Question spotting for F585 Economics The Global Economy OCR A level June 2011

Can Someone PLEASE Help Me!

This is what my teacher taught me:

The PIIGS has above average growth before the recession, but it was all demand led, and was not matched by supply. This meant the growth was short term in nature, and led to high inflation.

When the recession then hit, demand fell and the PIIGS were left with very weak economies because they had ignored supply side performance, which is vital for long term growth.

The PIIGS are now left with high labour and output costs, due to the high inflation pushing up wages and costs. This means they are uncompetitive within and outside the Euro area. Usually high inflation would lead to a fall in the value of the currency, but because the Euro is fixed for the PIIGS, this mechanism cannot work. To regain competitiveness, the PIIGS need to focus on improving their supply side performance.

Right, Here is What I dont understand.

If aggregate demand fell when the recession hit, why is inflation still high. I thought a fall in demand causes inflation to fall. So why didnt this fall in demand cause a fall in inflation, and hence a fall in output and labour costs.

Also, if there is low demand in the economy, what is the point in improving supply side performance. If there is no demand to match this rising supply, it will just lead to spare capacity and unemployment.

I dont understand how demand fell, but inflation has remained high.

Someone please explain this, I may be complicating things in my head.

whats difference between trade liberalisation and globalisation? or does trade liberlisation cause globalisation?

Agin, not sure if someones answered cause i'm trying to ctahc up on this thread again :P...

Erm trade liberalistion refers to opening up the market to make it more contestable, and i guess, is free trade.

When there is free trade, resources are allocated to where they are best produced and therefore, everyone can exploit their comparative advantages, specialise, (and in the theory of free trade), everyone benefits from being able to access more resources.
It can therefore benefit countries' development because they have access to resources, new technology and the best knowledge which can help them grow. Furthermore, as it is free trade, the would be free to import without the nuisance of tariffs, high tech machinery etc. to benefit the production of their resources. therefore, they can produce more! increasing their potential productive capacity.

With poverty, free trade means that more is consumed and more can be traded which can stimulate growth and improve peoples standards of living which therefore reduces poverty. In addition to this, Multinational corporations are more likely to invest in moving their production in those places which have the cheapest production costs or labour costs. And therefore FDI being an injection in to the circular flow of income, can multiply around the economy, creating jobs and income and growth in general.

however, this does not come without downfalls. FDi has been criticised as MNC's, can exploit cheap labour in countries such as India as they can pay labour next to peanuts and in countries which are still developing, they have no trade union to protect them from this exploitation. Therefore, the inequality grows between those rich and poor countries. Furthermore, although in general standards of living increase, relative poverty also increases.

Not only this, trade liberalisation although can benefit everyone depends on terms of trade. And also how well a country can deal with international competition, as infant industries cannot, and would need financial support, and therefore, development could actually be hindered...

There's so much more!...
- developing countries are the ones with poverty...but unfotunately developed countries tend to trade with eachother which means that developing countries struggle to be competitive.
- oh yes, i missed out all this, lower prices to enjoy, more choices, everyone becomes more competitive, more efficient, more productive, more contestability
-economies of scale can benefit the economy
-dynamic efficiency gains
-trade in actual knowledge stimulates development and production making better products, higher standards of living
-in the long run, if you're open to trade, you grow faster

etc etc...

In addition can you say that
- free trade will esentially create economic growth but not nessecarily development as growth is only one aspect of development.

Problems:
- Need a level playing field - e.g. E.U still imposed a restriction of health and safety laws to Bolivian Brazil nut producers meaning they couldn't export to the E.U.
- Depends how wealth is distributed - Often kept in hands of few people.
- LDC's often have corrupt governments with no interest in promoting development.
- Trading blocs such as E.U often divert trade from low cost producers(LDC's) to less efficient ones within the trading bloc.

However, you could give an example of how Germany and particularly China have developed so well as they have huge export markets although China still have a relatively low GDP per head.

Why does Spain suffer from a lack of competitiveness in output and labour markets ? :s

Could anyone explain what an output gap is?

i think bring in how development is measured, By using the human devlopment index
1) education
2) living standards ( real GDP per capita )
3) life expectancy

So economic growth imrpoves living standards but economic growth could be due to comparative advantage. Therefore the economy will only have skills for the industry they have an advantage in which may reduce education and skills all together, so by this measurement, economic growth may not always lead to development
(tell me if im wrong)

Spain suffers from a lack of competitiveness for a number of reasons. Firstly, it could be blamed on their generous welfare system. This is because having a generous welfare system means that rates of natural unemployment are higher. The labour force is being unproductive because the benefit of being out of work and on benefits is more than being in a low paid job during the recession.

Not only this, when the Euro was first implemented, but not in full circulation, everyone was unsure of the real value of the Euro, therefore, firms and producers, realising this, exploited consumers by raising their prices to gain the biggest profit margins they could, which made output prices rise. But by 2002when the Euro was in full circulation, it was in fact true that things were now very expensive, cause labour to demand higher wages. Therefore, as their output prices and labour unit costs were high, they lacked competitiveness

hope that helps

Yes but this is economics and not sociology so think of it from an economical perspective...look at the entire labour market rather than one person

Sure, someone with a Phd in astrophysics wouldn't want a career as a waiter....but look at the labour market as a whole
jobs are scarce and people are desperate for jobs, people are struggling maintain their standards of living so they are simply looking to get back into work to get some money coming in

Spains welfare system is not politics, is economics

and yeah exactly, that's the whole point of economics...im not right, and neither are you...the fact is that we're both analysing a perspective of economics, so the fact that natural unemployment exists in Spain is a good analytical standpoint of a downfall in their fiscal policy

there's no right or wrong answers in economics as long as you can display a balanced argument

surely for free trade to happen means that the EU has to give up their common external trade policy?

Could you explain what the EU common external trade policy is please?

Would you work as a dustbin man..(i know thats mean...) but i personnally wouldn't want to for a number of reasons, personal and not...

It was an example... and i wasn't syaing you were wrong. i was just trying to help. it's a broader picture than the economic consequences, as now, in economics we are learning about the social consequences as well as economically consequnces... (and i don't do sociology) how does it affect people on a personal level too...

that's the whole point of economics...im not right, and neither are you...the fact is that we're both analysing a perspective of economics, so the fact that natural unemployment exists in Spain is a good analytical standpoint of a downfall in their fiscal policy

Why does Spain suffer from a lack of competitiveness in output and labour markets ? :s

How many pages should you aim to write for the 10 and 20mark questions?

I was thinking 2 pages for 10 marker and 4 for 20 marker?

Doesn't really matter in terms of quantity, quality is key! In terms of 10 marks aim to get 2 points max 3 FOR and 3 Against and also a nice diagram!

20.. go crazy.