts this price as a fixed data and can’t influence it (accepting price)
Production of each company.- Each company will produce the quantity that its supply curve indicates for this price. The supply curve of each company is conditioned by its production costs.
Minimization of costs and equalization of profits.- Inefficient companies won’t be able to leave the sector in the short term. But in the long term they will sell their facilities, or make the necessary adjustments, therefore, there is a tendency to minimize costs and to equalize profits in perfect competition.
Perfectly inelastic supply curve.- Land was sometimes defined in classical and neoclassical economics as the "original and indestructible power of the soil." Georgists maintain that this implies a perfectly inelastic supply curve (ie, zero elasticity). This means that the availability of this resource is very limited in the short term, for example, the fishing grounds where boats can go to fish are what they are, the development of new fishing areas implies investment and planning by fishermen and administration.
Shifts in the demand curve.- As can be seen in the following graph, the price of land will depend on demand. For a given period of time the price will be set in this way.
Suppliers and demanders for work.- Labor markets function through the interaction of workers and employers. Labor economics looks at the suppliers of labor services (the workers), the demanders of labor services (the employers), and tries to understand the resulting patterns of wages, employment and income.
Labor demand and salary determination.- The labor demand is a derived demand. If the marginal revenue is greater than the marginal cost of a company, (what hiring brings me is greater than what it costs me) then the company will employ the worker.
Wages differences.- Wage differences exist, particularly in mixed and fully/partially flexible labor markets. For example, the wage of a doctor and that of a cleaning employee, both employed by Social Security, differ greatly. But why? There are many factors concerning this issue. This includes the worker's Marginal Income MRP (see above). The marginal income of a doctor is much higher than that of a cleaning employee. Also, the barriers to becoming a doctor are much greater than to becoming a cleaning employee. For example, to become a doctor you need a lot of education and training that is expensive, and only those who are socially and intellectually advantaged can succeed in such a demanding profession. The cleaning employee, however, requires minimal training. The supply of doctors, therefore, would be much more inelastic than the supply of cleaners. The demand would also be inelastic if there is a high demand for doctors, so Social Security will pay higher wages to attract professionals.
Labor supply curve.- (See point "Supply curves that change their slope" of this same topic).
FINANCIAL CAPITAL MARKET.-
Capital Market.- The capital market is the market for securities, where companies and governments can raise long-term funds. It’s a market in which money is borrowed for periods longer than one year. The capital market includes the stock market and the bond market.
Money Market.- The money market is a global financial market for short-term loans. Provides short-term liquidity for the global financial system. The money market is where short-term obligations such as Treasury bills, commercial paper and bank acceptances are bought and sold.
Main determinants of the capital market.- They’re the income and the interest rate
LIMITS OF THE MARKET MECHANISM AND ITS REPERCUSSION ON CONSUMERS.-
Development process.- A number of Third World countries were former colonies and with the end of imperialism, many of these countries, especially the smaller ones, faced the challenges of building a nation and institutions on their own for the first time. Due to this common origin, many of these nations were, throughout the 20th century, and are still developing in economic terms today. This term when used today generally denotes countries that haven’t developed to the same levels as the countries of the Organization for Economic Cooperation and Development (OECD), and that are, therefore, in the process of development.
Third World Status.- In the 1980s, the economist Peter Bauer offered a competent definition for the term Third World. He argued that attaching Third World status to a particular country wasn’t based on any stable economic or political criteria, and was primarily an arbitrary process. The great diversity of countries that were considered Third World, from Indonesia to Afghanistan, which ranges widely from the economically primitive to the economically advanced and from the politically not aligned with the Soviet Union. The only characteristic that Bauer found common in all Third World countries was that their governments demand and receive Western aid (the donation of which he strongly opposes). Therefore, the term Third Word was flawed and misleading even during the Cold War period.
Processed products-raw materials.- Third World countries sell raw materials and buy processed products that are more expensive; to put an end to this, the countries of East and South-West Asia have substituted imports and developed export industries.
PART B.- NATIONAL MAGNITUDES AND INDICATORS OF AN ECONOMY
INTERPRETATION OF NATIONAL AND INDIVIDUAL WEALTH.-
Wealth-income.- From an individual perspective, wealth is the amount of property or assets owned by someone. Instead, income is the sum of all wages, profit, interest payments, and other ways of earning money in a given period of time. If I save part of my income I’m generating wealth.
National wealth.- From a national perspective, national wealth will be the amount of properties owned by a nation, this definition could include the country's infrastructure, cultural heritage, etc.
CIRCULAR FLOW OF INCOME.-
Relationship between families and companies.-
Real flow - monetary flow.-
The real flow that goes from companies to families are goods and services and, as a counterpart, the monetary flow that goes from families to companies is consumer spending
The real flow that goes from families to companies are the production factors and, as a counterpart, the monetary flow that goes from companies to families are wages, income, dividends, etc.
Relationship between families and businesses and the government.-
Real flow-monetary flow.-
The real flow that goes from the State to families and companies are goods and services and, as a counterpart, the monetary flow that goes from families and companies to the State are taxes.
The real flow that goes from families and companies to the State is work and, as a counterpart, the monetary flow that goes from the State to families and companies are wages.
OBTAINING THE INTERNAL PRODUCT AND CALCULATION AND INTERPRETATION OF THE MAIN RELATED QUANTITIES.-
Gross domestic product (GDP) .-
Definition.- The Gross Domestic Product (GDP) or Gross Domestic Income, a basic measure of the economic performance of an economy, is the market value of all final goods and services made within the borders of a nation in a year.
Gross Domestic Product can be defined in two ways:
Gross Domestic Product at market prices.- It’s equal to the total expenses for all final goods and services produced within a country in a stipulated period of time (usually a 365-day year). GDPmp = Consumption + Gross investment + Government expenditures + (Exports - Imports), or, GDPmp = C + I + G + (X - M)
Gross Domestic Product at factor cost.- It’s equal to the sum of the added value of each stage of production (intermediate stages) by all industries within a country, in the period. GDPfc = Added Value of the Primary Sector + Added Value of the Secondary Sector + Added Value of the Tertiary Sector
RELATIONSHIP BETWEEN GDPfc AND GDPmp.- GDPfc = GDPmp - Indirect taxes (mainly VAT) + Subsidies in production and imports. GDPfc = GDPmp – Ti - Su
Net Domestic Product at factor cost.- The Net Domestic Product at factor cost (NDPfc) is equal to the Gross Domestic Product at factor cost (GDPfc) minus depreciation (loss of value of industrial equipment, etc.) in the capital goods of a country. NDPfc = GDPfc - Dep
Net National Product at factor cost.- The Net National Product at factor cost (NNPfc) is the Net Domestic Product at factor cost (NDPfc) plus the income earned by citizens abroad, minus the income earned by foreigners in the country. NNPfc = NDPfc + IEC - IEF
Net National Product at market prices.- The Net National Product at market prices is the Net National Product at factor cost plus indirect taxes minus subsidies in production and imports. NNPmp = NNPfc + Ti - Su
Example.- Calculate the NDPfc with this information: C = 500; I = 100; G = 200; X = 20; M = 30; Ti = 70; Su = 15; Dep = 25; IEC = 33, IEF = 27
NDPfc = C + I + G + (X - M) - Ti + Su - Dep = 500 + 100 + 200 + (20 - 30) - 70 + 15 - 25 = 710
Definition of income distribution.- The distribution of income is how the total economy of a nation is distributed among its population
Geographic.- This analysis measures the differences between the inhabitants of the regions
Functional.- This analysis measures the differences between the factors: land, labor and capital
Personal.- This analysis measures the differences in the distribution of income between families
Measurement of personal income distribution.-
Lorenz curve.- The Lorenz curve is often used to represent the distribution of income where it shows at the bottom the percentage of families and the percentage of total income they have. The percentage of families is plotted on the X axis, the percentage of income on the Y axis.
Perfect equality.- Each point of the Lorenz curve represents a state such as “20% of all families have 10% of total income”. A perfectly equal income distribution would be one in which each person has the same income. In this case, "n% of the company would have n% of the income". This can be represented by a straight line y = x, called the line of perfect equality or equidistribution.
Perfect inequality.- On the contrary, a perfectly unequal distribution would be one in which one person has all the income and the others nothing. In that case, the curve would be y = 0 for x <100% and y = 100% when x = 100%. This curve is called the line of perfect inequality
Gini coefficient.- The Gini coefficient is the area between the line of perfect equality and the observed Lorenz curve. The larger this area, the greater the inequality. It’s defined as a proportion and can vary from 0 to 1 (0% to 100%): A low Gini coefficient indicates more distribution of income or wealth, with 0 corresponding to perfect equality (all having exactly the same income), while higher Gini coefficients indicate a more unequal distribution, with 1 corresponding to perfect inequality (eg a situation with more than one individual, where one person has all the income)
Social impact.- In the neoliberal system there is a struggle over whether the market can regulate itself and distribute the wealth of a country in a balanced way or whether the government should intervene. Radical neoliberalism thinks that the government shouldn’t intervene in the economy just to guarantee stability. The updated socialism and the center sectors are part of a softer neoliberalism and promote a government more concerned about social issues, but without abandoning the ideology of contemporary liberalism.
LIMITATIONS OF MACROMAGNITUDES TO JUDGE THE HEALTH OF AN ECONOMY. HUMAN DEVELOPMENT INDICATORS.-
Limitations of the Gross Domestic Product to judge the health of an economy.-
Distribution of wealth.- GDP doesn’t take into account the disparity in income between the rich and the poor.
Transactions outside the market.- GDP excludes activities that aren’t maintained through the market, such as family production and voluntary or unpaid services.
Underground economy.- The official GDP estimates but doesn’t take into account the shadow economy, in which transactions contribute to production, such as illegal trade and activities that avoid taxes, aren’t reported, causing GDP to be underestimated.
Non-monetary economy.- GDP bypasses economies where no money comes into play at all, resulting in inaccurate and abnormally low GDP statistics. For example, in countries with very large informal business transactions, parts of the local economy aren’t easily recorded. Barter may be more prominent than the use of money, even extending to services
Quality of the goods.- People may buy cheap, short-lived goods over and over again, or they may buy long-lasting goods less often. It’s possible that the monetary value of the items sold in the first case is higher than in the second case, in which case a higher GDP is simply the result of greater inefficiency and waste.
Quality improvements and inclusion of new products.- By not adjusting to quality improvements and new products, GDP underestimates true economic growth. For example, although computers today are less expensive and more powerful than computers of the past, GDP treats them as the same products, accounting for them only by monetary value.
What is being produced.- GDP counts the work it produces, not the net change or that resulting from repairing the damage. For example, rebuilding after a natural disaster or war can produce a considerable amount of economic activity and consequently boost GDP. The economic value of health care is another classic example - it can increase GDP if many people are sick and are receiving expensive treatment, but it isn’t a desirable situation. Alternative economic measures, such as the standard of living or per capita income, better measure the human utility of economic activity.
Externalities.- GDP ignores externalities or "evils" (the opposite of goods) such as damage to the environment. By counting the goods that increase utility but not deducting the "evils" or accounting for the negative effects of increased production, such as pollution, GDP overstates economic wellfare. The Genuine Indicator of Progress is therefore proposed by ecological economists and "green" economists as a substitute for GDP. In countries highly dependent on resource extraction or with a high ecological footprint, the disparities between GDP and the Genuine Indicator of Progress (GIP) can be very large, indicating ecological excess. Some environmental costs, such as cleaning up petroleum spills, are included in GDP.
Sustainability of growth.- GDP doesn’t measure the sustainability of growth. A country can temporarily achieve high GDP by overexploiting natural resources.
Basket of goods.- GDP growth can vary greatly depending on the basket of goods used in the economy and the relative proportions used to deflate GDP statistics.
Comparable basket of goods.- International comparisons of GDP can be inaccurate if they don’t take into account local differences in the quality of goods, even when adjusted for purchasing power parity. This type of adjustment to an exchange rate is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries. This is especially true for goods that aren’t globally traded, such as houses.
Alternatives to GDP.-
Human Development Index (HDI) .- The HDI uses GDP as part of its calculation and then indicators of life expectancy and education levels
Genuine Indicator of Progress (GIP) or Sustainability Index of Economic Well-being (SIEW).- The GIP and the similar SIEW try to address many of the criticisms seen above by taking the same raw information offered by GDP and then adjusting for income distribution , adds the value of family and volunteer work, and subtracts crime and pollution.
Wealth estimator.- The World Bank has developed a system to combine monetary wealth with intangible wealth (institutions and human capital) and environmental capital. Some people have seen beyond the standard of living a broader sense of quality of life or well-being. This also establishes that GDP is a crucial statistic for the success of a specific country.
Remaining Private Product.- Murray Newton Rothbard and other Austrian economists argue that, since government spending is financed by productive sectors, and produces goods that consumers don’t want, it is a burden on the economy and, therefore, should be deducted. Rothbard argues that even government tax surpluses should be deducted to create an estimate of the PPR.
Study on the European quality of life.- This study, whose first edition was published in 2005, assesses the quality of life across European countries through a series of questions on global and subjective life satisfaction, satisfaction with different aspects of life life, and a group of questions used to calculate deficits of time, love, being and having.
Gini coefficient.- It considers the income disparity within a nation, qualifying the GDP results that can lead us to erroneous conclusions
Gross National Happiness.- The Bhutan Center for Studies is currently working on a complex set of subjective and objective indicators to measure “national happiness” in various areas (standards of living, health, education, cultural vitality and diversity, use of time and balance, good governance, community vitality, and psychological well-being). This set of indicators would be used to assess progress towards Gross National Happiness, which they have already indicated as the nation's priority, above GDP.
Planet Happiness Index.- The Planet Happiness Index (PHI) is an index of human well-being and environmental impact, introduced by the New Economic Foundation (NEF), in July 2006. It measures the environmental efficiency with which human well-being is achieved within a given country or group. Human well-being is defined in terms of subjective life satisfaction and life expectancy.
ECONOMIC GROWTH, DEVELOPMENT AND SUSTAINABILITY.-
Definition and measurement.- Economic growth is the increase in the amount of goods and services produced by an economy over a period of time and is dependent, among other things, on an adequate increase in the creation of money. Growth is conventionally measured as the percentage increase in real Gross Domestic Product, or real GDP. GDP is usually calculated in real terms, that is, in terms of adjusted inflation, to eliminate the effect of inflation on the price of the goods and services produced. Another perspective used in the theories of economic growth ”or“ the theory of economic growth ”typically refers to the growth of potential production, that is, production at“ full employment ”that is derived from the growth in aggregate demand.
Short-term stabilization and long-term growth.-
Distinction.- Economists distinguish between short-term economic stabilization and long-term economic growth. The issue of economic growth is fundamentally concerned with the long term
Short term.- The short-term variation in economic growth is classified as the economic cycle, and almost all economies experience periodic recessions and expansions.
Long term.- The long-term path of economic growth is one of the central questions of economics; despite measurement problems, an increase in a country's GDP is generally taken as an increase in the standard of living of its inhabitants. Over very long periods of time, even small annual growth rates can have big effects. A growth rate of 2.5% per year will lead to a doubling of GDP within 28 years, while a growth rate of 8% per year (experienced by some of the Four Asian Tigers: Taiwan, South Korea, Singapore and Hong Kong) will lead to a doubling of GDP within 9 years. This exponential characteristic can aggravate the differences between nations. A growth rate of 5% seems similar to another of 3%, but after two decades, the first economy have grown 165%, the second only 80%
Econometrics.- From econo, economy and metrics, measurement, that is, measurement of the economy, is the branch of economics that uses mathematical methods and models to analyze, interpret and predict various variables and economic systems, such as price, reactions market, cost of production, business trends and economic policy, as well as long-term economic growth.
Growth of the Gross Domestic Product without creating inflation.- In dominant economies, the purpose of government policy is to encourage economic activity without encouraging growth in the general price level. The reasoning is that if more money is changing hands, but the prices of individuals' goods are relatively stable, then it’s proven that there is more productive capacity, and therefore more capital, because it’s capital that is allowing get more done at a lower cost per unit.
Definition.- The term business cycle refers to fluctuations in the economy, in a broad sense, in production or economic activity over several months or years. These fluctuations occur around a long-term increasing trend, and typically involve shifts over time between periods of relatively rapid economic growth (boom or bust), and periods of relative stagnation or decline (contraction or recession).
Peak.- All economic activity is in a period of prosperity, the economy is in full employment or is close to it so that all productive resources are employed
Recession.- A recession is a general slowdown in economic activity over a sustained period of time, or a contraction of the business cycle. During recessions, many macroeconomic indicators vary in a similar way. Output, measured by Gross Domestic Product (GDP), employment, investment spending, utilization capacity, household income, and business profits, all fall during recessions. An economic crisis is a sudden transition to a recession.
Depression.- A depression is a sustained and long decline in economic activity. It’s more severe than a recession, which is seen as a normal downturn in the business cycle. Considered a rare and extreme form of recession, a depression is characterized by abnormal growth in unemployment, restricted credit, decreased production and investment, numerous bankruptcies, reduced trade, and highly volatile fluctuations in relative value. of the currency, mainly devaluations, and of the value of the Public Debt. Deflation or hyperinflation are also elements that can occur in a depression.
Expansion.- Expansion is a growth in the level of economic activity, and of the goods and services available in the market. It’s a period of economic growth measured by an increase in real GDP. Typically it refers to a rebound in production and use of resources.
NEGATIVE EFFECTS OF GROWTH.-
Crime or pollution.- Growth has negative effects on the quality of life such as crime, because mafia and corruption are common in periods of economic expansion, or pollution because growth generates more pollution or deterioration of the environment.
Consumerism.- Growth encourages the creation of artificial needs. The industry encourages consumers to develop new tastes and preferences for growth.
GEO-4.- The 2007 United Nations GEO-4 report warns that we’re living far beyond our means. This report supports the basic reasoning and observations made by Thomas Malthus in the early 1800s, that is, economic growth depletes nonrenewable resources rapidly.
Income distribution.- The gap between the world's poorest and richest countries has been growing. Although average and median wealth have increased globally, this widens wealth inequality. Poor countries are now richer or less poor but the distance from the rich is greater
The Austrian School.- The Austrian School maintains that the concept of "growth" or the creation and acquisition of more goods and services is dependent on the relative desires of the individual. Someone may prefer more free time to acquiring more goods and services, but this fulfillment of wishes would have a negative effect on the increase in GDP. Furthermore, they claim that the notion of growth implies the need for a "central planner" within an economy. For Austrian economists, this ideal is unethical within the concept of free market economy, and that, on the other hand, they understand that it’s the system that best satisfies the needs of consumers. Therefore, Austrian economists believe that the individual should determine how much "growth" he wants.
David Suzuki.- Canadian scientist David Suzuki indicated in the 1990s that ecology can only sustain 1.5 to 3% new growth per year, and consequently, any requirement for more agricultural or silvicultural yields (exploitation of forests) would necessarily cannibalize the natural capital of the soil or forest. Some think that this argument can be applied even to the most developed economies.
ECONOMIC GROWTH AND DEVELOPMENT OF ANDALUSIA.-
Introduction.- The Andalusian economy is the third economy in Spain in Gross Domestic Product (GDP). The tertiary sector is the most important. Tourism is very important in this community and it is the first community in income for this concept. Agriculture is of great importance in the primary sector. The industry is located mainly in the West, on the coasts and in the main cities.
Unemployment rate.- A higher unemployment rate (compared to the rest of Spain) regardless of the economic cycle
Trade balance.- Negative Trade balance that is getting worse due to petroleum and imported items (especially in the last stage of economic expansion)
Primary sector.- Lower importance of the primary sector in the Gross Value Added (GVA). 5.5% in 2005. However, it continues to be an important sector in Andalusia due to its roots in Andalusian culture
Construction.- A great importance of construction, with 13% of the Gross Value Added (GVA) in 2005 (the situation has changed drastically since 2008)
Industry.- A weak development of the industrial sector, especially the agri-food industry 12% of the Gross Value Added (GVA) in 2005
Tertiary sector.- The tertiary sector is 62% of the Gross Value Added (GVA). Tourism is very important in this sector, with more than 23 million tourists in 2005.
Current situation.- Andalusia, until 2007, has been approaching the European average, modifying its production structure, diversifying its industry and progressively decreasing the importance of the primary sector in its economy. Since 2008 the situation has notably worsened.
Andalusian economic indicators.-
GDP.- The Andalusian Gross Domestic Product (GDP) at market prices was 127,681 million euros in 2005, which implies an average growth of 3.65% between 2000 and 2005, higher than the growth rate of Spain or of the Eurozone.
GDP per capita.- Consequently, the participation of the Andalusian economy in the national economy has grown 5 tenths (since 2000) to 13.8% of national production. Although, in the same period, the Andalusian population has grown a lot (459,000 people between 2000-2005), mainly due to immigration, therefore the Gross Domestic Product per capita is about €16,200. This GDP per capita is 75.5% of the EU-25 average, that is, outside the convergence objective at least for the period 2007-2013.
Current situation.- According to the regional accounting made by the National Institute of Statistics, the GDP per capita was €17,251, one of the smallest in Spain. Although the growth of the Community, especially in the industry and services sector was higher than the average for Spain, this is not the case when compared with the most dynamic communities and the Eurozone, therefore it is foreseeable that at this growth rate the gap will continue for years to come
TOPIC 3.- DECISION MAKING AND GOVERNMENT INTERVENTION IN THE ECONOMY
THE ROLE OF THE PUBLIC SECTOR.-
Definition.- It’s the set of administrative bodies through which the State complies, or enforces the policy or will expressed in the laws of the country.
Examples.- Examples of public sector activity range from social security, administering urban planning or organizing national defense and justice.
Forms.- The organization of the public sector (public property) can take several forms, including:
Direct administration.- The direct administration of public service fundamentally by means of civil servants paid through taxes. The service offered doesn’t have a specific requirement to have commercial success criteria, and production decisions are determined by the government.
State-owned companies.- They differ from direct administration in that they have greater commercial freedom and are expected to operate according to commercial criteria, and production decisions aren’t generally made by the government (although goals can be established for them by the government)
Partial entrustment or partial subcontracting.- A part of the Public Sector activity is transferred to a third party hired to carry out the activity. For example, the Ministry of Education entrusts a private company with the maintenance of computer equipment.
Complete entrustment or complete subcontracting.- A limit form is the complete subcontracting, with a private company providing all the service on behalf of the government. This can be considered a mixture of private sector operations with public ownership of assets, although in some ways the control and risk of the private sector is so great that the service can’t be considered part of the public sector.
Public sector matters.- The decision on which are the matters of the public sector as opposed to those of the private sector is probably the most important line of division between socialists, liberals, conservatives, with (in general terms) the socialists preferring a more projects or state companies in the economy, liberals favoring minimal state participation, and conservatives favoring state participation in some aspects of the economy but not in others.
Definition.- Economic policy refers to the actions that governments take in the economic field. It intervenes or covers interest rates and the government deficit as well as the labor market, and many other areas of government
Influence.- Such policies are often influenced by international institutions such as the International Monetary Fund or the World Bank as well as the political ideologies and consequent policies of the parties.
Types of economic policies.- A distinction is basically made between demand policies and supply policies, the former are based, for example, on increasing spending in the event of a recession while the latter would try to reduce costs through a labor reform or other type. Specifically, it can be classified into the following types:
Stabilization Policy.- It’s basically made up of the fiscal and monetary policies that we’re going to develop below.
Trade policy.- It refers to tariffs, trade agreements and the international institutions that govern them.
Growth and Development Policies.- Policies designed to create economic growth (GDP growth) and for economic development
Redistribution Policies.- Of income, property or wealth
Regulation Policies.- Of monopolies or oligopolies, measures to correct negative effects on the market, etc.
Industrial policy.- To promote strategic business sectors, etc.
Macroeconomic Stabilization Policy.- Macroeconomic stabilization policy attempts to stimulate a prosperous economy away from recession or by limiting the money supply to prevent excessive inflation.
Fiscal policy.- Fiscal policy, often linked to Keynesian economics, uses government spending and taxes to guide the economy
Deficit.- It’s defined as the difference between public expenditures and public income
Tax policy.- Refers to the manipulation of taxes to collect government revenue
Government expenditure.- We’re going to refer to all government expenses and transfers.
Monetary policy.- I’is concerned with the amount of money in circulation and, consequently, interest rates and inflation.
Interest rates.-It’s the price of money and can be influenced by the monetary authorities.
Cash ratios.- It’s the percentage of deposits that banks have to keep in the Central Bank.
Bills, bonds and obligations of the State.- They’re titles that represent a participation of the Public Debt and that the State sells in exchange for a remuneration fixed in advance (as for example in Spain the Treasury Bills)
Tools and goals.-
Goals.- Economic policy is generally directed to achieve particular objectives, such as inflation, unemployment or economic growth targets. Sometimes other objectives, such as military spending or nationalization are important (see Bolivia or Argentina)
Tools.- To achieve these goals, governments use political tools that are under their control. These generally include the interest rate and money supply, government taxes and spending, tariffs, exchange rates, the labor market, regulations, and many other aspects of government.
Selecting tools and goals.- The government and central banks are limited in the number of goals they can achieve in the short term. For example, there may be pressure on the government to reduce inflation, reduce unemployment, and lower interest rates while maintaining the stability of the currency. If all of these are selected as short-term goals, then the policy is probably incoherent, because a normal consequence of reducing inflation and maintaining currency stability is to increase unemployment and increase interest rates.
Demand policies versus supply policies.- It’s not a question of a dilemma but of complementary policies. For example, unemployment could potentially be reduced by altering laws relating to unions or unemployment insurance, as well as demand-side policies such as lowering interest rates.
Discretionary policies versus political rules.-
Discretionary policy.- For most of the 20th century, governments adopted discretionary policies as demand management with the aim of correcting the economic cycle. They used fiscal and monetary policy to adjust for inflation, production, and unemployment.
Stagnation with widespread inflation.- However, due to the widespread stagnation and inflation of the 1970s, politicians began to be attracted to the political rules
Dynamic inconsistency.- A discretionary policy is supported because it allows politicians to respond quickly to events. However, discretionary policies can be subject to dynamic inconsistency: a government may say that it tries to raise interest rates indefinitely to get inflation under control, but relaxing its stance later makes the policy unbelievable and, long, ineffective.
Rules-based policies. - A rule-based policy can be more credible, because it’s more transparent and easier to anticipate. Examples of rule-based policies are fixed exchange rates, interest rate rules, the Public Deficit limit in constitutions, the stability and growth pact. Some political rules may be imposed by external bodies, for example the Exchange Rate Mechanism for the currency of the International Monetary Fund when it intervenes in an economy.
Independent body.- A compromise between strict discretion and strictly rule-based policy is to grant discretionary power to an independent body. For example, the European Central Bank, which bases its actions on achieving the objectives set out in the ECB's Independence Law, but doesn’t approve the rules.
ANALYSIS OF THE COMPONENTS OF A STATE BUDGET. PUBLIC INCOME AND EXPENSES.-
The Budget.- The budget of a government is a summary or plan of the anticipated income and expenses of a government.
Preparation and approval.- The Spanish Budget is prepared once a year by the Ministry of Finance and approved in the project phase by the Council of Ministers. The Government presents them to the Congress, which first votes on their generic admission or the amendments to the entirety, which if successful entail their return to the Government. Once this process has been passed, the capacity for alteration by partial amendments is subject to the non-alteration of the budget balance. Later they go to the Senate, which makes a second reading, but whose ability to alter them is very limited, with a final referral to Congress. In the event that they aren’t approved, the extension of the budget from the previous year is foreseen.
The State budget.- House of His Majesty the King, General Courts, Ombudsman, Court of Auditors, Constitutional Court, Council of State, etc.
The budgets of the autonomous Bodies of the General State Administration.- Spanish Agency for International Cooperation, State Mobile Park, Traffic Headquarters, etc.
The Social Security budget.-
The budgets of the State Agencies.- Cervantes Institute, Spanish Data Protection Agency, National Intelligence Center, State Tax Administration Agency, National Competition Commission, Economic and Social Council, Spanish Institute of Foreign Trade, Nuclear Safety Council and Prado Museum.
The budgets of public bodies, whose specific regulations confers limiting character to the credits of their budget of expenses.-
The budgets of the state mercantile companies.-
The budgets of the foundations of the state public sector.-
The budgets of public business entities and other public bodies.-
The budgets of the funds lacking legal personality.-
Direct taxes and social contributions
About the rent
Other direct taxes
About the Added Value
On specific consumptions
About outside traffic
Other indirect taxes
Fees, public prices and other income
Other income from the provision of services
Sale of goods
Refunds from current operations
Of autonomous bodies
Of the Social Security
Of Companies, Public Business Entities, Foundations and other entities of the Public Sector.
From Autonomous Communities
Of the outside
Interest on advances and loans granted
Interest on deposits
Dividends and profit shares
Real estate income
Products of concessions and special uses
Sale of real inversions
Of the other real investments
Reimbursements for capital operations
Of autonomous bodies
From Autonomous Communities
Of the outside
Repayments of loans granted to the Public Sector
Repayments of loans granted outside the Public Sector
Current expenses on goods and services
Contingency fund and other contingencies
Financial liabilities (-)
Transfers between subsectors
INTERPRETATION OF TAX POLICIES AND THEIR EFFECTS ON INCOME DISTRIBUTION.-
Definition of fiscal policy.- Fiscal policy is the use of government spending and revenue collection to influence the economy
Fiscal policy versus monetary policy.- Fiscal policy can be compared to the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. There is a debate between which policy is most effective in promoting economic growth. The two main instruments of fiscal policy are government spending and taxes. Changes in the level and composition of taxes and government spending can impact the following variables in the economy:
Aggregate demand and the level of economic activity
The pattern of allocation of productive resources
The distribution of income
Stances.- The three possible positions in fiscal policy are neutral, expansive and restrictive.
Neutral. - A neutral fiscal policy stance implies a balanced budget where G = T (Government expenditure = Tax revenue). Government spending is completely financed by tax revenues and overall the budget result has a neutral effect on the level of economic activity.
Expansive.- An expansionary fiscal policy stance implies a net increase in government spending (G> T) through increases in government spending or a fall in tax revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansive fiscal policy is usually associated with a budget deficit.
Restrictive.- A restrictive fiscal policy (G <T) occurs when net government spending is reduced either through higher tax revenues or by reducing government spending or a combination of the two. This would lead to a smaller budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Tight fiscal policy is usually associated with a surplus.
Keynes.- John Maynard Keynes was one of the leading advocates of fiscal policy in the 1930s.
Economic effects of fiscal policy.-
Aggregate demand and the level of economic activity.- Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that adjusting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool to promote the framework for strong economic growth and, consequently, full employment. In theory, if this policy generated a deficit, it would be paid for by the income generated by economic growth.
Resource allocation pattern.- Fiscal policy can promote a new allocation of productive resources by varying taxes, promoting certain economic activities over others; or through increases and decreases in Public Expenditure promoting the production of certain goods and services (for example, in Spain renewable energies have been promoted through fiscal or other types of support).
The distribution of income.- Fiscal policy can also influence the distribution of income at different levels, personal, geographical and functional. Thus, for example, when different economic activities are promoted, different territories and different professional specializations and qualifications are being indirectly favored.
The multiplier effect.-
Definition.- In economics, the multiplier or multiplier effect of spending is the idea that an initial amount of spending (usually provided by the government) leads to increasing consumer spending and will result in an increase in national income greater than the initial amount of spending. Spending. In other words, an initial change in aggregate demand causes a change in aggregate output for an economy that is a multiple of the initial change.
Ralph George Hawtrey.- The existence of a multiplier effect was initially proposed by Ralph George Hawtrey in 1931. It’s particularly associated with Keynesian economics; some other schools of economics however rejected, or downplayed the importance of multiplier effects, particularly in the long run. The multiplier effect has been used as an argument for the effectiveness of government spending or tax relief in stimulating aggregate demand.
Factory.- For example: a company spends a million dollars to build a factory. The money doesn’t disappear, but a lot turns into wages for the masons, income for the suppliers, etc. Builders will have higher disposable income as a result, consumption will also grow, and therefore aggregate demand will also grow. Suppose the recipients of the new builders spending spend their new income, this will raise consumption and demand more, etc.
GDP.- The increase in the Gross Domestic Product is the sum of the increases in net income of all those affected. If the builder receives $1 million and pays $800,000 to subcontractors, he has a net income of $200,000 and a corresponding increase in disposable rent (the amount left after taxes).
Cycle.- This process lowers the amount collected towards subcontractors and their employees, each one experiences an increase in disposable income to the extent that the new work they do doesn’t displace other work that they have already done. Each participant who experiences an increase in his disposable income spends a portion of it on final (consumer) goods, according to his marginal propensity to consume, which causes the cycle to repeat itself an arbitrary number of times, limited only by capacity. idle available.
Short-term effect and long-term effect.- All the effects mentioned are short-term; in the long term, the income that the factory contributes to the economy will depend on its competitive capacity and not on the economic amount of the initial investment.
Another example.- When tourists visit some place they need to buy the plane ticket, take a taxi from the airport to the hotel, check in at the hotel, eat in a restaurant and go to see movies or tourist destinations. The taxi driver needs fuel for his taxi, the hotel needs to hire staff, the restaurant needs assistants and chefs, and the movies and tourist destinations need staff and cleaners.
Theories of John Maynard Keynes.-
Say's Law.- Some classical economists had believed in Say's Law, that supply creates its own demand, so that a “general glut” (unsold surplus) would therefore be impossible. Keynes argued that the aggregate demand for goods could be insufficient during economic recessions, leading to unnecessarily high unemployment and a loss of potential output. Keynes argued that government policies could be used to increase aggregate demand, thereby increasing economic activity and reducing unemployment and deflation.
Stimulating the economy.- Keynes stated that the solution to the depression was to stimulate the economy (“incentive to invest”) through some combinations of two proposals: a reduction in interest rates and in government investment in infrastructure. Government investment injects revenue, which results in more spending in the general economy, which successively stimulates more production and investment, implying even more revenue and spending, etc. The initial stimulation begins a cascade of events, whose total increase in economic activity is a multiple of the original investment (multiplier effect).
Full employment.- A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism, derived from the functioning of the market, moves production and employment towards levels of full employment. This conclusion disagrees with the economic proposals that assume a general trend towards equilibrium. In the "neoclassical synthesis", which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow by price adjustment (including wages, which is the price of labor) to achieve this goal.
Criticisms of fiscal policy.-
Stagflation.- Stagflation is an economic situation in which inflation and economic stagnation (a prolonged period of slow economic growth) occur simultaneously and remain unimpeded for a period of time. This situation prevents the implementation of Keynesian policies based on more spending, since they would cause more inflation.
Classical and neoclassical economists.- Some classical and neoclassical economists argue that fiscal policy may not have a stimulating effect; this is known as the Treasury Point of View (fiscal policy has no effect on unemployment, even during times of economic recession) and categorically rejected by Keynesian economics. The Treasury Point of View refers to the theoretical positions of classical economists in the British Treasury who opposed Keynes's call for fiscal stimulus in the 1930s.
Time.- Another possible problem with the fiscal stimulus includes the time lag between the implementation of the policy, and the detectable effects on the economy and the inflationary effects driven by increased demand. In theory, the fiscal stimulus doesn’t cause inflation when it uses resources that would otherwise have been idle. For example, if a fiscal stimulus employs a worker who would otherwise have been unemployed, there is no inflationary effect; however, if the stimulus employs a worker who would otherwise have had a job, the stimulus is increasing demand while the supply of labor remains fixed, leading to inflation. An example of a sectoral nature can be that of construction in the last economic expansion.
Displacement or expulsion effect.- In economics, the displacement effect is any reduction in private consumption or investment that occurs due to an increase in government spending. If the increase in government spending is financed by an increase in taxes, the increase in taxes would tend to reduce private consumption. If, on the other hand, the increase in government spending isn’t accompanied by an increase in taxes, the government borrowing to finance the increased public spending would increase interest rates, leading to a reduction in private investment. There is some controversy in modern macroeconomics on the subject
The intervention of the public sector in the Andalusian economy.-
In Andalusia, as in the rest of Spain, the public sector intervenes to control the economy and avoid the problems that arise with a pure market economy.
ASSESSMENT OF THE EFFECTS OF THE DEVELOPMENT OF THE WELFARE STATE.-
Interpretations.- There are two main interpretations of the idea of the welfare state:
Model.- A model in which the state assumes primary responsibility for the well-being of its citizens. This responsibility in theory should be comprehensive, because all aspects of well-being are considered and universally applied to citizens as a “right”.
Network of welfare provision entities.- The welfare state can also mean the creation of a “social safety net” of a minimum level of various forms of welfare. Here is some confusion between a "welfare state" and a "welfare society" in common debate on the definition of the terms. For example, the Food Bank, which organizes the distribution of basic foods among the poorest.
Modern welfare states.-
Europe.- In the period following the Second World War, many countries in Europe went from a partial or selective provision of social services to a relative complete coverage of the population.
Pensions, etc.- The activities of the current welfare states extend to the provision of welfare benefits (such as pensions or unemployment benefits in cash) and welfare services in kind (such as health or childcare services) .
Initial approaches to Social Security.- In Great Britain, in 1942, Social Security and United Services were created by Sir William Beveridge to help those who were in need of help, or in poverty. Beveridge volunteered for the poor, and created Social Security. He indicated that “All people of working age should pay a weekly contribution to Social Security. In return, the benefits would be paid to people who were sick, unemployed, retired or widows. The basic assumption of the report was the National Health Service, which provided free health care for Great Britain. The Universal Family Subsidy was a plan to give benefits to parents, encouraging people to have children allowing them to care for and support a family. This was particularly beneficial after WWII when Britain's population was declining. The Universal Family Allowance may have helped lead to the Baby Boom. The impact of the report was enormous and 600,000 copies were made.
Before 1939 (in Great Britain).- Sir William Beveridge recommended to the government that they should find ways to tackle the five giants, which are: Necessity, Sickness, Ignorance, Misery and Inactivity. He argued that, to cure these problems, the government should provide adequate income to the people, adequate health care, adequate education, adequate housing, and adequate jobs. Before 1939, health care had to be paid for, this was done through a wide network of mutuals, unions and other insurance companies that had the vast majority of Britain's working population as members. These mutuals provided sickness, unemployment and disability insurance, therefore providing people with an income when they couldn’t work. But from the Beveridge Report of 1942
In Spain.- In 1963 the Law on the Bases of Social Security appeared, the main objective of which was the implementation of a unitary and integrated model of social protection, with a financial basis of distribution, public management and participation of the State in financing. Despite this definition of principles, many of which were embodied in the General Law of Social Security of 1966, effective on January 1, 1967, the truth is that old contribution systems still survived far from the real wages of workers, the absence of periodic revaluations and the tendency to unity didn’t materialize, until many years later, when a multitude of overlapping organisms survived. For example, ISFAS and MUFACE are overlapping systems that coexist, even today, with Social Security.
Development.- Welfare systems have been developing intensively since the end of the Second World War. At the end of the century, due to its restructuring, part of its responsibilities began to be channeled through non-governmental organizations that became important providers of social services.
Two forms of welfare state.-
First model.- According to the first model, it’s fundamentally or primarily concerned with directing the resources that “the people need the most”. This requires tough bureaucratic control over the affected people, with maximum interference in their lives to establish who is "in need" and minimize scam. The unintended result is that there is a sharp divide between the recipients and the producers of social welfare or the funders of it. Producers tend to totally reject the idea of social welfare because they receive nothing. This model is dominant in the United States.
Second model.- According to the second model, the state distributes welfare with as little bureaucratic interference as possible, for all people who easily meet the established criteria (for example, having children, receiving medical treatment, etc.). This requires high taxation, of which almost everything collected is channeled to tax payers with minimal expenses for bureaucratic personnel. The intended - and also achieved in many cases - result is that there will be broad support for the system because most people receive at least something. This model was created by the Scandinavian ministers Kart Kristian Steincke and Gustav Möller in the 1930s and is dominant in Scandinavia and other European countries.
Dependent citizens.- A welfare state makes citizens dependent and less inclined to work. Some unemployment benefit systems discourage active job search.
Theft.- Another criticism characterizes welfare as theft of property or work. This criticism is based on the liberal human right to obtain and own property, where each human being owns his body, and owns the product of his body's work (for example, goods, services, land or money). It continues that the transfer of money by any state or governmental mechanism from one person to another is upheld as a theft of property and/or a violation of their property rights, even if the mechanism was legally established by a democratically elected assembly.
Fraud.- A third criticism is that the welfare state supposedly provides its dependents with a similar level of income for a minimum wage. Critics argue that fraud and economic inactivity are apparently quite common now in Britain and France and other European countries. Some conservatives in Britain claim that the welfare state has produced a generation of dependents (or several) who, instead of working, depend exclusively on the state for income and aid. The welfare state in Britain was created to provide certain people with a basic level of aid to alleviate poverty, but that, as a matter of opinion it has been expanded to provide a greater number of people with more money than the country can ideally afford or so some experts think. Some feel that this argument is demonstrably false: the aid system in Great Britain provides individuals with considerably less money than the national minimum wage, although people who are entitled to a variety of aid, including aid in kind, such as hosting costs that usually make the overall grants much higher than the basic statistics show.
High taxes.- A fourth criticism of the welfare state is that it results in high taxes. This is usually true, as is evident for places like Denmark (with a tax level of 48.9% of GDP in 2007) and Sweden (with a tax level of 48.2% of GDP in 2007). Such high taxes don’t necessarily mean less income for the entire nation, since state taxes ideally go to the people from whom the taxes come. These high rates (taxes) are argued to result in a greater redistribution of that income from citizens who don’t accept welfare (don’t receive assistance) to citizens who accept it (those who receive assistance).
More expensive.- A fifth criticism of the welfare state is the belief that services of social assistance given by the State are more expensive and less efficient than if the same services were given (offered) by private companies.
Anarchists.- The most extreme criticism of states and governments is from anarchists, who believe that all states and governments are undesirable and/or unnecessary. Most anarchists believe that while social welfare gives a certain level of independence from market (market-based) and individual capitalism, it creates dependence on the state, which is an institution that, according to this point of view, supports and protects capitalism in the first place.
The welfare state and social spending.-
Rich countries-poor countries.- Welfare provision in the contemporary world tends to be more advanced (broad) in countries with more strongly developed economies. Poor countries tend to have limited resources for social services. There is actually very little correlation between economic performance and welfare spending (see the example of the USA or Sweden, developed countries but with a different welfare provision strategy).
European Union.- There are individual exceptions on both sides, but the higher levels of social spending in the European Union aren’t associated with lower growth, lower productivity or higher unemployment, but rather with higher growth, higher productivity or lower unemployment.
Free market.- Likewise, the search for free market policies doesn’t lead to guaranteeing prosperity or social collapse.
Spending.- Countries with more limited spending, such as Australia, Canada, and Japan don’t do better or worse economically than countries with high social spending, such as Belgium, Germany, and Denmark.
The global impression.- There is a slight positive correlation between increased (broad) spending on social services and higher GDP per capita. Also a higher ranking on the Human Development Index (this concept will be developed later).
TOPIC 4.- FINANCIAL ASPECTS OF THE ECONOMY
Types of money.-
M0.- Banknotes and coins in circulation and in bank vaults, plus commercial bank reserves kept in their accounting at the Central Bank (minimum reserves and surplus or voluntary reserves). This is the basis from which other forms of money are created and is traditionally the most liquid measure of the money supply. M0 is usually called the monetary base.
M1.- Same as M0 + demand deposits (also known as current accounts and other deposits that function as demand deposits) + traveler's checks. M1 represents the assets that strictly make up the definition of money: assets that can be used to pay for a good or service or to pay a debt. Although checks linked to demand deposits are becoming less popular, automatic collection cards linked to these deposits are becoming more common. Like checks, automatic collection cards, as a means of completing a transaction through their link with demand deposits, can also be considered as a form of money.
M2.- Same as M1 + savings deposits (savings books), and also fixed-term deposits of up to two years and deposits available with notice of up to three months. M2 represents money and "close substitutes" for money. M2 is a broader classification of money than M1. Economists use M2 when they are waiting to quantify the amount of money in circulation and they try to explain the different monetary economic conditions. M2 is a key economic indicator used to forecast inflation.
M3.- Same as M2 + all other long-term deposits, institutional money market funds, short-term repurchase agreements (repos), along with other more liquid assets. M3 is not published or disclosed to the public by the central bank of the United States (in Europe it is).
Functions of money.-
Medium of exchange.- When money is used to mediate in the exchange of goods and services, it is performing a function as a medium of exchange. This avoids the inefficiencies of a barter system, such as the problem of double coincidence of needs.
Unit of account.- A unit of account is a standard numerical unit of measurement of the market value of goods, services and other transactions. Also known as a "measure" or "standard" of relative value and installment payments, a unit of account is a necessary requirement for the formulation of trade agreements that involve indebtedness. To function as a “unit of account”, what is being used as currency must be:
Divisible.- Divisible into smaller units without losing value; precious metals can be minted from bars, or cast into bars again
Homogeneous.- That is, a unit or piece must be perceived as equivalent to any other, for example: diamonds, works of art or real estate are not advisable as money
Weight, measure or size.- A specific weight, measure or size to be accounting comparable. For example, coins are often made with ridges around the edges, so that any extraction of material from the coin (lowering its value as a commodity) is easily detected.
Store of value.- To act as a store of value, a commodity, a form of money, or financial capital must be able to be saved, stored and recovered with confidence - and be predictably useful when it is recovered. Legal currency such as paper or electronic money, which is no longer backed by gold in most countries, is not considered by some economists as a store of value in exceptional situations (strong currency depreciation)
MONEY CREATION.- In current economic systems, money is created in two ways:
Central bank money.- All money created by the central bank in any of its forms (bills, coins, electronic money through loans to private banks)
Money from commercial banks.- Money created in the banking system through borrowing and lending, sometimes called bank money.
In the following table we assume that €100 is initially deposited in bank A, the bank reserves 20% and the rest is lent. The person or entity that receives the €80 deposits it in bank B, which in turn reserves 20% (€16) and lends the rest to a third person or entity.This process is repeated many times until, in theory, the reserves reached the initial €100.
INFLATION AND ITS CONSEQUENCES ON CITIZENS AND ON THE ECONOMY OF A COUNTRY.-
Definition.- In economics, inflation is an increase in the general level of prices of goods and services in an economy over a period of time.
Consumer price index.- Inflation is usually measured by calculating the rate of change of a price index, usually the Consumer Price Index. The Consumer Price Index measures the prices of a selection of goods and services purchased by a “typical consumer”. Therefore, inflation is the percentage change in a price index over a period of time (if the index goes from 100 to 102, inflation would be 2%).
Nominal value versus real value.- Price indices are used to convert nominal values to real values or vice versa. In economics, the nominal value refers to any price or value expressed in money of the day, as opposed to the real value, which is adjusted for the effects of inflation. Examples include a package of things like Gross Domestic Product and income. The nominal values do not specify how much of the difference is due to changes in the price level. The real values eliminate this ambiguity. The real values convert to the nominal values as if the prices were constant in each year of the series. Any differences in real values are then attributed to differences in package quantities or to differences in the amount of goods that money income can buy each year. Therefore, the real values indicate the quantities of the bundle of items or the purchasing power of the money income for each year in the series.
Calculation of real GDP.- Calculate the real GDP of 2008 if the nominal GDP was 40,000 and the price index was 130%.
REALgdp = NOMINALgdp : Index · 100 = 40,000 · 100 : 130 = 30,769.23
Calculation of nominal GDP.- Calculate the nominal GDP of 2008 if the real GDP was 70,000 and the price index was 120%.
NOMINALgdp = REALgdp . Index : 100 = 70.000 · 120 : 100 = 84,000
Types of inflation according to the value of the ratio.-
Hyperinflation.- Economists generally agree that high inflation rates and superinflation are caused by excessive growth in the money supply.
Moderate inflation.- The points of view on which factors determine low to moderate inflation are more varied. Low or moderate inflation can be attributed to fluctuations in real demand for goods and services, or changes in available supplies, such as during times of scarcity (in periods of hardship or crisis), in addition to the growth of the money supply. However, the consensus view is that a long sustained period of inflation is caused by a money supply growing (at a rate) faster than the rate of economic growth.
Causes of moderate inflation.-
Monetarists point of view.-
Money supply.- Monetarists believe that the most important factor that influences inflation or deflation is the management of the money supply, facilitating or hindering credit. They consider that fiscal policy, or government spending and taxation, as ineffective in controlling inflation.
Monetary phenomenon.- Monetarists claim that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. The theory of the quantity of money simply indicates that the total amount of spending in an economy is fundamentally determined by the total amount of money in existence (circulation).
Point of view of the Keynesians.-
Main cause.- Keynesian economic theory proposes that changes in the money supply don’t directly affect prices, and that visible or measurable inflation is the result of pressures in the economy expressing themselves in prices. Monetary supply is a major (but not the only) cause of inflation
Three types.- There are three main types of inflation, as part of what Robert J. Gordon calls the “model triangle”.
Demand inflation.- It is caused by increases in aggregate demand due to the increase in private and public spending. Demand inflation is generated for a faster rate of economic growth as a result of excess demand due to favorable market conditions that stimulate investment and expansion.
Cost inflation.- It is caused by a fall in the aggregate supply of certain goods and services. This may be due to natural disasters, a fall of potential production or increased prices of inputs for other reasons (in the production system). For example, a sudden decrease in the supply of petroleum, leading to increased petroleum prices, can cause cost inflation. Producers to whom petroleum is a part of their costs will pass it on to consumers in the form of increased prices.
Self-built inflation.- It is induced by adaptive expectations, and is often connected to the “price/wage spiral”. This type of inflation is based on the assumption that workers try to keep their wages above prices (above inflation), and that companies pass on these higher labor costs to their customers as higher prices, leading to a “ vicious circle".
Monetarists-Keynesians.- Monetarists emphasize keeping the growth rate of money constant, and using monetary policy to control inflation (increasing interest rates, slowing the increase in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary and fiscal policy (increasing taxation or reducing public spending to reduce demand).
Fixed exchange rates.-
Stabilize the value.- Under a fixed exchange rate regime, a country's currency is pegged in value to another currency or to a group of other currencies (or, sometimes, to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency. It can also be used as a means to control inflation. However, if the value of the reference currency rises or falls (appreciates or devalues), so does the currency pegged to it. This means, essentially, that the inflation rate in the country with a fixed exchange rate is determined by the inflation rate of the country of the currency to which it is pegged. Furthermore, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability.
Exchange rates.- Under the Breton Woods agreement, most countries in the world had currencies that were pegged to the US dollar. This limited inflation in those countries, but also exposed them to the danger of speculative attacks. After the Breton Woods agreement failed in the early 1970s, countries gradually returned to floating exchange rates. However, in the latter part of the 20th century, some countries reverted to a fixed exchange rate as part of an attempt to control inflation. This policy of using a fixed exchange rate to control inflation was used in many countries in South America in the latter part of the 20th century (for example, Argentina (1991-2002), Bolivia, Brazil and Chile). Argentina in this period linked its currency, the peso, to the US dollar.
Convertible into gold.- The gold standard is a monetary system in which the common medium of exchange is banknotes that are normally freely convertible into predetermined, fixed amounts of gold. The currency itself has no innate value, but is accepted by merchants because it can be exchanged for the gold equivalent.
Form of money.- Gold was a common form of representative money due to its rarity, durability, divisibility, homogeneity, and ease of identification. Representative (fiat) money and the gold standard were used to protect citizens from hyperinflation and other monetary policy abuses, as seen in some countries during the Great Depression. However, they were not without problems and criticism, and that is why they were partially abandoned by the adoption of the Breton Woods System. Under this system all the major currencies were pegged at fixed rates to the dollar, which itself was pegged to gold at the rate (or exchange) of $35 per ounce. This system finally collapsed in 1971 (as we have already studied), which caused most countries to switch to current or fiduciary currency, supported only by the laws of the country. Austrian economists were in favor of returning to a one hundred percent gold standard because of its advantages, especially because it protects against inflation.
Inflation rate.- Under a gold standard, the long-term rate of inflation (or deflation) would be determined by the growth rate of the gold supply relative to total production. Critics maintain that this would cause arbitrary fluctuations in the inflation rate, and that monetary policy would be essentially determined by gold mining, which some believed contributed to the Great Depression.
Price and wage controls.-
In wartime.- Another method, to correct inflationary problems, tried in the past has been the controls of prices and wages (income policies). These controls have been successful in wartime settings in combination with rationing. However, its use in other contexts is very uneven. Notable failures in its use include the imposition of wage and price controls in 1972 by Richard Nixon. For example, there may be excess demand for some goods and excess supply for others.
Temporarily.- In general, wage and price controls are seen as exceptional and temporary measures, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in an even stronger shortage. The usual economic analysis is that any product or service that is priced too low is superconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices.
Liberalize prices.- Temporary controls can complement a recession (in the short term) as a way to fight inflation (or deflation): controls make recessions more efficient (reducing the need to increase unemployment or maintain existing employment since the controls prevent a further drop in production). For example, unions tend to refuse labor reforms, promoted by governments, that allow lower wages that reduce the demand for goods and services. However, in general the advice of economists is not to impose price controls but to liberalize prices assuming that the economy will adjust and abandon economic activity that is not beneficial. Less activity will put less demands on whatever items are leading to inflation; labor, resources, and inflation will fall with total economic output. This often produces a severe recession, when productive capacity is redistributed from one sector to another more profitable and is therefore very unpopular with people whose livelihood is destroyed.
Cost of living adjustment.-
Indexation.- The real purchasing power of fixed payments (such as income or wages) is eroded by inflation unless they are adjusted for inflation to keep their real values constant (indexation). In many countries, employment contracts, retirement benefits, and government entitlements (such as Social Security unemployment benefit) are linked to the cost of living index, typically the Consumer Price Index. A cost of living adjustment adjusts wages based on changes in the cost of living index. Salaries are typically adjusted annually. They can also be linked to a cost of living index that varies by geographic (regional) location if the employee relocates.
Default future.- The causes of annual increases in employment contracts can specify retroactive or future growth percentages in payments to workers that are not strictly linked to any index. These negotiated increases in payments are colloquially called cost of living adjustments or cost of living increases because of their similarity to increases linked to externally determined indices.Many economists and severance analysts consider the idea that future predetermined "increases in the cost of living" are misleading for two reasons: (1) In most recent periods in the industrialized world, average wages have increased faster than most calculated cost of living indices (2) Most living cost look backward
THE FINANCIAL SYSTEM AND THE OPERATION OF THE EUROPEAN CENTRAL BANK.-
Definition of Financial System.- The financial system is the system that allows money transfers between savers and borrowers. It is made up of banks, savings banks, insurance companies, stock exchanges, etc.
European Central Bank.- The ECB is the central bank for the only European currency, the euro. The euro zone comprises the 19 countries of the European Union that have introduced the euro since 1999.
The European System of Central Banks.- The European System of Central Banks comprises the European Central Bank and the national central banks of all the member states of the European Union, whether they have adopted the euro or not.
The Eurosystem.- The Eurosystem includes the European Central Bank and the national central banks of those countries that have adopted the euro. The Eurosystem and the European System of Central Banks will coexist as long as there are member states of the European Union outside the euro zone.
Competences and objectives of the European Central Bank.-
Price stability.- The primary objective of the European Central Bank is to maintain price stability within the Eurozone, or, in other words, to keep inflation low. The Governing Council defines price stability as inflation (Harmonized Consumer Price Index) below, but close to 2%. Unlike, for example, the Federal Reserve (Central Bank) of the United States, the European Central Bank has only one primary objective with other objectives subordinate to it.
Monetary policy.- The key tasks of the European Central Bank are to define and implement monetary policy for the Eurozone, direct foreign exchange operations, and take care of (guard) the foreign reserves of the European System of Central Banks.
European banknotes.- Furthermore, it has the exclusive right to authorize the issuance of European banknotes. Member states can issue coins but the amount must first be authorized by the European Central Bank (since the introduction of the euro, the European Central Bank also has the exclusive right to issue coins). The bank must also cooperate within the European Union and internationally with other organizations and entities (IMF among others). Finally, it contributes to maintaining a stable financial system and supervising the banking sector. The latter can be seen, for example, in the bank intervention during the credit crisis of 2007 when it lent billions of euros to banks to stabilize the financial system. In December 2007 the European Central Bank decided, in conjunction with the Federal Reserve, under a program called “Auction Mandate”, to facilitate the improvement of the liquidity of the dollar in the eurozone to stabilize the money market.
Commercial banks (typical operations).-
Passive operations (borrowing money).-
Active operations (lend money).-
Loans.- The user receives the total amount agreed from the beginning, forcing him to return this and all the interests in certain days established before.
Credit accounts.- The bank allows the customer a credit for a certain period of time and up to a certain amount, forcing the customer to pay a commission and return the desired amounts within the stipulated time limit.
Discount of bills of exchange.- The bank advances to a person the amount of a commercial paper (bills of exchange and promissory notes).
Definition.- A stock exchange is a corporation or mutual organization that provides trading facilities for stockbrokers to exchange stocks and other securities (stocks, bonds, etc.).
Types of markets.-
Primary market.- The primary market is that part of the capital markets that deals with the issuance of new securities.
Secondary market.- The secondary market, also known as the “aftermarket”, is the financial market where previously issued securities and financial instruments such as stocks, bonds, options and futures are bought and sold for the second or successive times.
Liquidity.- The secondary market is vital for an efficient and modern capital market. In the secondary market, securities are sold and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (originally, the one way to create this liquidity was by bringing investors and speculators together in a fixed location regularly; this is how stock exchanges originated. As a general rule, the greater the number of investors participating in a given market, and the greater the centralization of that market, the more liquid the market.
Liquidity preference-capital preference.- Fundamentally, secondary markets assemble investors' preference for liquidity (that is, the investor's desire not to peg their money for a long period of time, in case the investor needs it to deal with unforeseen circumstances) with the capital preference of users (financial and non-financial entities) to be able to use the capital for a long period of time.
Exact price of the share.- The exact price of the share allocates scarce capital more efficiently when new projects are financed through primary supply markets; but in addition, accuracy can also matter in the secondary market because: 1) accuracy in price can reduce agency costs, and make a hostile takeover a less risky proposition and, consequently, move capital into the hands of better managers, and 2) the exact price of a share helps in the efficient allocation of external financing if debt or institutional loans are offered.
Control.- The National Securities Market Commission (CNMV) is the agency in charge of supervising and inspecting the Spanish Stock Exchanges and the activities of all participants in those markets.
MONETARY POLICY AND ITS EFFECTS ON INFLATION, GROWTH AND WELFARE.-
Definition of monetary policy.- Monetary policy is the process by which the government, central bank or monetary authority of a country controls (i) the supply of money, (ii) the availability of money, and (iii) the cost of money or type of interest, to achieve a group of objectives oriented to the growth and stability of the economy.
Functioning - Broadcast monopoly – Beginnings.- Monetary policy is based on the relationship between interest rates in an economy, (which is the price at which money can be borrowed), and the total money supply. Monetary policy uses a variety of tools to control one or both of them, to influence outcomes such as economic growth, inflation, exchange rates with other currencies, and unemployment. Where the currency is in a monopoly of issuance, or where there is a regulated system of issuance of the currencies through banks that are linked to the central bank, the monetary authority has the ability to alter the money supply and, consequently, influence the interest rate (to achieve political goals). The beginnings of monetary policy come from the late nineteenth century, where it was used to maintain the gold standard.
Types.- A policy is called restrictive if it reduces the size of the money supply or increases the interest rate. An expansionary policy increases the size of the money supply, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is neither intended to create growth nor combat inflation; or strict if expects to reduce inflation.
Tools – Separately.- There are several monetary policy tools available to achieve monetary policy ends. Since the 1970s, monetary policy has generally been formed separately (independently) from fiscal policy. Even prior to the 1970s, the Bretton Woods system still ensured that most nations would form the two policies separately.
Credible Ads.- It is important for politicians to make credible announcements and not downgrade interest rates as if they are not important and relevant in relation to monetary policy. If private agents (consumers and businesses) believe that politicians are committing to lower inflation, they will anticipate prices to be lower than otherwise possible. If an employee expects prices to be higher in the future, they will prepare (request a change) a contract with a high wage to match these prices. Therefore, the expectation of lower prices is reflected in the behavior of establishing lower wages between employees and employers (lower wages if prices are expected to be lower) and if wages are in fact lower there is no demand inflation because employees are receiving a smaller wage and no cost inflation because employers are paying less in wages.
History of monetary policy.-
Beginnings - Interest rates - Government decision - Commercial networks.- Monetary policy is primarily associated with interest rates and credit. For many centuries there were only two forms of monetary policy: (i) Currency minting decisions; (ii) Decisions to print paper money to create credit. Interest rates, while now thought to be part of the monetary authority, were generally not coordinated with the other forms of monetary policy during this time. Monetary policy was seen as a decision for governments, and it was generally in the hands of the authority with the power to issue currency, or power to mint. With the advent of large commercial networks came the ability to set a price between gold and silver, and the price of local currency relative to foreign currencies.
Bank of England - Setting interest rates.- With the creation of the Bank of England in 1694, which acquired the responsibility of printing banknotes and backing them with gold, the idea of monetary policy as independent of executive action began to be established. The goal of monetary policy was to keep the value of the minting of coins, to print notes that would trade alongside coins, and to prevent currencies from going out of circulation. The establishment of central banks by industrialized nations was then associated with the desire to keep nations tied to the gold standard, and to trade in a narrow band with other gold-backed currencies. To achieve this goal, central banks, as part of the gold standard, began to set the interest rates that they charged their own borrowers and other banks that required liquidity. Maintaining a gold standard required, almost monthly, interest rate adjustments.
Birth of central banks - Paper - Interest rates - Cycles.- During the period 1870-1920, the industrialized nations established a central bank system, one of the last being the Federal Reserve in 1913 (the Bank of Spain was born in 1856 with the transformation of the Banco de San Fernando into the Central Bank). By that time, the central bank's role as the "lender of last instance" was understood. Interest rates were also recognized as having an effect on the entire economy. It also became clear that there was an economic cycle, and economic theory began to understand the relationship of interest rates to that cycle. Cass Business School Research has also suggested that perhaps it is the central bank's expansionary or restrictive policies that are causing the business cycle; evidence can be found by looking at the lack of cycles in economies before central bank policies existed.
Monetarist macroeconomists.- Monetarist macroeconomists have sometimes advocated a simple growth of the money supply at a low and constant rate, as the best way to keep inflation low and economic growth stable. However, when the Governor of the United States Federal Reserve, Paul Volcker, attempted this policy in October 1979, it was found to be impractical because of the highly unstable relationship between monetary aggregates and other macroeconomic variables. Even Milton Friedman acknowledged that the money supply goal was less successful than he had expected, in an interview with the Financial Times on June 7, 2003.
In favor of a return to the gold standard.- A small but noisy group of people (economists) advocates a return to the gold standard (the elimination of the legal tender status of the dollar and even the Federal Reserve). Their argument is basically that monetary policy is loaded with risk and these risks will result in drastic damage to the population and should undermine monetary policy. Others see another problem with our current monetary policy. The problem for them is not that our money doesn’t have anything physical to define its value, but that the fact of not having physical support has led to the expansion of money and credit, which is why today a significant proportion of society ( including all governments) are perpetually in debt.
Against.- In fact, many economists disagree with the return to the gold standard. Doing so, they argue, would drastically limit the money supply, and waste 100 years of monetary policy advancement. The financing of the economy, both from the public and private sectors, would be limited by the amount of gold available (see video of "The contestant").
Trends in central banks.-
Interest rates - Open market - Cash ratio - Discounts.- The central bank influences interest rates by expanding or contracting the monetary base, which consists of money in circulation and the banks' reserves in deposits with the central bank. The first way in which the central bank can affect the monetary base is through open market operations or sales and purchases of second-hand public debt, and/or by changing the cash ratio. If the central bank wants to lower interest rates, it buys public debt (certificates of deposit, in Spain) and thereby increase the amount of cash in circulation or bank reserves. Alternatively, you can lower the interest rate in discounts or overdrafts from commercial banks at the Central Bank. If the interest rate on such transactions is low enough, commercial banks can borrow from the central bank to meet the cash ratio and use the additional liquidity to expand their balance sheets, increasing the credit available to the economy. Lowering the cash ratio has a similar effect, freeing up funds for banks to increase loans or buy other profitable assets.
Truly independent monetary policy.- A central bank can only operate a truly independent monetary policy when the exchange rate is floating. If the exchange rate is pegged or directed in any way, the central bank will have to buy or sell currencies. These foreign currency transactions will have an effect on the monetary base analogous to the open market purchases and sales of public debt; if the central bank buys foreign currency from a foreign investor who wants to invest in our country, the monetary base expands, and vice versa. But even in the case of a pure floating exchange rate, central banks and monetary authorities can at best "lend against the wind" in a world where capital is mobile.
Sterilize or offset its foreign exchange operations.- Consequently, the management of the exchange rate will influence domestic monetary conditions. To maintain its monetary policy objective, the central bank will have to sterilize or clear its foreign exchange operations. For example, if a central bank buys foreign currency (to counteract the appreciation of the exchange rate), the monetary base will increase. Therefore, to sterilize this increase, the central bank must also sell public debt to contract the monetary base by an equal amount. Following this turbulent activity in the currency markets can cause a central bank to lose control of domestic monetary policy when it is also managing the exchange rate.
Independent central bank.- In the eighties, many economists began to believe that making the central bank of a nation independent from the rest of the executive government is the best way to ensure optimal monetary policy, and those central banks that did not have independence began to achieve it. This is to avoid overt manipulations of monetary policy tools to achieve political goals, such as reelecting the current government. Independence typically means that the members of the committee that directs monetary policy have long, fixed terms. Obviously, this is somewhat limited independence. In Spain, the Central Bank has been independent since 1994, before joining the euro.
Inflation targeting.- In the 1990s, central banks began to adopt formal, public inflation targets with the goal of making the results, if not the process, of monetary policy more transparent. In other words, a central bank may have an inflation target of 2% for a given year, and if inflation turns out to be 5%, then the central bank will typically have to come up with an explanation.
Smoothing economic cycles.- The debate is hardening on whether monetary policy can smooth economic cycles or not. A central conjecture of Keynesian economists is that the central bank can stimulate aggregate demand in the short run, because a significant number of prices (a basket of product prices) in the economy are fixed in the short run and firms will produce as many goods and services as they are demanded (in the long run, however, money is neutral, that is, the quantity of money in circulation doesn’t determine the quantity of goods produced, as in the neoclassical model).
Problems.- Developing countries may have problems establishing an effective and operational monetary policy. The first difficulty is that few developing countries have deep markets for public debt and, as a consequence, cannot conduct open market operations. In general, central banks in many developing countries have poor records in conducting monetary policy. This is often because the monetary authority in a developing country is not independent from the government, so good monetary policy takes second place to the political wishes of the government or is used to pursue other non-monetary goals. For this and for other reasons, developing countries that want to establish a credible monetary policy can institute a monetary authority that maintains a fixed exchange rate with a currency, or adopt dollarization. Such forms of monetary institutions, therefore, essentially tie the hands of the government from interference and, it is hoped, that such policies will import the monetary policy of the subject nation.
Implement monetary policy.- Recent attempts to liberalize and reform financial markets (particularly the recapitalization of banks and other financial institutions in Nigeria and elsewhere) are gradually providing the freedom required to implement the monetary policy framework by the relevant central banks.
Types of monetary policy.-
CPI.- Under this policy, the requested or established objective is to preserve the inflation defined under a particular standard such as the Consumer Price Index, within a desired scope or specific numerical objective (in the euro zone, 2%)
Relationship between inflation and interest rate.- If financial institutions lend at low interest rates, families will ask for money, increasing demand, to buy goods and services, and prices may rise if supply doesn’t increase in the same proportion, generating inflation (if it is a generalized phenomenon).
Interbank interest rate.- The inflation target is reached through periodic adjustments to the Central Bank’s interest rate target. The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flows. Depending on the country this particular interest rate might be called the cash or kind to like something.
Open market operations.- This type of operation can also be used to achieve an interest rate target. Typically, the duration that the interest rate target is kept constant will vary between months and years.
Taylor's rule.- There is a relationship between interest rates and economic growth. Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends. For example, a simple inflation targeting method called the Taylor rule adjusts the interest rate in response to changes in the inflation rate and the output gap.
Price level target.-
Subsequent.- The price level target is similar to the inflation target except that the growth of the Consumer Price Index in one year is offset in subsequent years, such that, for a time, the price level, as a whole, doesn’t change.
Sweden.- Something similar to the price level target was attempted by Sweden in the 1930s, and appears to have contributed to the relative good performance of the Swedish economy during the Great Depression. Since 2004, no country has operated a monetary policy based on a price level target.
The 1980s.- In the 1980s, several countries used an approach based on constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1, etc.). In the United States, this approach to monetary policy was suspended with the selection of Alan Greenspan as chairman of the Federal Reserve.
Monetarism.- This approach is also sometimes called monetarism
Approach.- While most monetary policies focus on a signal price (indicator) in one way or another, this approach is focused on monetary quantities.
Fixed exchange rate.-
Degrees.- This policy is based on maintaining a fixed exchange rate with a currency or foreign currency (such as the US dollar). There are various degrees of fixed exchange rates, which can be classified in relation to how rigid the fixed exchange rate is with the subject nation.
Fixed rates.- Under a system of fixed rates of legal tender, the local government or the monetary authority declares a fixed exchange rate.
Bands.- Under a fixed convertibility system, the currency is bought and sold by the central bank or the monetary authority on a daily basis to reach the target exchange rate. This target can be a fixed level or a fixed band, within which the exchange rate can fluctuate until the monetary authority intervenes to buy or sell what is necessary to keep the exchange rate within the band. (In this case, the fixed exchange rate with a fixed level can be seen as a special case of the banded fixed exchange rate where the bands are set to zero.)
Backed.- Under a system of fixed exchange rates maintained by a monetary authority, each unit of local currency must be backed by one unit of foreign currency (corrected for the exchange rate). This ensures that the local monetary base does not grow without being backed by a hard currency and eliminates any concerns about a race in the local currency by those who wish to convert the local currency into the hard currency.
Dollarization.- Under dollarization, foreign currency (usually the US dollar, hence the term dollarization) is used freely as a means of exchanging either exclusively (as the only circulating currency) or in parallel with the local currency. This result may come because the local population has lost all faith in the local currency, or it may also be a government policy (such as a decision to use a foreign currency as local currency)
Transfer monetary policy.- These policies often transfer monetary policy to the foreign monetary authority or government. As monetary policy in the pegged nation, it must align with the anchor nation's monetary policy to maintain the exchange rate. The degree to which local monetary policy becomes dependent on the anchor nation depends on factors such as capital mobility, openness, credit channels, and other economic factors.
Definition.- The gold standard is a system in which the price of the national currency is measured in units of gold bars and is kept constant for the daily purchase and sale of the base currency to other countries and citizens. Selling gold is very important for economic growth and stability.
Special case.- The gold standard can be seen as a special case of “fixed exchange rate” policy. And the price of gold could be seen as a special kind of "commodity price index."
Not used.- Today, this type of monetary policy is not used anywhere in the world, in Switzerland (one of the most stable economies in the world), at the end of 2010, some economists proposed a constitutional reform where the Swiss franc would be supported 100% for gold as a means of defending against the international financial crisis, although a form of the gold standard was widely used throughout the world before 1971.
Main monetary policy tools (a review).-
Monetary base.- Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. A central bank can use open market operations to change the monetary base. The central bank would buy or sell securities in exchange for hard currency (dollar, euro, yen, yuan). When the central bank disburses or collects these payments in hard currency, it alters the amount of money in the economy, thereby altering the monetary base.
Cash ratio.- The monetary authority exercises regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must keep in reserve with the central bank. Banks only keep a small proportion of their assets as cash available for immediate withdrawals; the rest is invested in illiquid assets such as mortgages and loans but profitable. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve or the Central Bank changes the availability of loanable funds. This acts as a change in the money supply.
Discount in the central bank of bills and other previously discounted short-term effects.- Many central banks or governments (through the Public Treasury) have the authority to lend funds to financial institutions within their country. In this way the monetary authority can directly change the size of the money supply.
Interest rates.- The contraction of the money supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have different levels of control over interest rates. By increasing interest rates under its control, a monetary authority can contract the money supply, because high interest rates encourage savings and discourage borrowing. Both effects reduce the size of the money supply.
Monetary authority agreements.- A monetary authority of a country can establish a monetary agreement that links the monetary base of a country to that of an anchor nation. Essentially it operates as a fixed and rigid exchange rate, through which the local currency in circulation is backed by the foreign currency of the anchor nation at a fixed exchange rate. Therefore, to increase the local monetary base an equivalent amount of foreign currency must be held in reserves with the monetary authority. This limits the possibility for local monetary authorities to increase the money supply or pursue other objectives.
Open market operations.- The open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities or other financial instruments. Monetary targets, such as interest rates or exchange rates, are used to guide this implementation.
TOPIC 5.- THE INTERNATIONAL CONTEXT OF THE ECONOMY
Definition.- International trade is the exchange of capital, goods and services across international borders or territories. In most countries it represents a significant part of the Gross Domestic Product (GDP). While international trade has been present through much of history, its economic, social, and political importance has been increasing in recent centuries. Industrialization, advanced transportation, globalization, multinationals and the purchase of manufactured products in a foreign company to save costs are all having a very important impact on the international trading system. The growth of international trade is crucial for the permanence of globalization. International trade is a very important source of economic income for each nation that is considered a world power. Without international trade, nations would be limited to goods and services produced within their own borders.
Theories of international trade.-
Absolute advantage.- It refers to the capacity of a person or a country to produce a particular good at a lower absolute cost than another.For example, if Morocco produces a toy with a cost of 2 euros and a Spanish company needs to incur costs of 5 euros for the same toy. The Moroccan company has an absolute advantage over the Spanish company. According to this theory, the toys that are sold in Spain will be Moroccan. This theory explains part of international trade, see the growth of businesses that sell Arab products. However, it does not fully explain international trade, since countries with higher costs than Morocco are able to export their products to the Arab countries.
Definition.- Comparative advantage refers to the ability of a person or a country to produce a particular good at a lower relative cost than another person or country. It is the ability to produce a product more efficiently given the other products that could be produced. It can be contrasted with the absolute advantage that refers to the ability of a person or a country to produce a particular good at a lower absolute cost than another. Comparative advantage explains how trade can create value for both parties even when one produces all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade.
Example.- We are going to suppose two countries (Spain and Morocco) and two products (bicycle and computer). Morocco produces both products with less cost, but the difference (relative cost) won’t be the same, that is, Morocco has an advantage in both but it is likely that the cost difference in the bicycle is greater since it is less mechanized. Thus, Spanish companies should stop producing bikes and focus on the production of computers and, on the contrary, Moroccan companies should direct their resources to the production of bikes. In this way, the returns to productive resources are maximized.
Regulation of international trade.-
Overview.- Traditionally, trade was regulated through bilateral treaties between two nations. For centuries, under the belief in Mercantilism, most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in the UK, a belief in free trade became paramount. This belief became the dominant thought among Western nations ever since. In the years since World War II, controversial and multilateral treaties such as the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (many years later) have attempted to create a globally regulated structure of trade. These trade agreements have resulted in protests and discontent with complaints of unfair trade that is not mutually beneficial. But also in developed countries, where some traditional economic activities derived from competition from countries with lower costs have been lost.
Free trade.- Free trade is usually most strongly supported by the most economically powerful nations, although they often engage in selective protectionism for those industries that are strategically important, such as the protective tariffs applied to agriculture by the United States. and Europe. The Netherlands and the United Kingdom were both advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are their biggest supporters. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they are becoming more economically powerful themselves. As customs levels fall there are, too, greater facilities for trade.
Agricultural interests.- Traditionally, the agricultural interests of poor or developing countries are usually in favor of free trade, while the manufacturing sectors of these countries often support protectionism as a means of promoting still incipient or immature businesses. However, agricultural lobbies, particularly in the United States, Europe, and Japan, are mainly responsible for particular rules in the main international trade treaties that allow more protectionist measures in agriculture than for other goods and services that don’t exist.
Recessions.- During recessions there is often strong internal pressure to increase tariffs to protect domestic industries. This happened around the World during the Great Depression (and now too). Many economists have tried to blame tariffs as the underlined reason behind the collapse in world trade that many seriously believe deepened the depression in the 1930s. In the current recession there is also discussion about the advantages and disadvantages that membership of the EU has brought us, where trade hasn’t any barriers.
Regulation.- The regulation of international trade is done through the World Trade Organization at a global level, and through various other regional agreements such as MERCOSUR in South America, the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European Union among 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed, in large part, because of opposition from the population of Latin American nations. Similar agreements such as the Multilateral Agreement of Investment (MAI) have also failed in recent years.
Definition.- Protectionism is the economic policy of restricting trade among states, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent the foreign control of local markets and companies. This policy is closely aligned with anti-globalization, and in contrast to free trade, where government barriers to trade are kept to a minimum. The term is, for the most part, used in the context of economics, where protectionism refers to policies or doctrines that protect businesses and workers within a country by restricting or regulating trade with other foreign nations.
Mercantilism.- Historically, protectionism was associated with economic theories such as mercantilism (which believed that it was beneficial to maintain a positive trade balance), and replace imports with products manufactured in the interior of the country. During that time, Adam Smith famously warned against the "self-serving sophistry" of the industry, seeking to gain an advantage at the expense of consumers (in this situation consumers would pay higher prices for products that can be purchased in other countries at a lower price ). All economists today agree that protectionism is harmful only because its costs are greater than its benefits, and that hinders economic growth. Nobel Prize winner in economics and trade theorist Paul Krugman once famously stated that "If there were an Economic Creed, it would surely contain the statements:" I understand the Principle of Comparative Advantage "and" I believe in Free Trade. ".
Recent examples.- Recent examples of protectionism in first world countries are, as a rule, motivated by the desire to protect the livelihoods of individuals in politically important national industries. Whereas before, manual jobs were being lost to foreign competition, in recent years there has been a renewed debate on protectionism due to outsourcing in tax havens and the loss of office jobs (technicians and specialists). However, most economists agree that the benefits of free trade, in the form of consumer surplus (higher sales) and increased efficiency mainly due to foreign competition, are greater than job losses in the economy in at least a 2 to 1 margin, with some arguing that the margin is as high as 100 to 1 in favor of free trade.
Tariffs.- As a general rule, tariffs are taxes on imported goods. Tariff rates usually vary according to the type of imported goods. The amount of tariffs will increase the cost to importers, and will increase the price of imported goods in local markets, thereby reducing the quantity of imported goods. Tariffs can also be imposed on exports (for example, China has imposed tariffs on Chinese rice exporters to prevent it from being sold in more attractive or profitable markets). However, as export tariffs are often perceived as harmful to local industries, while import tariffs are perceived as helpful to local industries, while import tariffs are perceived as helping local industries, export tariffs are rarely implemented.
Import quotas.- These are limitations in quantity or units of products that can be imported in a given period (generally one year). To reduce the quantity and therefore increase the market price of imported goods. The economic effect of an import quota is similar to that of a tariff, except that the tax revenue earned by a tariff will, on the contrary, in this case, be distributed to those who receive the import licenses. Economists often suggest that import licenses must be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff.
Administrative barriers.- Countries are sometimes accused of using various administrative rules (regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports (for example, in Spain it is common to sale of oranges in mesh that is not allowed in other countries).
Legislation against the sale of imported merchandise at prices below its market value.- Supporters of this type of laws argue that they prevent the “dumping” of cheaper foreign goods that would cause local companies to close forever or they are acquired by foreign competition and then prices are raised until costs are covered again. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters.
Direct subsidies.- Government subsidies (in the form of lump sum payments or cheap loans) are sometimes given to local companies that cannot compete well against foreign imports. These subsidies are intended to protect local jobs, and to help local businesses adjust to world markets (for example, in Andalusia, subsidies have been given to Santana Motor in Linares for many years to maintain production of Suzuki vehicles with the excuse of maintaining employment).
Export subsidies.- Export subsidies are often used by governments to increase exports. Export subsidies are the opposite of export tariffs, exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade.
Exchange rate manipulation.- A government can intervene in the exchange market to lower the value of its currency by selling its currency on the exchange market. Doing this will increase the cost of imports and lower the cost of exports, leading to an improvement in your trade balance. For example, China keeps its currency artificially devalued (the yuan) to favor its exports and limit its imports. However, such a policy is only effective in the short term, since it will most likely lead to inflation in the country in the long term, which will increase the cost of exports, and reduce the relative price of imports.
Common Agricultural Policy (CAP) in the EU.- Some of the main critics of the Common Agricultural Policy reject the idea of protectionism, in theory, in practice or both. Free market advocates are among those who disagree with any kind of government intervention because, they say, a free market without interference will allocate resources more efficiently. The setting of artificial prices inevitably leads to distortions in production, with excess production being the usual result. The creation of "grain mountains" or fully filled silos, where huge reserves of unwanted grain are purchased directly from farmers at prices set by the CAP well above the market may be one example. Subsidies allow smaller, old-fashioned or inefficient agricultural farms to continue operating that would not otherwise be viable. An honest economic model would suggest that it would be better to allow the market to find its own price levels, and for non-economic agriculture to cease. The resources used in agriculture would then be shifted to a myriad of more productive outputs, such as infrastructure, education or health.
Definition.- Free trade is a type of commercial policy that allows traders to act and trade without government interference. Therefore, the policy allows mutual trading partners to gain from trade, with goods and services produced according to the theory of comparative advantage.
Adam Smith and David Ricardo.- The value of free trade was first observed and documented by Adam Smith in his great work, The Wealth of Nations in 1776. Later, David Ricardo demonstrated the benefits of trade via specialization.
Protectionism - Free trade.- The countries protect, mainly, their agriculture and their basic or strategic industries. Free trade is, above all, for non-essential goods while protectionism has been the most common approach in the trade of raw materials and agricultural products.
Preferential trade area.-
Definition.- A preferential trade area (also a preferential trade agreement) is a trade bloc that gives preferential access to certain products from participating countries. This is done to reduce tariffs, but not to abolish or eliminate them completely. A preferential trade area can be established through a trade pact. It is the first phase of economic integration. The line between a preferential trade area and a free trade area, which we will see next, can be blurred, since almost any preferential trade area has as its main goal to become a free trade area, in accordance with the General Agreement on Tariffs and Trade.
Examples.- The European Union and the group of African, Caribbean and Pacific states (ACP countries) until 2007
Free trade area.-
Definition.- The free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas, and preferences on most (if not all) of the goods and services traded between them. It can be considered the second phase of economic integration. Countries choose this type of form of economic integration if their economic structures are complementary. If they are competitive, they will choose a customs union, which is discussed later.
Rules of origin.- Unlike a customs union, members of the free trade area don’t have the same policies with respect to non-members, meaning different quotas and customs. To avoid evasion (through re-export), countries use the certification system at origin more commonly called rules of origin, where there is a requirement for a minimum degree of contributions of local material and local value-added transformations for imported goods. Goods that don’t meet these minimum requirements aren’t authorized by the special treaty provided for in the free trade area clauses.
Example.- The European Free Trade Association (EFTA), which was established in 1961 as an alternative to the European Economic Community (EEC). Today only Iceland, Norway, Switzerland and Liechtenstein are members of EFTA.
Definition.- A customs union is a free trade area with a common external tariff. Participating countries establish a common foreign trade policy, but in some cases use different import quotas. The common competition policy is also useful in promoting competition in the internal market. The purposes of establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between member countries. It is the third phase of economic integration. The customs union is established through a commercial pact.
Example.- The Southern African Customs Union or SACU (Southern African Customs Union) is a customs union that brings together five Southern African countries, which are Botswana, Lesotho, Namibia, South Africa and Swaziland.
Definition.- A common market is a customs union with common policies on product regulation, and freedom of movement of production factors (capital and labor) and business. The goal is that the movement of capital, labor, goods and services between members is as easy as within them. It is the fourth phase of economic integration.
Example.- The Southern Common Market - MERCOSUR - is made up of the Argentine Republic, the Federative Republic of Brazil, the Republic of Paraguay, the Eastern Republic of Uruguay, the Bolivarian Republic of Venezuela and the Plurinational State of Bolivia.
Economic and monetary union.-
Definition.- An economic and monetary union is a common market with a common currency. It is the fifth phase of economic integration. The economic and monetary union is established through a trade pact related to the currency.
Example.- The euro is used by nineteen member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Holland, Portugal, Slovakia, Slovenia and Spain.
THE WORLD TRADE ORGANIZATION (WTO).-
Presentation.- The World Trade Organization (WTO) is an international organization designed by its founders to monitor and liberalize trade. The organization officially began on January 1, 1995, under the Marrakesh Agreement replacing the General Agreement on Tariffs and Trade of 1947.
Regulation.- The World Trade Organization deals with the regulation of trade between participating countries; provides a framework to negotiate and formalize trade agreements, and a resolution debate process that aims to strengthen participants' adherence to WTO agreements that are signed by representatives of member governments and ratified by parliament. Most of the WTO’s objectives focus on those derived from planned trade negotiations, especially the Uruguay Round (1986-1994). The organization is currently trying to persist or develop a trade negotiation called the Doha Development Agenda (or Doha Round), it was started in 2001 to improve the equitable participation of the poorest countries that represent a majority of the world population and negotiations are still ongoing. However, the negotiation has been difficult from the beginning due to “disagreements among exporters of agricultural products in large quantities with countries with large numbers of subsidized farmers in the precise terms of a special safeguard measure to protect farmers from waves of imports. Right now, the future of the Doha Round is uncertain
History.- The predecessor of the World Trade Organization, the General Agreement on Tariffs and Trade (GATT), was established after World War II in the awakening of other new multilateral institutions dedicated to international economic cooperation - notably the Bretton Woods institutions known to the World Bank and the International Monetary Fund. A comparable international institution for trade, called the International Trade Organization, was successfully negotiated. The International Trade Organization was to be a specialized agency of the United Nations and would be dedicated not only to barriers to trade but also to other issues indirectly related to trade, including employment, investment, restrictive business practices and commodity agreements. But the International Trade Organization treaty was approved neither by the United States nor by a few other signatories and never went into effect. In the absence of an international organization for trade, the General Agreement on Tariffs and Trade would transform itself, over many years, into a de facto international organization.
Divergence.- Free trade leads to a divergence rather than a convergence of income levels between rich and poor countries (the rich get richer and the poor get poorer). One reason for this may be that small countries have less bargaining power.
Labor relations and the Environment.- Labor relations and environment issues are firmly ignored. Thus, consumers in rich countries buy products made without respecting in their production process any norm for the protection of the environment or occupational safety and hygiene.
Decision.- Decision-making in the World Trade Organization is complicated, ineffective, unrepresentative and not global. The World Trade Organization (WTO) is dominated by a few but large industrial countries that negotiate and make decisions behind closed doors. They then try to side with "influential" developing countries, chosen by them. This lack of democracy makes the WTO one of the least transparent international organizations.
THE WORLD BANK.- The World Bank is an international financial institution that provides leveraged loans (projects financed almost entirely by this institution) to developing countries for capital programs with the stated goal of reducing poverty. The World Bank is one of the two main institutions created as a result of the Bretton Woods Conference in 1944. The International Monetary Fund, a related but separate institution, is the second. Delegates from a wide variety of countries attended the Bretton Woods Conference, but the most powerful countries present, the United States and Great Britain, primarily, shaped the negotiations.
THE INTERNATIONAL MONETARY FUND (IMF).-
Presentation.- The International Monetary Fund (IMF) is an international organization that supervises the global financial system following the macroeconomic policies of its member countries, particularly those with an impact on exchange rates and the balance of payments. It is an organization formed to stabilize international exchange rates and facilitate development. It also offers highly leveraged loans mainly for the poorest countries. Its headquarters is located in Washington, District of Columbia, United States.
Executive Director.- Rodrigo Rato became the ninth Executive Director of the IMF on June 7, 2004 and resigned from his post at the end of October 2007. Currently she is Kristalina Georgieva, before Christine Lagarde and before DSK (Dominique Strauss-Kahn).
THE EUROPEAN UNION (EU).-
Presentation.- The European Union (EU) is an economic and political union of 27 member states, located mainly in Europe (for example, the Canary Islands or French Guiana). It was established by the Maastricht Treaty on November 1, 1993, on the foundations of the pre-existing European Economic Community. With a population of about 450 million.
Freedom of movement.- The EU has developed a common market through a standardized system of laws that are applied in all member states, ensuring the freedom of movement of people, goods, services and capital. It maintains common policies in trade, agriculture, fishing and regional development. A common currency, the euro, has been adopted by nineteen member states constituting the eurozone. The EU has played a limited role in foreign policy, having representation at the World Trade Organization, the G8 summits and the United Nations. It enacts legislation in justice and local affairs, including the abolition of passport controls among many member states that are part of the Schengen Area. Twenty-one EU countries are members of NATO.
The European Commission.- The European Commission acts as the executive arm of the EU and is responsible for initiating legislation and for the day-to-day running of the EU. It is intended to act only in the interest of the EU as a whole, as opposed to the Council which consists of leaders of member states that reflect national interests. The Commission is also seen as the engine of European integration. It is currently made up of 27 commissioners for different policy areas, one for each member state. The President of the Commission and all other Commissioners are nominated by the Council. The appointment of the President of the Commission, and also of the Commission as a whole, has to be confirmed by Parliament.
The European Parliament.- The European Parliament is part of the legislative assembly of the EU. Members of the European Parliament are directly elected by EU citizens every five years. Although members of the European Parliament are elected on a national basis, they sit according to political groups rather than their nationality. Each country has a established number of seats. Parliament and the Council form and pass legislation jointly, using co-decision, in certain areas of policy. This procedure has been extended to many new areas under the new Lisbon Treaty, and consequently increases the power and relevance of Parliament. This procedure gives the European Parliament, which represents the citizens of the Union, the power to adopt acts jointly with the Council of the European Union. With this, Parliament becomes a co-legislator, on an equal footing with the Council, except in the cases, provided by the Treaties, in which the consultation and approval procedures are applied. The ordinary legislative procedure also involves qualified majority voting in the Council. Parliament also has the power to reject or censor the budget of the Commission and the UE. The President of the European Parliament performs the role of spokesperson in parliament and represents it externally. The president and vice-presidents are elected by the members of the European Parliament every two and a half years.
The Council of the European Union.- The Council of the European Union (“Council of Ministers” or “Council”) is the main decision-making body of the European Union. It meets at the level of the ministers of the Member States and is therefore the representative institution of the Member States. The seat of the Council is in Brussels, but it can meet in Luxembourg. Council meetings are convened by the Presidency, which sets its agenda. The Council of the European Union (sometimes referred to as the Council of Ministers) forms the other half of the EU legislative assembly. It consists of a government minister for each member state and meets in different compositions depending on the political area in question. Despite its different compositions, it is considered a single organism. In addition to its legislative functions, the Council also exercises executive functions in relation to the Common and Foreign Security Policy.
The European Court of Justice.- The judicial branch of the EU consists of the European Court of Justice and the Court of First Instance. Together they interpret and apply EU law and treaties. The Court of First Instance, mainly, deals with cases brought by individuals and companies directly before the EU courts, and the European Court of Justice, fundamentally, deals with cases brought by member states, institutions and cases referred to them by the courts of the member states. The decisions of the Court of First Instance can be appealed by the Court of Justice but only in one point of the law.
BALANCE OF PAYMENTS.-
Definition.-The Balance of Payments is an accounting document in which all operations derived from the trade of goods and services are recorded, as well as operations derived from capital movements, among some countries and others.
Registration.- The central banks of the different countries are responsible for the registration of operations in the balance of payments.
Shows.- The balance of payments has all income from the rest of the world (derived from exports of goods and services and from foreign capital inflows from the sale of domestic financial assets), as well as payments made by our country to the rest of the world as a consequence of our imports of goods and services and of our purchases abroad of foreign financial assets.
Equilibrium.- By definition, the balance of payments is always balanced, that is, the sum of all income from the rest of the world is always equal to the total sum of payments made to the rest of the world.
Formula.- BP = Income from the Rest of the World (X and capital inflows) - Payments to the Rest of the World (M and capital outflows) = 0
Subbalances.- Although the balance of payments is always zero, the different types of transactions included in this accounting document are structured in three large accounts or sub-balances, whose individual balances may differ from zero. These three balances are: current account balance, capital balance and financial balance.
Current account balance.- It includes transactions derived from the trade of goods and services, income and payments derived from labor and capital income, and income and payments derived from unilateral transfers without counterpart (mainly remittances from immigrants). In turn, the Current Account Balance is classified in other sub-balances:
Trade balance.- Income - Payments derived from merchandise trade
Services balance.- Income - Payments derived from trade in services (tourism, transport freight, business services, insurance services, etc.).
Income balance.- Income - Payments related to earned income and capital income (dividends and interest)
Work income.- Income paid by foreigners to domestic residents - Income paid by Spain to foreign residents.
Capital income.- Capital income refers to income and payments derived from income from capital movements (dividends and interest).
Transfers balance.- It includes the income and payments from unilateral transfers without counterpart. This type of unilateral transfers are mainly remittances from immigrants (when an immigrant residing in our country sends to his country of origin what he has managed to save for his work in Spain) and subsidies made by the European Union to member countries. Also included here are economic contributions to the EU budget, development aid, etc.
Balance of the current account balance.- The sum of all the balances included in the current account balance gives the balance of the current account balance. If the current account balance is positive (Income> Payments), the country is said to have a current account surplus. If, on the contrary, the balance of said balance is negative (Income <Payments), it is said that the country has a current account deficit.
Capital account balance.- This balance includes: 1) Unilateral capital transfers without counterpart that do not modify national income. This includes the cohesion funds of the European Union and also debt forgiveness. 2) Purchase and sale of intangible assets (patents, trademarks, copyrights ...), as well as purchase and sale of non-financial non-produced assets. As in the current account, the capital account balance can be positive (surplus) or negative (deficit).
Economic interpretation of the balance of the current account and capital account.- The balances of the Current Account and Capital Account are interpreted jointly, said joint balance indicating the capacity or need for financing by a country compared to the rest of the world. Thus, if the joint balance of the current account and capital account is positive, it means that the income from the rest of the world from exports, income from labor and capital income, transfers received, etc., are greater than the payments made for our imports, payments related to labor and capital income and transfers abroad. This implies that our country has financing capacity compared to the rest of the world, that is, with our income from the rest of the world we are able to finance the payments that the rest of the world must make to us. In summary, that with our excess income from our sales to the rest of the world we can finance the payments that the rest of the world must make to us: “the rest of the world is in debt with us”. On the contrary, if the joint balance of the current account and capital account is negative, it means that our payments to the rest of the world for the aforementioned concepts have been greater than what we have entered and, therefore, our country needs financing from the rest of the world. In summary, that the income we receive from our sales to the rest of the world is not enough to cover the payments that we must make to the rest of the world and therefore we need the rest of the world to finance that difference between income and payments. Therefore, if the balance is negative (Payments>Income) will increase our external debt. As is logical to think, a country cannot maintain a chronic current account deficit, since the debt capacity of a country has a limit, since the more indebted that country is, the greater the amount of interest it must pay on its debt and also, being heavily in debt, it will become increasingly difficult for you to get someone (some country) to finance you.
Balance by Financial Account.-
Shows.- This balance shows the difference between capital inflows from the rest of the world and capital outflows to the rest of the world. An inflow of capital to our country occurs when a sale of domestic assets is made to residents abroad; for example, the sale of shares of a Spanish company to a resident of the United States would be the sale of an internal financial asset; the sale of Spanish government bonds to a foreign resident would also be the sale of an internal asset, etc. On the contrary, a capital outflow occurs when a national resident buys a foreign financial asset; for example, if a resident in Spain buys shares in a foreign company or decides to deposit their savings in a foreign deposit, etc.
Therefore.- Capital inflows : Sales of domestic assets to foreign residents, Capital outflows: Purchases of foreign assets to foreign residents
Signs.- Capital inflows are recorded with a positive sign (credit) in the Financial Account and capital outflows are recorded with a negative sign (debit).
Formula.- Financial Account = Sales of domestic assets - Purchases of foreign assets
Transactions that are collected in the financial account.-
Investments (direct and portfolio) of Spain abroad (capital outflow: negative sign)
Foreign investments (direct and portfolio) in Spain (capital inflow: positive sign)
Deposits from Spain abroad (capital outflow: negative sign)
Deposits from abroad in Spain (capital inflow: positive sign)
Loans from Spain abroad (capital outflow: negative sign)
Loans from the rest of the world to Spain (capital inflow: positive sign)
Balance of transactions of official reserves or Variation of international official reserves (gold and currencies). Collect foreign assets in the hands of the Central Bank.
Position of Spain.- When Spain invests abroad (capital outflow) Spain becomes a creditor of the country in which it invests. When a country invests in Spain (capital inflow), Spain becomes a debtor of that country. Therefore, the financial balance reflects the creditor or debtor position of a country with respect to the rest of the world.
Balance.- If the balance of the financial balance is positive, it means that there have been more capital inflows into Spain than outflows, therefore Spain becomes a debtor. In this case, it is said that there has been a net inflow of capital. When the balance of the financial balance is negative, it means that capital outflows have been greater than capital inflows and in this case Spain becomes a creditor country of the rest of the world. It is therefore said that there has been a net capital outflow
Variation of reserves.-
What things are composed of? .- As previously shown, within the financial balance is the balance of official transactions of reserves or variation of official reserves. Official international reserves are mainly made up of foreign currencies (mainly dollars) and represent a foreign asset in the hands of central banks. Central banks often buy and sell currencies (official interventions in the currency market) in order to control the money supply. Therefore, official reserve transactions are the purchases and sales of official reserves by Central Banks.
Functioning of the Reserve Variation item.-
Imports.- When Spain imports a car to the United States and pays for the car with a check for 20,000 euros, this represents a negative entry in the current account of Spain due to the importation of the car. How is the payment of the importation of the car recorded in our Financial Account? For us, the payment of the 20,000 euros has meant the sale of an internal asset (by paying euros we are “selling” euros). This sale of a domestic asset is an export of capital that is recorded with a positive sign in the balance of official transactions. Therefore, a positive sign in our Reserves variation item or Reserve Transaction Balance means that domestic assets in the hands of foreigners are increasing: we are becoming debtors for the rest of the world.
Exports.- Suppose now that Spain exports wine to the United States for an amount of 15,000 dollars. The export is marked with a positive sign in the Current Account (since it represents an income for us). How does this export affect the Reserves Variation account? The wine company has received a check for $15,000 which is exchanged at the Central Bank for euros. Therefore, the Central Bank is buying dollars in exchange for euros, thus increasing the assets of the United States in the hands of the Spanish, that is, Spain is becoming a creditor of the United States. With what sign do you count this purchase of dollars? With a negative sign, because it is an import of capital, it is the purchase of a foreign asset.
Capital inflows and outflows.- Now, not only the operations that affect the Current Account are reflected in the Reserves Variation item. The capital inflows and outflows recorded in the financial account also have their counterpart in the Variation of Reserves. Suppose that Spain buys shares in an American company. As we said before, this supposes an outflow of capital for Spain and as such is recorded with a negative sign in the Financial Account. Suppose that the purchase of shares is for an amount of 10,000 euros. The payment in euros means that domestic assets in the hands of the rest of the world increase (it involves the sale of a domestic asset: euros) and therefore this operation will have its counterpart in the Variation in reserves with a positive sign.
Balance of Reserves Variation.- Therefore, the Reserves Variation item includes all the counterparts derived from international transactions (trade in goods and services and capital movements). Given the aforementioned accounting mechanism, if the balance of the Variation in Reserves is positive, it indicates that domestic assets in the hands of foreigners are increasing, which implies that the country is getting into debt vis-à-vis the rest of the world. Similarly, a negative balance in the Reserves Variation item indicates that foreign assets in the hands of the Central Bank are increasing.
Errors and omissions.- Finally, there is the item of errors and omissions, derived from the difficulty of obtaining absolute precision in the annotation of operations. This item must be minimal.
FUNCTIONING OF THE FOREX MARKET AND ITS EFFECTS ON THE EXCHANGE RATE.-
Definition of exchange rate.- The exchange rate between two specified currencies is defined as how much one currency is worth in terms of the other. It is the value of the currency of a foreign nation in terms of the currency of another country. For example, an exchange rate of 102 Japanese yen per dollar means that 102 yen is worth the same as $1. The Foreign Exchange Market is one of the largest in the World. By some estimates, about $3.2 trillion worth of currency exchanges each day.
Spot exchange rate and forward exchange rate.- The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is indicated and traded today but for delivery and payment on a specific future date.
Nominal and real exchange rates.- The nominal exchange rate is the price in foreign currency of one unit of a national currency. The real exchange rate is the rate at which an organization can trade goods and services from one economy (for example, from a country) for those of or another economy. For example, if the price of a good increases 10% in Great Britain, and the Japanese currency simultaneously appreciates 10% against the British currency, then the price of the good remains constant for someone in Japan. The people in Britain, however, will still have to deal with a 10% increase in domestic prices. Another well-known example is the Big Mac index published by The Economist magazine, the purpose of which is to compare, through the reference value of sale of the Big Mac hamburger belonging to the McDonald's fast food chain, the cost of living in the countries where it is sold the hamburger.
Exchange rate systems.-
Fixed exchange rate.-
Definition.- A fixed exchange rate, sometimes called a pegged exchange rate, is an exchange rate regime where the value of one currency corresponds to the value of another currency or of a basket of other currencies, or to another measure of value, like gold.
Stabilize.- A fixed exchange rate is usually used to stabilize the value of a currency to the currency to which it is pegged. This facilitates trade and investment between the two countries, and is especially useful for small economies where foreign trade makes up a large part of their GDP.
Inflation.- It is used, also, as a means to control inflation. However, when the referenced value rises or falls, the linked currency does the same. Furthermore, a fixed exchange rate prevents a government from using national monetary policy to achieve macroeconomic stability.
Floating exchange rate.-
Definition.- A floating exchange rate or flexible exchange rate is an exchange rate regime where the value of a currency is allowed to fluctuate according to the Foreign Exchange Market. A currency that uses a floating exchange rate is known as a floating currency. The opposite of a floating exchange rate is a fixed exchange rate.
Preferable.- There are economists who think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates. As floating exchange rates adjust automatically, they allow a country to cushion the impact of shocks and foreign business cycles, and to anticipate the possibility of having a Balance of Payments crisis. However, in certain situations, fixed exchange rates may be preferable for their greater stability and security. This may not necessarily be true, considering the result of countries that tried to keep the prices of their currencies "strong" or "high" relative to the others, such as Great Britain or the countries of Southeast Asia before the crisis Asian currency.
Managed float.- In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Consequently, the floating exchange rate regime may be more technically known as managed floating. A central bank could, for example, allow the price of a currency to float freely between an upper and a lower limit, a ceiling and a floor price. Management by the central bank may take the form of buying or selling large amounts to ensure price maintenance or resistance, or, in the case of some national currencies, there may be legal penalties for trading outside these limits.
Fear of floating.-
Emerging economies.- A floating exchange rate increases the volatility of currencies. There are economists who think this could cause serious problems, especially in emerging economies. These economies have a financial sector with one or more of the following conditions: high enforceable dollarization (debts), financial fragility and strong effects on the balance sheet of banks and companies.
Liabilities.- When liabilities (debts) are expressed in foreign currency while assets are in local currency, unexpected depreciations of the exchange rate deteriorate the balance sheet of banks and companies and threaten the stability of the national financial system.
Intervention.- For this reason emerging countries appear to face greater fear of floating, as they have minor variations much of the nominal exchange rate, still face greater shocks and interest rate and reserve movements. This is the consequence of the frequent reaction of free-floating countries to movements in the exchange rate with monetary policy and/or intervention in the foreign exchange market.
Functioning.- For example, if imports increase in the euro zone, the demand for the dollar increases and the euro/dollar exchange rate increases, as a consequence imports decrease because imported goods and services become more expensive and, as a consequence, the Exports increase (since the products of the euro zone have become cheaper) and, consequently, the demand for the dollar decreases, returning to equilibrium
The Gold Standard.-
Definition.- In an international gold standard system (which is necessarily based on an internal gold standard in the affected countries), gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. Under such a system, when exchange rates rise above or fall below the set rate for more than the cost of transporting gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to exchange currency for gold.
Functioning.- If imports increase (ceteris paribus, the Trade Balance becomes more deficit), the total amount of gold in a country decreases, as a consequence domestic prices decrease (because the amount of money that circulates depends on the amount of gold that there is in the Central Bank), therefore, exports increase and imports decrease, returning to equilibrium.
Limited.- The total amount of gold that has been mined from 1492 to 2012 has been estimated at around 171,000 tons. Assuming the price of gold is $1,000 per ounce, or $32,500 per kilogram, the total value of all gold mined would be around 4.5 trillion. This is less than the value of money in circulation in the United States alone, when more than 8.3 trillion is in circulation or on deposit (M2). However, this is specifically a perceived disadvantage of the return to the gold standard and not the effectiveness of the gold standard itself. Some proponents of the gold standard consider this to be both acceptable and necessary, while others, who are not opposed to legal reserves for customer deposits in banks, argue that only the base currency, and not deposits, it would need to be replaced.
Stabilize.- Most mainstream economists believe that economic recessions can be largely mitigated by increasing the money supply during economic crises. Following a gold standard would mean that the quantity of money would be determined by the supply of gold, and therefore monetary policy could not be used to stabilize the economy in times of economic recession.
Gold production.- Monetary policy would be essentially determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation, if there is an increase, or deflation, if there is a decrease. Some hold the view that this contributed to the severity and duration of the Great Depression.
Speculative attacks.- Some have argued that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak. For example, some believe that the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency.
Definition.- After abandoning the Gold Standard, the IMF proposed different systems for fluctuating exchange rates. One possibility raised is that which allows a 1% fluctuation on each side of the exchange rate set by the Central Bank.
Functioning.- In this system, where the fluctuation oscillates between +/- 1%, if imports increase, the demand for dollars increases and the euro/dollar exchange rate increases; the central bank increases the supply of dollars, consequently the euro/dollar exchange rate decreases and returns to equilibrium.
Type of imbalance.- It was difficult to determine if the imbalance was temporary or not
Abrupt adjustments.- The countries clung to exchange rates, therefore, the adjustments were abrupt.
Countries with surplus.- The countries with surpluses were not willing to raise the parity of their currencies.
No autonomy.- Countries lose their autonomy over monetary policy (because they are authorized to act very limited)
Dependence on the dollar.- This system depended on a single currency, the dollar. The loss of confidence in this currency caused this system to be abandoned.
GLOBALIZATION. REPERCUSSIONS ON THE ANDALUSIAN ECONOMY.-
Definition.- Globalization is the process by which the people of the world are united in a single society and work together. Globalization is often used to refer to economic globalization; the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. This process is usually recognized to be driven by a combination of economic, technological, sociocultural, political, and biological factors. The term can also refer to the international dissemination of ideas, languages or popular culture.
History of modern globalization.-
Bretton Woods Conference.- Globalization, since World War II, is largely the result of planning by politicians to break down the borders that hinder trade in order to increase prosperity and interdependence and, consequently, decrease the possibility of a future war. His work led to the Bretton Woods conference, an agreement by world political leaders to establish the framework for international trade and finance, and the founding of several international institutions intended to oversee the process of globalization.
Institutions.- These institutions include the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund. Globalization has been facilitated by advances in technology that have lowered the cost of trade, and rounds of trade negotiations, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on trade. free trade.
GATT.- Since World War II, barriers to international trade have been considerably lowered through international agreements – GATT. Particular initiatives carried out as a result of the GATT and the World Trade Organization, for which the GATT, since its foundation, has included:
Promotion of free trade.- Elimination of tariffs, creation of free trade zones with small or no tariffs.
Transport.- Reduced transportation costs, especially as a result of the development of the use of containers for ocean transportation.
Capital controls.- Reduction or elimination of capital controls
Subsidies.- Reduction, elimination or harmonization of subsidies for local businesses and creation of subsidies for multinational companies.
Intellectual property.- Harmonization of intellectual property laws in most states, with more restrictions
Patents.- Supranational recognition of intellectual property restrictions (for example, patents granted by China would be recognized in the United States).
Cultural globalization.- Cultural globalization, driven by communication technology and world marketing of Western cultural industries, was understood at first as a process of homogenization, due to the global domination of American culture at the expense of traditional diversity. However, an opposite trend soon became evident in the emergence of protest movements against globalization and giving a new impetus to the defense of local singularity, individuality and identity, but with uneven results.
Uruguay Round.- The Uruguay Round (1986-1994) led to a treaty to create the World Trade Organization (WTO) to mediate trade disputes and establish a uniform platform for trade. Other bilateral or multilateral trade agreements, including sections of the Maastritch Treaty (1992) of Europe and the North American Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing tariffs and barriers to trade.
Increased.- World exports increased from 8.5% of Gross World Product in 1970 to 16.1% of Gross World Product in 2001.
Positive effects of globalization.-
Industrial.- Global production markets have developed and there is greater access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national limits.
Financial.- Emergence of global financial markets and better access to external financing for borrowers. As these global structures grew faster than any regulatory regime, the instability of the global financial infrastructure increased dramatically, as evidenced by the financial crisis of 2008.
Economical.- Realization of a global common market, based on the freedom of exchange of goods and capital. The interconnectivity of these markets, however, meant that an economic collapse in any given country could not be contained.
Political.- Some use globalization as a means for the creation of a world government that regulates relations between governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers; partly because of its strong and rich economy. Influenced by globalization and with the help of the United States' own economy, the People's Republic of China has experienced tremendous growth in the past decade. If China continues to grow at the rate projected by trends, then it is very likely that in the next twenty years, there will be a further redistribution of power among world leaders. China will have a lot of wealth, industry, and technology to rival the United States for the position of leading world power.
Informative.- Increases in information flow between geographically remote locations. It could be said that this is a technological change with the arrival of fiber optic communications, satellites, and the increase in telephone and Internet availability.
Language.- The most popular language is English. About 35% of post, telex and cable are in English. About 40% of world radio programs are in English. About 50% of all Internet traffic uses English.
Competition.- Survivors in the new world business market call for improved productivity and increased competition. Because the market is becoming global, companies in various industries have to improve their products and use technology skillfully to face increased competition.
Ecological.- The arrival of global environmental changes that could be solved with international cooperation, such as climate change, waters that cross borders and pollution, ocean overfishing, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalization and free trade can increase pollution. On the other hand, economic development historically requires a dirty industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living.
Cultural.- The growth of intercultural contacts; the arrival of new categories of knowledge and identities that express cultural diffusion, the desire to increase one's standard of living and enjoy foreign products and ideas, adopt new technologies and practice, and participate in a “world culture” . Some lament the resulting consumerism and the loss of languages.
Multiculturalism.- The spread of multiculturalism, and better individual access to cultural diversity (for example, through the export of Hollywood and Bollywood films). Some consider such imported culture a danger, since it can supplant the local culture, causing reduction in diversity or even assimilation. Others consider that multiculturalism promotes peace and understanding between people.
Travels and tourism.- More international travel and tourism. WHO estimates that up to 500,000 people are on airplanes at any one time.
Immigration.- Increased immigration, including illegal immigration
Consumption of local products.- The extension of the consumption of local products (for example food) to other countries (often adapted to their culture).
Social.- The development of the system of non-governmental organizations as the main agents of global public policy, including humanitarian aid and development efforts.
Technique.- The development of a global telecommunications infrastructure and a greater flow of data between borders, using technologies such as the Internet, satellite communications, the submarine fiber optic cable and wireless telephones.
Models applied globally.- An increase in the number of models applied globally; for example, copyright laws, patents, and global trade agreements
Legal/ethical.- The creation of the international criminal court and international justice movements. The importation of crime and the growing awareness of global crime fighting efforts and cooperation. The emergence of global administrative law.
Offshoring.- It is too easy to look at the positive aspects of globalization and the great benefits that are clear anywhere, without acknowledging several negative aspects. They are often the result of globalized businesses and the offshoring of once self-sustaining economies.
Inequality and environmental degradation.- Globalization - the increasing integration of economies and societies around the world - has been one of the most heated topics of debate in the international economy in recent years. Rapid growth and poverty reduction in China, India and other countries that were poor 20 years ago has been a positive aspect of globalization. But globalization has also generated significant international opposition that inequality and environmental degradation have increased. In the Midwest of the United States, globalization has eroded its competitiveness in industry and agriculture, lowering the quality of life in places that have not adapted to change.
Repercussions on the Andalusian economy.-
Caviar.- The Riofrío fish farm in Granada exports up to 40% of its caviar production. It competes in international markets with Russian and Iranian caviar.
Focus.- The trade is focused on the export of agri-food products and the import of energy products. The three main countries that buy Andalusian products are Germany, France and Italy with 33% of total exports. The economies of these countries buy the majority of Andalusian agri-food products. On the other hand, Algeria, Nigeria and Russia mainly sell petroleum to Andalusia with 24.2% of imports. The challenge for Andalusia in the future is to diversify its exports to other more elaborate products with greater added value and to reduce its dependence on the export of energy products.
TOPIC 6.- CURRENT ECONOMIC IMBALANCES
THE CYCLICAL CRISIS OF THE ECONOMY.-
Marxist economics.- For Marx, the economy based on the production of articles to be sold on the market is inherently prone to crisis. From the Marxist point of view, profit is the main engine of the market economy, but the profitability of businesses (capital) has a tendency to fall that repeatedly creates crises, in which there is massive unemployment, businesses fall, the remaining capital is centralized and concentrated and profitability is recovered. In the long run, these crises tend to be more severe and the system will eventually fail. Some Marxist authors such as Rosa Luxemburg saw the lack of purchasing power of workers as a cause of the tendency of supply to be greater than demand, creating crises, in a model that has similarities with the Keynesian model. A number of modern authors have attempted to combine the views of Marx and Keynes. Others, in contrast, have emphasized the basic differences between the Marxist and Keynesian perspectives: while Keynes saw capitalism as a system of maintenance of value and susceptible to efficient regulation, Marx saw capitalism as a historically condemned system that cannot be put down. under social control.
1860.- In 1860, the French economist Clement Juglar identified the presence of business cycles of 7 to 11 years, although he was cautious not to assert any rigid regularity. Later, the Austrian economist Joseph Schumpeter argued that a Juglar cycle has four stages: (i) expansion (increase in production and prices, low interest rates); (ii) crisis (the stock markets fall precipitously and there are multiple bankruptcies of companies); (iii) recession (falls in prices and production, high interest rates); (iv) recovery (the shares are recovered due to the fall in prices and income). In this model, recovery and prosperity are associated with increases in productivity, consumer confidence, aggregate demand, and prices.)
Typology of business cycles.- In the middle of the 20th century, Schumpeter and others proposed a typology of business cycles according to their periodicity, for this reason a number of particular cycles were named after their discoveries or proposals:
Economic stabilization.- Business cycles after World War II were generally more moderate than previous cycles. The economic stabilization policy, using fiscal policy and monetary policy, appeared so that the worst excesses of the economic cycles were lost. Automatic stabilization due to aspects of the government budget also helped defeat the cycle even without conscious action from politicians.
Frictional.- Frictional unemployment occurs when a worker changes from one job to another. While he is looking for a job, he is experiencing frictional unemployment. This applies to new graduates looking for a job as well. This is a productive part of the economy, increasing long-term worker welfare and economic efficiency, and it is also a type of voluntary unemployment. It is the result of imperfect information in the job market, because if job seekers knew that they would be employed for a particular vacancy, almost no time would be wasted in getting a new job by eliminating this form of unemployment. Frictional unemployment is always present in an economy, therefore, the level of involuntary unemployment is appropriately the unemployment rate minus the frictional unemployment rate, which means that increases or decreases in unemployment are normally underrepresented in simple statistics.
Classic.- Classic unemployment or real wage unemployment can occur when real wages for a job are set above the agreed minimum level (in Spain the Minimum Wage). Liberal economists like FA Hayek argue that unemployment increases further if the government intervenes in the economy to try to improve the conditions of those with jobs. For example, the minimum wage increases the cost of low-skilled laborers above market equilibrium, resulting in people who want to work at the starting line but cannot as the imposed wage is greater than their value as workers, becoming or becoming unemployed. They believed that laws restricting firing made it less likely for businesses to hire up front, as hiring becomes riskier, leaving many young people unemployed and unable to find work. Some, such as Murray Rothbard, suggest that even social taboos (non-market, supply and demand criteria) can prevent wages from falling to the agreed level (MW).
Cyclical or Keynesian.- Cyclical or Keynesian unemployment, also known as demand-poor unemployment, occurs when there isn’t enough aggregate demand in the economy. This is caused by a recession in the business cycle, and wages don’t fall to find the equilibrium level.
Definition.- Structural unemployment is caused by a mismatch between jobs offered by employers and potential workers. This can refer to geographic locations, skills, and many other factors. If such a mismatch exists, frictional employment is likely to be more significant as well. For example, in the late 1990s there was a technology bubble, creating demand for IT specialists. In 2000-2001 this bubble burst. A housing bubble soon formed, creating demand for real estate agency workers, and many computer scientists had to retrain to find employment.
Permanent.- André Gorz believes that structural unemployment could be permanent in modern society, as the microchip revolution and the explosion in computer science and the robotization of work, even in the least developed countries in the industry increases productivity.
Seasonal.- Seasonal unemployment results from fluctuations in labor demands in certain industries due to the seasonal nature of production. In such industries there is a seasonal pattern in the demand for labor. During the period when the industry is at its peak there is a high degree of seasonal employment, but during the off-peak period, there is seasonal unemployment. Seasonal unemployment occurs when an occupation is not in demand in certain seasons.
Voluntary and involuntary.- Although there have been various definitions of voluntary and involuntary unemployment in the economic literature, a simple distinction is often applied. Voluntary unemployment is attributed to the decisions of individuals, while involuntary unemployment exists because of the socioeconomic environment (including market structure, government intervention, and the level of aggregate demand) in which individuals operate. In these terms, much or most of frictional unemployment is voluntary, as it reflects individual search behavior. On the other hand, cyclical unemployment, structural unemployment, and classical unemployment, are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by unemployment in the past, while classical unemployment may result from legislative and economic choices made by unions and political parties. Thus, in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers, even when wages can be adjusted so that if all vacancies were filled, there would be unemployed workers. This is the case with cyclical unemployment, whereby macroeconomic forces lead to microeconomic unemployment while classical unemployment can result from legislative and economic elections made by unions and political parties. Thus, in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers, even when wages can be adjusted so that if all vacancies were filled, there would be unemployed workers. This is the case with cyclical unemployment, whereby macroeconomic forces lead to microeconomic unemployment.
Cost of unemployment.-
Individual.- Unemployed individuals cannot earn money to meet financial obligations. Failure to pay your mortgage or rent can lead to homelessness through foreclosure or eviction. Unemployment increases susceptibility to malnutrition, illness, mental stress, loss of self-esteem, leading to depression. According to a study published in Social Indicators Research, even those who tend to be optimistic find it difficult to see the bright side of things when they are unemployed.
Production Possibilities Frontier.- An economy with high unemployment is not using all the resources, for example, available work. Since it is operating below its production possibility frontier, it could have higher output if the entire labor force were usefully employed. However, there is a trade-off between economic efficiency and unemployment: if frictional unemployment accepted the first job offered, they would probably be operating below their skill level, reducing economic efficiency.
Xenophobia and protectionism.- High unemployment can encourage xenophobia and protectionism as workers are afraid that foreigners are stealing their jobs. Efforts to preserve existing jobs for national and native workers include legal barriers against outsiders who want work, obstacles to immigration and/or tariffs, and similar trade barriers against foreign competitors.
Oligopsony.- Finally, a growing unemployment rate concentrates the oligopsony power of employers, increasing competition among workers for scarce employment opportunities.
Eurostat.- Eurostat, the statistical office of the European Union, defines unemployment as those between 15 and 74 years old who are not working, have looked for work in the last four weeks, and are ready to start working in two weeks, in conformity with the standards of the International Labor Organization (ILO). The Eurostat also includes a long-term unemployment rate. This is defined as a part of unemployment that has been unemployed for a period of more than one year.
Three methods.- Three data collection methods are used in the European Union. First, the European Labor Force Study (EU-LFS) collects data from all member states every quarter. Second, for monthly calculations, national surveys or national records from employment offices are used in conjunction with EU-LFS quarterly data. And thirdly, on a monthly basis, unemployment rates are interpolated from the monthly data of the member states to provide “harmonized data”.
Spain.- Mainly, unemployment is measured monthly with the “Labor Force Survey” (EPA) and the unemployment data registered in the Employment Offices (in Andalusia the Andalusian Employment Service -SAE-).
Definition.- In economics, people in the workforce are job suppliers. The workforce is all people, not military, who are employed or unemployed. In 2005, the world's workforce was over three billion people. In Spain, in the fourth quarter of 2013, the total workforce amounted to 22,654,500 people.
Working age.- Normally, the active population of a country (or other geographical entity) consists of all those who are of working age (typically above a certain age (over 14 or 16) and below the retirement age, who are participating workers, which are people actively employed or looking for work. Child labor laws in the United States prohibit people under the age of 18 from hazardous work.
Unemployment rate.- The fraction of the workforce that is looking for a job but cannot find it determines the unemployment rate.
THE ENVIRONMENT AS A SENSITIVE AND LIMITED RESOURCE.-
The limits of growth.-
1972.- Limits to Growth is a 1972 report modeling the consequences of rapid world population growth and limited supply of resources, commissioned by the Club of Rome. Its authors were Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W. Behrens III. The report used the World3 model to simulate the consequences of the interaction between Earth and human systems. The book echoes some of the concerns and predictions of Reverend Thomas Robert Malthus in "An Essay on the Principles of Population." (1798).
Five variables.- Five variables were examined in the original model, on the assumption that exponential population growth, with great precision, would describe their growth patterns, and that the ability of technology to increase the availability of resources grows only linearly. These variables are: world population, industrialization, pollution, food production and resource depletion. The authors intended to explore the possibility of a sustainable feedback pattern that would be achieved by altering the growth trends among the five variables.
Recent updated version.- The most recent and updated version was published on June 1, 2004 by Chelsea Green Publishing Company and Earthscan under the name "Limits to Growth: The Update 30 Years Later". Donnella Meadows, Jorgen Randers and Dennis Meados have updated and expanded the original version. They had previously published: Beyond the Limits in 1993 as an update twenty years after the original material.
Graham Turner.- In 2008 Graham Turner, at the Commonwealth Scientific and Industrial Research Organization (CSIRO) in Australia published a document called "A Comparison of" The Limits to Growth "with thirty years of reality". Examining the past thirty years of reality with predictions made in 1972 found that changes in industrial production, food production and pollution are all in line with the book's predictions of an economic collapse in the 21st century.
Oceans.- The circulation patterns of the oceans have a strong influence on climate and weather and, in turn, on the food supply of humans and other organisms. Scientists have warned of the possibility, under the influence of climate change, of a sudden alteration in the circulation patterns of ocean currents that could drastically alter the climate in some regions of the globe. The main environmental impacts occur in the most inhabited regions of the ocean's limits - estuaries, the coastline and bays. Ten percent of the world's population - some 600 million people - live in low-lying areas vulnerable to rising sea levels. Worrisome trends that require management include: overfishing (beyond sustainable levels), coral bleaching due to ocean warming and ocean acidification due to increasing levels of dissolved carbon dioxide; and the sea level rises due to climate change. Because its vast oceans also act as a convenient dump for human waste. Strategies to remedy this include: more care in waste management, legal control of fishing overexploitation by adopting sustainable fishing practices and the use of sensitive and sustainable aquaculture and fish farms, reduction of fossil fuel emissions and the restoration of coastal habitats and other habitats; coral bleaching due to ocean warming and ocean acidification due to increasing levels of dissolved carbon dioxide; and the sea level rises due to climate change. Because its vast oceans also act as a convenient dump for human waste. Strategies to remedy this include: more care in waste management, legal control of fishing overexploitation by adopting sustainable fishing practices and the use of sensitive and sustainable aquaculture and fish farms, reduction of fossil fuel emissions and the restoration of coastal habitats and other habitats.
Toxic substances.- Chemical synthetic production has increased following the stimulus received during the Second World War. Chemical production includes everything from herbicides, pesticides, and fertilizers to household chemicals and hazardous substances. Aside from increasing greenhouse gas emissions into the atmosphere, chemicals of particular concern include: heavy metals, nuclear waste, chlorofluorocarbons, persistent organic pollutants, and all harmful chemicals capable of bioaccumulation. Although most synthetic chemicals are harmful, rigorous testing of new chemicals is needed in all countries for adverse health and environmental effects. International law has been established to deal with the global distribution and management of dangerous goods.
Erosion, etc.- Environmental issues can include erosion, sink formation, loss of biodiversity, and contamination of soil, groundwater, and surface water from chemical mining processes. In some cases, additional logging of forests is done in the vicinity of mines to increase the space available for the storage of created waste and dirt. In addition, creating environmental damage, the pollution resulting from the escape of chemical products also affects the health of the local population. Mining companies, in some countries, are required to follow environmental rehabilitation codes, ensuring that the area in which mining has been applied is returned to its original state.
Arsenic, etc.- Mining can have adverse effects on the surrounding surface and groundwater if protective measures are not taken. The result can be unnatural high concentrations of some chemicals, such as arsenic, sulfuric acid, and mercury over a significant surface or underground area. Liquid residues of mere dirt or rock debris - even if they are non-toxic - also devastate the surrounding vegetation. Dumping liquid waste into surface waters or forests is the worst option here. Disposing of the waste at the bottom of the sea is seen as the best option (if the dirt is pumped to great depth). Mere storage on land and refilling the mine after it has been depleted is even better, of course, if forests do not need to be cleared for waste storage. There is the potential for massive contamination of the area around the mines from various chemicals used in the mining process, as well as potentially harmful components and metals pulled out of the ground with the ore. Large amounts of water produced from mine drainage, mine cooling, aqueous extraction, and other mining processes increase the potential for these chemicals to contaminate soil and surface water. In well-regulated mines, hydrologists and geologists take careful soil and water measurements to exclude any type of water contamination that could be caused by mining operations. The reduction or elimination of environmental degradation is imposed on modern American mining by federal and state laws, restricting operators from finding standards to protect surface and groundwater from contamination. This is best done through the use of non-toxic extraction processes such as Bioleaching. If the project site does, however, become contaminated, mitigation techniques such as acid mine drainage (AMD) need to be carried out.
Definition.- The Kyoto Protocol is a United Nations protocol within the Framework of the Convention on Climate Change, an international environmental treaty agreed at the United Nations Conference, a treaty whose objective is to achieve the “stabilization of gas concentrations with a greenhouse effect in the atmosphere at a level that would prevent dangerous man-made interference with the climate system”. The Kyoto Protocol establishes legally binding commitments for the reduction of four greenhouse gases (carbon dioxide, methane, nitrous oxide and hexafluoro sulfide), and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by industrialized nations, like, as general commitments for all member countries. In the January 2009 update, 183 countries have ratified the protocol, which was initially signed on December 11, 1997 in Kyoto, Japan, and entered into force on February 16, 2005. Under Kyoto, industrialized countries agreed to reduce their collective greenhouse gas emissions 5.2% compared to 1990. National limitations range from 8% for the European Union, 6% for Japan and 0% for Russia. The treaty allows greenhouse gas emissions to increase by 8% for Australia and 10% for Iceland. The United States has not ratified the protocol. At the Doha summit in 2012 it was agreed to extend the Kyoto Protocol until 2020, but Russia, Japan and Canada have not agreed to this new commitment.
Flexible mechanisms.- Kyoto includes what is defined as “flexible mechanisms” such as the purchase and sale of emissions, the Clean Development Mechanism and joint implementation to allow the economies involved to reach their limitations on greenhouse gas emissions by purchasing credits for reducing emissions from anywhere else, through financial exchanges, projects that reduce emissions in the economies not involved, from other economies involved, or from economies involved with excessive concessions. In practice this means that the economies not involved have no restrictions on their emissions, but they have financial incentives to develop emission reduction projects to receive “carbon credits” that can then be sold to buyer economies involved, encouraging sustainable development. Furthermore, the flexible mechanism allows the nations involved with efficient, low industrial greenhouse gas emissions, and high environmental prevalence standards to buy carbon credits on the world market instead of reducing greenhouse gas emissions domestically. The entities involved will want to acquire carbon credits as cheaply as possible, while the entities not involved want to maximize the value of the carbon credits generated from their greenhouse gas projects.
Authorities.- Among the signatories, all nations have established Designated National Authorities to direct their greenhouse gas portfolio; countries including Japan, Canada, Italy, the Netherlands, Germany, France, Spain and others, are actively increasing government carbon funding, supporting multilateral carbon intentions to buy carbon credits from non-involved countries, and are working closely with major utilities, energy, petroleum and gas, and chemical conglomerates to acquire Greenhouse Gas Certificates as cheaply as possible. Virtually all countries not involved have also established Designated National Authorities to administer the Kyoto process, specifically the Clean Development Mechanism process that determines which Greenhouse Gas Projects they wish to propose for accreditation by the Executive Council of the Clean Development Mechanism.
REPERCUSSIONS ON ANDALUSIAN ECONOMIC GROWTH ON OUR ENVIRONMENT AND ON OUR LEVEL OF LIVING.-
Chemical industry.- Huelva and its nearby populations are linked, from the 1960s to the chemical industry (petroleum refineries, power plants natural gas or thermal located in the city or in nearby locations). Its installation in the area was due (among other aspects) to the high degree of underdevelopment and unemployment that existed in the area in those days, and also to the need to take advantage of the nearby mining industry allowing it to continue in the country.
Advantages and disadvantages.- The development of Huelva is undeniable, but so are the serious diseases associated with mining and the main ecological steps backwards. In the past, citizens were divided between those who saw the chemical area as the economic engine of the city, and those who saw it as a main problem for their health and for the Environment.
Important.- Today, the area with more than 1,500 hectares (half the land of the city), is one of the most important complexes in the country, with 16 companies and more than 6,000 workers.
Pérez Cubillas.- As a consequence of the activities of Fertiberia, and, to a lesser extent, FMC Foret, another 1,200 hectares are used indirectly by the chemical industry. They are the phosphogypsum pools, which are located about 300 meters from the Pérez Cubillas de Huelva neighborhood, one kilometer from the city center. Greenpeace established that the cancer rate in Huelva is the highest in Spain and recently denounced that phosphogypsum pools emit radiation 27 times higher than the allowed amount. There is a citizen platform called the “Mesa de la Ría”, which shows its concern about the negative effects of the chemical industry, in environmental and health terms.
Aznalcóllar Disaster.- The mine's waste pond broke at the end of April 1998, sending a toxic wave to the Doñana National Park, one of the largest natural reserves in Europe. The spill caused damage over an area of about 30 kilometers, destroying rare plants, flora and fauna. At present, the reopening of the mine is being studied again.
CONSUMER SOCIETY. CONSUMERISM.-
Definition.- Consumerism refers to economic policies that emphasize consumption. In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society (Productivism, especially in the British sense of the term).
First civilizations.- Consumerism has strong ties to the Western world, but it is, in fact, an international phenomenon. People buying goods and consuming materials in excess of their basic needs (subjective) are as old as the earliest civilizations (Ancient Egypt, Babylon, and Ancient Rome, for example).
Industrial Revolution.- A big change in consumerism came just before the Industrial Revolution. Whereas scarcity of resources had previously been the norm, the Industrial Revolution created an unusual situation: for the first time in history, products were available in remarkable quantities, at markedly low prices, and were therefore available to virtually everyone. And that is why the era of mass consumption began, the only era where the concept of consumerism is applicable.
Alternative lifestyle.- It is good to keep in mind that, since consumerism began, various individuals and groups have consciously sought an alternative lifestyle, such as the simple life movements, ecological awareness and purchases of local products.
20th century.- Although consumerism is not a new phenomenon, it has become widespread in the course of the 20th century, and particularly in recent decades. The influence of neoliberal capitalism has made the citizens of capitalist countries extraordinarily wealthy compared to those living under economic systems under the influence of capitalist countries.
Brands.- In many critical contexts, consumerism is used to describe the tendency of people to identify strongly with the products or services they consume, especially those with trademark names and perceived as attractive status symbolism, for example luxury car, designer clothes, or expensive jewelry. A culture that is permeated by consumerism can be referred to as a consumer culture or a market culture.
Status.- Opponents of consumerism argue that many luxuries and unnecessary consumer products can act as a social mechanism allowing people to identify with like-minded individuals through the presentation of similar products, again using aspects of status symbolism to judge socioeconomic status and social stratification. Some people believe that relationships with a product or brand are substitutes for healthy human relationships that are lacking in societies, and with consumerism, create cultural hegemony, and are part of a general process of social control in modern society. Critics of consumerism often point out that consumerist societies are more prone to damaging the environment, to contribute to global warming and to waste resources faster than other societies.
Trends.- In a capitalist market with the objective of selling, certain trends can emerge:
Needs and wishes.- It is in the interest of product advertisers and sellers that the needs and wishes of consumers are never completely or permanently fulfilled, so that the consumer can repeat the consumption process and buy more products.
Made to break.- Products made to break are more beneficial for the producer, the seller and, therefore, for the entire market. Consequently, planned obsolescence is embedded in the production and marketing process of new goods and services.
Fashion.- It’s also profitable for the producer to make his products part of a continuously changing fashion market. By doing this, items that are still in good condition and can last for many years are considered in need of constant replacement, to keep in sync with current fashion trends.
Time.- In this way, fixed earnings are secured by this self-perpetuating system, but consumers are not comfortable or satisfied for a significant period of time with what they have.
Modern Consumerism in the 21st century.-
1990s.- Beginning in the nineties, the most frequent reason given for attending college had changed to make a lot of money, on top of reasons such as becoming an authority in a field or helping others in difficulty. This statement is directly related to the rise of materialism, specifically in the technological aspect. At that time CD players, digital media, personal computers, and cell phones all began to integrate into the affluent everyday American way of life. Madeline Levine criticized what she saw as a major change in American culture - "a change from the values of community, spirituality, and integrity, and toward competition, materialism, and disconnection."
Upper class.- Businesses have realized that wealthy consumers are the most attractive targets for marketing their products. The tastes, lifestyles and preferences of the upper class slowly spread to become the standard that all consumers seek to emulate. Not-so-wealthy consumers can "buy something new that will speak to your site in the tradition of prosperity." A consumer can have the instant gratification of purchasing an expensive item that will help improve their social status.
Famous.- Imitation is also a central component of 21st century consumerism. As a general trend, regular consumers seek to imitate those who are above them in the social hierarchy. The poor try to imitate wealth, and wealth imitates celebrities and other icons. Celebrity product advertisements can be seen as evidence of the desire of modern consumers to buy products, in part or only to imitate people of higher social status. This buying behavior can coexist in the mind of a consumer with an image of oneself being an individualist.
Anti-consumer movement.- There has always been strong criticism of anti-consumer movements. Most of this comes from liberal thoughts.
Liberal Criticism.- Libertarian critiques of the anti-consumer movement are, for the most part, based on the perception that it leads to elitism. Namely, liberals believe that no one should have the right to decide for others which goods are necessary for life and which goods aren’t, or that necessarily wasteful luxuries, and consequently hold that anti-consumerism is a precursor of central planning or a totalitarian society.
Definition.- Poverty is the shortage of common things such as food, clothing, shelter and safe drinking water, everything that determines the quality of life. It can also include lack of access to opportunities such as education and employment that help escape poverty and/or allow one to enjoy the respect of fellow citizens.
Causes of poverty.-
Economic inequality.- Even if the median income is high, it may be the case that the poverty rate is also high if incomes are badly distributed. However, the evidence of the relationship between absolute poverty rates and inequality is unequal and sensitive to the inequality index used. For example, while many Sub-Saharan countries have high inequality and high poverty rates, other countries, such as India, have low inequality and high poverty rates. In general, the extent of poverty is much more closely related to average income than to the variation in its distribution. At the same time, some studies indicate that countries that start with a more equal income distribution find it easier to eradicate poverty through economic growth. In addition, to income inequality, an unequal distribution of land can also contribute to high levels of poverty.
Increases in food prices.- The poor spend a greater proportion of their budgets on food than the rich. As a result, poor households, and those close to the poverty line, can be particularly vulnerable to increases in food prices.
Lack of democracy in poor countries.- The records, when we look at the social dimensions of development - access to clean water, women's literacy, health care - are even more starkly divergent. For example, in terms of life expectancy, rich democracies typically enjoy life expectancies that are nine years higher than poor autocracies. Chances of finishing high school are 40 percent greater in rich democracies than in poor autocracies. Infant mortality rates are 25 percent lower in rich democracies than in poor autocracies. Agricultural outputs are about 25 percent higher, on average, in poor democracies than in poor autocracies - an important fact, given that 70 percent of the population in poor countries is often rural. The poor democracies do not spend more on their health and education sectors, as a percentage of GDP, than the poor autocracies do, they don’t get higher levels of foreign assistance. They don’t accumulate higher levels of budget deficit. They simply manage the resources they have more efficiently.
Effectiveness.- The effectiveness of governments has an important impact on the delivery of socioeconomic results for the poor populations.
Legislation.- Weak legislation can discourage investment and therefore perpetuate poverty.
Curse of natural resources.- Poor management of resource revenues may mean that rather than lifting countries out of poverty, revenues from such activities as petroleum production or gold mining actually lead to poverty of the common people.
Infrastructure.- Government failures to provide essential infrastructure worsen poverty.
Education.- Poor access to affordable education traps individuals and countries in cycles of poverty.
Corruption.- High levels of corruption undermine efforts to make a sustainable impact on poverty.
Welfare states.- Welfare states have an effect on poverty reduction. Today's modern, expansive welfare states that ensure economic opportunity, independence, and security in close proximity are still the exclusive domain of developed nations.
Demography and social factors.-
Overpopulation.- Overpopulation and lack of access to birth control methods.
Historical factors.- For example imperialism, colonialism and post-communism.
Matthew effect.- It is the phenomenon, widely observed throughout the advanced welfare states, that the middle classes tend to be the main beneficiaries of social benefits and services, even if they are primarily directed to the poor.
Cultural causes.- Those who attribute poverty to common patterns of life, learned or shared within a community. For example, Max Weber maintained that the Protestant work ethic contributed to growth during the industrial revolution.
Poor access.- Poor access to affordable health care makes individuals less resistant to economic deprivation and more vulnerable to poverty.
Nutrition.- Inadequate nutrition in childhood, an effect in itself of poverty, undermines the ability of individuals to develop all their human capacities and, consequently, makes them more vulnerable to poverty. Lack of essential minerals such as iodine and iron can affect brain development.ç
Disease.- Specifically diseases of poverty: AIDS, malaria and tuberculosis.
Clinical depression.- It undermines the resistance of individuals and, when they are not properly treated, makes them more vulnerable to poverty.
Substance abuse.- Including, for example, alcoholism and drug abuse when not properly treated undermines resistance and can send people into vicious cycles of poverty.
Desertification and overgrazing.-
Deforestation.- As exemplified by the widespread rural poor in China that began in the early twentieth century and is attributed to the unsustainable felling of trees.
Natural factors.- Such as climate or environmental change. Lower-income families suffer most of climate change; however, on a per capita basis, they contribute as little as possible to climate change.
Geographic factors.- For example, access to fertile land, fresh water, minerals, energy, and other natural resources. On the other hand, research on the resource curse has found that countries with an abundance of natural resources creating rapid export growth tend to have less long-term prosperity than countries with less of these natural resources.
Absolute poverty.- Absolute poverty refers to a standard scenario that is constant over time and between countries. An example of an absolute measure would be the percentage of the population that eats less food than is needed to sustain the human body (approximately 2,000-2,500 calories per day for an adult male).
Definition.- Relative poverty considers poverty as socially defined and dependent on the social context, therefore relative poverty is a measure of income inequality. Relative poverty is usually measured as the percentage of the population with incomes less than a fixed proportion or median income. There are several other different measures of income inequality, for example the Gini coefficient or the Theil index.
Measure.- Relative poverty measures are used as official poverty rates in several developed countries. However, these poverty statistics measure inequality more than material deprivation or hardship. The measures are usually based on a person's annual income and often do not take into account total wealth. The main poverty line in the Organization for Economic Cooperation and Development and the European Union is based on “economic distance”, an income level set at 50% of the median income of a household.
Median income.- Median income (not average income) is that level of income that allows the individuals of a society to be divided into two exactly equal groups. For example, if we have three people who earn 1 euro, 2 euros and 10 euros, the average income would be almost 4.5 euros, but the median income would be 2 (half of the observations are to the left of 2 and the other half to the right)
Extreme poverty and moderate poverty.- The World Bank defines extreme poverty as living with less than a Parity Purchasing Power of $1.25 per day, and moderate poverty as less than $2 per day. It has been estimated that in 2001, 1.1 billion people had consumption levels below $1 a day and 2.7 billion people lived below $ 2 a day. The proportion of the world's population in developing countries living in extreme economic poverty fell from 28 percent in 1990 to 21 percent in 2001. Looking at the period 1981-2001, the percentage of the world's population living with less than $1 a day has dropped ___
Poverty reduction strategies.-
Distributive change.- Growth accompanied by a better distribution is better than just growth.
Not enough.- Organizations such as the International Monetary Fund and the World Bank see economic growth as a necessary but not sufficient condition for poverty reduction. Therefore, it is important to note that varying poverty rates may not just and simply be related to economic growth. Some research tends to show that some countries can have economic growth and reduce poverty while other poor nations cannot.
Good government.- Good government means efficient and fair government, a government that is less corrupt and that works for the long-term interests of the nation as a whole. Examples of good governance leading to economic development and poverty reduction can be seen in countries such as Thailand, Taiwan, Malaysia, South Korea, and Vietnam.
Debt relief.- Given that many less developed nations have themselves incurred extensive indebtedness with banks and governments of wealthy nations, and given the interest payments on these debts are often more than a country can generate per year in export earnings, canceling part of all these debts can allow poor nations to “get out of the hole”. However, the effectiveness of debt relief is uncertain and whether or not it has lasting effects is debated. It may not change the underlying conditions that led to less long-term development in the first place.
Import substitution and export industries.- The most widely used policies of East and South-West Asian countries have been successful and to reduce poverty they have substituted imports and developed export industries.
Substitution of imports.- It simply means trying to discourage the importation of goods so that the domestic economy of less developed countries can begin to make the products themselves. Import substitution was carried out successfully in Taiwan. Another example is South Korea's ban on imported Japanese cars that lasted for decades. This led South Korea to strengthen its own automobile industry, now selling millions of highly valued automobiles in the United States and Europe.
Export industries.- There is also a common export industries policy. With this policy, the government helps to stimulate the production of goods to export to rich nations to obtain a favorable trade balance and the capital inflow or funds for more investment. An avalanche of consumer products such as televisions, radios, bicycles, and textiles in the United States, Europe, and Japan has helped incresase the economic expansion of the Asian tiger economies in recent decades.
Microloans.- One of the most popular of the new technical tools for economic development and poverty reduction is the microloans made famous in 1976 by the Grameen Bank in Bangladesh. The idea is to lend small amounts of money to farmers or villages so that these people can get the things they need to increase their financial reward. A small water pump that costs only $50 can make a big difference in a town without irrigation, for example. A couple hundred dollars for a small bridge linking a town to a city where you can market farm produce is another example.
Fair trade.- Another method that has been proposed to alleviate poverty is fair trade, which advocates payment above the market price in addition to social and environmental standards in areas related to the production of goods. The effectiveness of this method for poverty reduction is controversial.
Critics.- Some non-governmental organizations have maintained that Western monetary aid often only serves to increase poverty and social inequality, or because it is conditioned by the implementation of harmful economic policies in the recipient countries, or because it is linked to the importation of products from the donor country over cheaper alternatives, or because foreign aid is seen as serving the interests of the donor rather than the recipient. Critics also maintain that some of the foreign aid is stolen by corrupt governments and officials, and that higher levels of aid erode the quality of government. Politics is much more oriented towards getting more monetary aid than towards the needs of the people.
Audit.- Advocates maintain that these problems can be solved with a better audit of how the aid is used. Help from non-governmental organizations can be more effective than government aid; this may be because it is better at locating the poor and is better controlled at the level of the common people.
Millennium Development Goals.- The eradication of extreme poverty and hunger is the First Millennium Goal. One of the objectives within this goal is to halve the proportion of people living in extreme poverty by the year 2015. In addition to broader methods, the Sachs Report (for the United Nations Millennium project) proposes a series of “Quick earnings” methods identified by development experts that would cost relatively little but could have a significant constructive effect on global poverty. Some of these “Quick earnings” are such as targeted assistance to local entrepreneurs to grow their businesses and create jobs, access to information on sexual and reproductive health, drugs for AIDS, tuberculosis and malaria, free school meals for children, legislation for women's rights, providing soil nutrients for farmers in Sub-Saharan Africa, access to electricity, water and sanitation, improving shacks and providing land for the construction of houses of public promotion, among other things.
Definition.- Underdevelopment is the state of an organization (for example a country) that hasn’t reached its maturity. It is often used to refer to economic underdevelopment, symptoms of which include lack of access to job opportunities, health care, clean water, food, education, and a home.
Overview.- Underdevelopment occurs when resources are not used for their full socioeconomic potential, with the result that local or regional development is slower, in most cases, than it should be. Furthermore, it results from the complex interaction of internal and external factors that allow the least developed countries only an unbalanced progression of development. Underdeveloped nations are characterized by a large disparity between their rich and poor populations, and a deficit trade balance.
Extended overview.- The economic and social development of many developing countries has not even been. They have an unbalanced trade balance that results from their dependence on primary products (usually only a handful) for their export earnings. These items are often (1) in limited demand in industrialized countries (eg tea, coffee, sugar, cocoa, bananas); (2) they are vulnerable to being replaced by synthetic substitutes (jute, cotton, etc.); o (3) are experiencing a reduction in demand with the evolution of new technologies that require smaller amounts of raw materials (as is the case with many metals). Prices cannot be raised as this simply accelerates the use of synthetic substitutes or alloys, production cannot be expanded since prices fall rapidly. Consequently, primary commodities, on which most developing countries depend, are subject to considerable short-term price fluctuations, making the foreign exchange earnings of developing nations unstable and vulnerable. Development therefore remains complicated.
History.- The world consists of a group of rich nations and a large number of poor nations. It is usually held that economic development takes place in a series of capitalist phases and that currently underdeveloped countries are still through a phase in history that developed countries today passed through long ago. Countries that are not now fully developed have never been underdeveloped in the first place, although they could have been.
Definition.- The Modernization Theory is a socio-economic theory, also known as the Development Theory. It highlights the positive role played by the developed world in modernizing and facilitating sustainable development in underdeveloped nations.
It consists of three parts.-
Identification.- Identification of the types of companies, and explanation of how those designated as modernized or relatively modernized differ from the others.
Specification.- Specification of how societies become modernized, comparing the factors that are more or less conducive to transformation.
Generalizations.- Generalizations about how the parts of a modernized society fit each other, involving comparisons of stages of modernization and types of modernized societies with clarity on the prospects for further modernization.
Definition.- Dependency Theory is the body of theories of various intellectuals, Third World and First World, that suggest that the rich nations of the world need a peripheral group of poor states to maintain wealth. The Dependency Theory states that the poverty of the countries in the periphery is not because they aren’t integrated into the world system, but because of how they are integrated into the system.
Poor nations - rich nations.- These poor nations provide natural resources, cheap labor, a destination for outdated technology, and markets for rich nations, without which they could not have the standard of living they enjoy. First world nations actively, but not necessarily conscientiously, perpetuate a state of dependency through various policies and initiatives. This state of dependency is multifaceted, involving economic, media control, political, banker and financial, educational, sporting and all aspects of human resource development. Any attempt by the dependent nations to resist the influences of the dependency could result in economic sanctions and/or invasion or military control. This is rare, however, and dependency is forced more by wealthy nations establishing international trade rules.
Definition.- External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors from outside the country. The debtors can be the government, companies or households. Debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF or the World Bank.
The debt of developing countries.-
Definition.- It is the external debt incurred by the governments of the Third World countries, generally in amounts beyond the political capacity of the governments to pay. "Unpayable debt" is a term used to describe foreign debt when the interest on the debt exceeds what a country's politicians believe they can collect from taxpayers, based on the nation's Gross Domestic Product, thereby preventing it from the debt can be repaid.
1973 Petroleum Crisis.- Many of the current debt levels were amassed following the 1973 petroleum crises. Increases in petroleum prices forced the governments of many poorer nations to borrow excessively to buy politically essential supplies. At the same time, OPEC funds deposited in Western banks provided a ready source of funds for loans. While a proportion of the borrowed funds were through infrastructure and development economics financed by central governments, a proportion was lost to corruption and over a fifth was spent on weapons.
Discussion on Third World debt.-
Responsibility.- There is much debate about whether the poorest countries should be responsible for the debt. The legitimacy of such liability is small due to the terms of international and contract law, but much discussion in the debate has to do with the fairness or practicality of the current system.
Refinance.- Critics of the practical point in this discussion might question whether unpayable debt really exists or not, since governments can roll over their debt via the IMF or the World Bank, or reach a negotiated settlement with their creditors. However, this is not a discussion that can withstand a glance at the state of essential services supposedly being provided by many of the highly indebted countries. There is overwhelming evidence that governments have financed their debts through the instigation of austerity policies targeting essential services and subsidies for essential goods. The history of Mali, for example, from 1968 onwards, provides a clear illustration of this. In fact, the requirement that governments should cover debts at the expense of their populations is integral to the strategies adopted by Washington institutions in 1982 to resolve the banking crisis triggered by the Mexican Weekend in August of that year. Austerity was one of the ways in which interest could continue to be covered, preventing liquidity problems in the banks of the United States. The same principle is evident in the design of the Highly Indebted Poor Countries Initiative. While refinancing has taken place (particularly to reduce the subsequent exposure of private creditors in 1982) it has come with conditions that have caused a development crisis negotiated by the Washington Institutions.
Consequences of debt forgiveness.- Some economists argue against debt forgiveness on the grounds that it would motivate countries to delay in paying their debts, or, deliberately, to borrow more than they can afford, and that this wouldn’t prevent a recurrence of the problem. Economists often refer to this as "moral hazard." But some critics and activists for debt relief say that the problem isn’t necessarily with the borrowers, but with the borrowers, and therefore the moral hazard isn’t necessarily immoral borrowing, but immoral lending.
Recent Debt Relief.- A number of impoverished countries have recently received partial or total cancellation of loans from foreign governments and international financial institutions, such as the IMF and the World Bank.
Odious debt.- In international law, odious debt is a legal theory that holds that national debt incurred by a regime for purposes that don’t serve the best interests of the nation, such as war or aggression, should not be enforceable. Such debts are therefore considered by this doctrine as personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under duress.