INTRODUCTION TO ECONOMIC DEVELOPMENT AND PLANNING

25/2/2019

INTRODUCTION TO ECONOMIC DEVELOPMENT AND PLANNING

Economic Growth

This is the increase in the productivity of a country which can be seen in the continued increase in the national income over a period of years.
It can be measured by taking the average percentage of increase in national income over a period of time (number of years) and be assumed to be the average rate of economic growth in the country.

Economic Development

This is the quantitative change or increase in a country’s national income over the years, accompanied by favorable changes in the structures within the country that leads to general improvement of the individual well being, as well as the entire nation.
A country may experience economic growth without experiencing economic development. This is because the increase in the national income may be as a result of people working for long hours without any time for rest, recreation and other development to occur in their body. This will make them not to have better living, despite the fact that the national income shall have increased.
The expected structural changes to be realized in a case of economic development include;

Shifting from depending on agricultural sector to manufacturing sector in the economy
Reducing illiteracy levels
Increase in skilled manpower in the economy
Improvement in health facilities within the country
Increase in technology and improvement of entrepreneurial ability
Increase and improvement of institution that handles new methods of productive economic activities

Outline the differences that exist between economic growth and economic development

Underdevelopment

This refers to a situation whereby the economic growth is in the negative direction (decreasing) accompanied by uneven distribution of wealth and decrease in quality and quantity of the factors of production available

Characteristics of Underdevelopment

High level of poverty. This is characterized by most of the people in the country depending on mainly subsistence, or lives below the poverty levels. Their per capita income is lower as compared to the developed countries
High disparity in income distribution. The income in this countries are not evenly distributed with the few rich people earning so much while the poor majority earns so little
Low levels of savings and investments. They have very little if at all exist to save and invest for their further development, making them to continue being poor. This is well illustrated in the vicious circle of poverty
High population growth rates. This is due to some of them not being able to afford, ignorant about or simply refusing to use the modern birth control methods since they find consolation on their high number of children
Dominance of subsistence sector. This is due to their inability to raise capital for indirect production
Problem of unemployment. The high population growth rate leads to high supply of labour that the country’s economy cannot afford to absorb all, leading to unemployment
Under utilization of natural resources. This may be due to lack of capital in this countries or in appropriate technology they use
Dependence on the developed countries. This is due to their in ability to sustain themselves financially, which makes them keep on calling upon the developed partners for financial assistance
Poor infrastructure. Their roads and communication networks are not properly maintained due to the in availability of adequate resources to improve them

Goals of Economic Development

The following are the changes that economic development seeks to put in place, which in Kenya they have been joined together in what is referred to as the millennium development goals. They includes

Eradicate extreme poverty and hunger
Achieve universal primary education
Promote gender equality and empower women
Reduce child mortality
Improve maternal health
Combat HIV/AIDS, malaria and other diseases
Ensure environmental sustainability
Develop a global partnership for development; Some includes;
1. Reducing income disparity in distributions
2. Reducing unemployment
3. Provision of important basic needs such as food, shelter, etc

Factor which may hinder development in a country

The rate of a country’s economic development may be influenced negatively by the following factors

Low natural resource endowment. Absence or inadequacy of natural resources such as raw materials, fertile land for agriculture, etc may slow the pace of the country’s economic development
Inadequate capital. This reduces the rate at which they exploit their natural resources, or produce in the economy
Poor technology used. The traditional methods of production that they use cannot sustain their requirement any more
Poor human resource endowment. Their inability to train adequate skilled manpower together with their inappropriate system of education leads to their slow development
Unfavorable domestic environment. Their political, social and economic institutions within their countries are not structured to favour economic development. For example
1. Their political system is characterized by corruption, authoritarian kind of leadership with lengthy procedures and bureaucratic controls that scares the investors
2. Their social environment is still full of outdated or retrogressive cultural values and negative attitude towards work and investment, leading to slow development
3. Their Economic institutions has allowed their markets to be influenced so much that that leads to interference in their smooth operations

Development Planning

This is the process through which the country establishes their objectives to be achieved, identify the resources that will be required and put in place the strategies or methods of acquiring the resources and achieving their pre-determined objectives.
In most cases their objectives or goals are the goals of economic development
The plan will prioritize the objectives to be achieved and even break it down in to targets that if achieved with the planned strategy and resources, the objective shall have been achieved.

Need for economic planning

It enhances the following

Appropriate resource allocation, where resources are allocated according to the need of the objective and in a most productive way
Stimulation of effort of people in the desired direction. The plan outlines including the possible outcomes which persuade people to move to that direction
Support foreign aid bargain. Since it shows including the objective that the country seeks to achieve, it is capable of convincing the donor to finance it in the country
Project evaluation, by assisting on checking whether the predetermined targets or objectives are being achieved
Long term decision making, as it will show what each and every sector of the economy will require in the future to make it stable.
Avoiding duplication of industries in different parts of the country, for it will show the ones that have been set in those parts and even enhance balancing
Promote balancing in regional development by ensuring that they are not concentrated in only one region, ignoring other regions

Problems encountered in development planning

Problems at the planning stage

Lack of accurate or detailed data for planning. This may lead to in appropriate plan being developed, as it entirely depends on the quality and availability of the data
Existence of large subsistence sector, which make the planning unrealistic
Lack of qualified personnel to assist in planning. This may make the country to rely on foreign experts who do not fully understand the country
Problem of the private sector which will always require incentives for them to follow the plan
Transfer of inappropriate development plan. As some planners may simply borrow a plan that they feel may have worked for a given country, yet the condition in those countries may not be the same

Problems at the implementation stage

Over reliance on donor funding, which if they don’t receive, the plan may not be implemented
Lack of domestic resources such as skilled personnel, finance and capital may make the implementation a problem
Failure to involve the local people in planning. This will make them not to be willing to implement it, for they will not be understanding it or rebelling for the fact that they were not included
Natural calamities such as diseases, floods, drought, etc may make the funds that had been set a side for implementation be diverted to curb them
Over-ambitious plans which are a times just made to impress the donors to release their funds but may not be easy to implement
Lack of co-operation among the executing parties which may make the work not to kick off. For example a conflict between the ministry of finance and that of planning of the amount to be released
Inflation which may make the estimated value of implementation not to be adequate, bringing a problem of finances
Lack of political will and commitment in implementing the plan. This may frustrate the implementation.

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Trends in International Trade

19/2/2019

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Trends in International Trade

Liberalization that has led to removal of many trade restriction among the countries, increasing the levels of trade
Development of E-Banking which has enable the international trader to get access to their bank accounts from wherever they are in
Development of export processing zones (EPZ) by the government to allow the industries involved just concentrate in the exported goods only. It enable the country enjoy the following benefits (advantages of EPZ)
1. It creates job opportunities to the citizens
2. It creates market for locally produced raw materials that they use in their production
3. It encourage the foreign investors to invest in the countries, i.e. in the processing zones, increasing the level of investment in the country
4. Encourages export in the country as the incentives given to them by the government makes them to produce more and more for export
5. It stimulates industrialization in the country in all sector including the ones producing for local consumptions

However EPZ’s have the following problems/disadvantages
Most of them employ foreigners in their management team, denying the locals a chance to get employed

They do not generate revenue to the government, especially during tax free periods
They are concentrated in few towns, bringing about imbalance regional development
Some of them encourages social evils such as prostitution in areas where they are developed

Development of e-commerce/website trading which has promoted the selling and buying of items through the internet, with payments made online.

E-commerce has the following benefits/advantages:

One is able to access the market worldwide, as the countries are connected to the internet
There is no discrimination, as both the small and large industries are able to transact through the internet
It is fast to transact the business through internet, as it saves on travelling time and therefore suitable for urgent transaction
It is cheap especially on the cost of sending, receiving and storing information
It is easy for firms to share valuable information about production

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Introduction, Advantages And Disadvantages Of International Trade

Terms Of Trade, Balance Of Trade, Balance Of Payment

International Financial Institutions

Economic Integration

Trends In International Trade

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International Financial Institutions

18/2/2019

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International Financial Institutions

Some of the institutions that play a role in international monetary system include;

International Monetary Fund (I.M.F)
African Development Bank (A.D.B)
African Development Fund (A.D.F)
International Bank For Reconstruction and Development (World Bank)

International Monetary Fund (I.M.F)

This bank operates like the central bank of the central banks of the member countries. Its objective includes the following;

Ensuring that the member country maintains a stable foreign exchange rates for their currencies; this it does by advising the country to raise or increase the supply of their currency to devalue them or increase their value internationally
Provide financial support to the member country to alleviate poverty and boost their income; relieving heavily indebted countries of debt repayment so that it can use that fund to raise the living standards of its people.
Providing funds to the member countries to finance the deficits in their balance of payment; provide forum through which the member country can consult and cooperate on matters concerning trade among them
Maintaining currency reserves of the different countries, enabling member countries to buy foreign exchange to be used to import goods and services

African Development Bank (A.D.B)

This bank was formed to promote the economic and social progress of its regional member countries in Africa. It main source of finance is the members’ contributions and the interest charged on the money they lend members.
Its functions include;

Providing loans for economic and social development to member countries
Provide technical advice in planning and implementation of the development plans
Assist member country to appropriately exploit it resources
To encourage co-operation among African countries in order to bring economic growth
To co-operate with various economic institutions in order to bring about development especially in Africa countries

African Development Fund (A.D.F)

This was formed to provide long term financial assistance to the low income countries that cannot obtain loan from other financial institutions at the prevailing terms and condition. Their loans may recover a longer repayment periods with no interest except the commitment fees and service charge which is minimal.
They fund activities, which includes;

Education and research activities
Offer technical advice to the member countries

International Bank for Reconstruction and Development (World Bank)

The World Bank was formed to carry out the following functions;

Giving loans to countries at very low interest rates to finance economic development activities.
Provision of grants to finance the provision of social amenities and basic infrastructural development in developing countries.
Fighting against corruption and poor governance which may lead to misuse of public funds in different countries.
Advancing money to countries to finance balance of payment deficit.
Giving advice on economic challenges that country may face.
Availing technical assistance and personnel to help countries run their economic programmes

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Introduction, Advantages And Disadvantages Of International Trade

Terms Of Trade, Balance Of Trade, Balance Of Payment

International Financial Institutions

Economic Integration

Trends In International Trade

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Economic Integration

17/2/2019

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Economic Integration

This occurs where two or more countries enter into a mutual agreement to cooperate with each other for their own economic benefit. They may do this by allowing free trade or relaxing their existing trade barriers for the member countries.
Economic integration may occur in the following forms;

Free Trade Area

This is a case where the member countries agree to abolish or minimize tariffs and other trade restrictions but the individual countries are free to impose restrictions on non-member countries. They includes; Preferential Trade Area (P.T.A), European Free Trade Area (E.F.T.A), Latin America Free Trade Area (L.A.F.T.A), etc.

Custom union

This is where the members of the free trade area may agree not only to abolish or minimize their tariffs, but also establish a common tariff for the exchange of goods and services with the non member countries. They include; Economic Community of West Africa States (E.C.O.W.A.S), East Africa Custom Union (E.A.C.U), Central Africa Custom and Economic Union (C.A.C.E.U)

Common Market

This is where the member countries allow for free movement of factors of production across the boarders. People are free to move and establish their business in any member country. They include; East Africa Common Market (E.A.C.M), European Economic Community (E.E.C), Central American Common Market (C.A.C.M), Common Market for Eastern and Southern Africa (COMESA)

Economic Union

This is where the members of the common market agree for put in place a common currency and a common central bank for the member countries. They even develop common infrastructures which includes railways, communication networks, common tariffs, etc

Importance of economic integration

Economic integration will ensure the following benefits for the member countries;

Availability of wider market for the goods and services produced by the member countries. This enables them to produce to their full capacity
It enables the country to specialize in the goods they produce best, making them to effectively utilize their resources
It leads to promotion of peace and understanding among the member countries through interaction
It leads to high quality of goods and services being produced in the country due to the competition they face
It allow members to get access to wider variety of goods and services which satisfy different consumer needs
It leads to creation of employment for individuals living within the region, as they can work in any of the member country
It increase the economic bargaining power in trading activities by the countries forming a trading bloc
Improvement of the infrastructure in the region due to increased economic activities.
It brings about co-ordination when developing industries, as the members will assign the industries to each other to create balance development and avoid unnecessary duplication

Free Trade Area

This is a situation where there is unrestricted exchange of goods and services between the countries. It has benefits/advantages similar to those of economic integration.

Disadvantages of free trade area

Some of the problems it is likely to bring include;

It may lead to importation of inferior goods and services to the country, as the member country may not be able to produce high quality as compare to other non-member countries
It may discourage the growth of the infant industries due to competition from well developed industries in other countries
It may lead to reduced government revenue because no tariff may be charged on the goods and services
A country may be tempted to adopt technology not suitable for its level of development.
If not controlled, it may lead to unfavourable balance of payment, where a country imports more than it export
It may lead to importation of harmful goods and services, that may affect the members health such as illegal drugs
It may lead to lack of employment opportunities especially where more qualified people have moved from their country to secure job opportunities in the country
It may expose the country to negative cultural practices in other countries, interfering with their morals. For example the exposure to the pornographic materials.
Compromising political ideologies especially where member countries with different ideologies wants to fit in to the bloc
It may lead to over exploitation of non-renewable economic resources such as minerals

Trade Restrictions

These are deliberate measures by the government to limit the imports and exports of a country.
They are also known as protectionism and include the following;

Tariffs which include taxes levied on both import and export. It can be used to increase or decrease the level of both import and export
Quotas which is the restriction on the quantity of goods to be either imported or exported. It can be increased or decreased to increase or decrease the level of import or export respectively.
Total ban (zero quota) where the government issues a direction illegalizing either the import or export of the products
Complicated import procedure in order to discourage some importers from importing
Subsidies on locally produced goods to discourage imports
Legislation against importation of certain goods
Setting the standards of products to be imported

Reasons for trade restrictions

To prevent the inflow of harmful goods into the country, that may be harmful to the lives of the citizens
To protect the local infant industries that may not be able to compete favourably with well established industry
To give a country a chance to exploit its natural resources in producing their goods
To protect strategic industry, since their collapse may make the country to suffer
To minimize dependency of the country to other countries for their stability
To create employment opportunity to its people by establishing the industries to produce the goods and services
To prevent dumping of goods in the country by the developed partners which may create unfair competition
To correct balance of payment deficit by limiting import
To protect good cultural and social values which may be influenced by unaccepted values they are likely to acquire from other country through interaction
To expand market for locally produced goods by restricting the number of foreign goods in the market.
To enable the country earn foreign exchange through imposing taxes and other tariffs

Advantages of trade restrictions

It promotes self reliance as industries have an opportunity to engage in the production of goods and services that were previously imported
It protects the local industries from stiff competition that they may have faced from the well developed countries
It may help to correct the balance of payment deficit
It restrict the entry of harmful goods into the country as it controls the inflow of imports in to the country
It enables the country to conserve their valuable social and cultural values from the external influence
It help in creating more job opportunities through diversification in the production
It promotes the growth of local/infant industries in the country.

Disadvantages of trade restriction

There will be availability of limited variety of goods in the country that will limit the consumer’s choices
May lead to production of low quality goods as there will be no competition for the producing firms
Other countries may also retaliate, leading to reduction in export from their country
There is likely to be high prices charged on the locally produced goods, since the small firms which produce them may not be enjoying the economies of scale
The country is likely to be exposed to small market, should all countries restrict which may lead to reduction in trade.
As a result of the continued protection, some industries may develop a tendency of remaining young to still enjoy the protection, which limits the level of development
It may lead to emergence of monopoly as the protected industry may end up remaining alone in the market, bringing about the problems of monopolies

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Introduction, Advantages And Disadvantages Of International Trade

Terms Of Trade, Balance Of Trade, Balance Of Payment

International Financial Institutions

Economic Integration

Trends In International Trade

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TERMS OF TRADE, BALANCE OF TRADE, BALANCE OF PAYMENT

17/2/2019

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TERMS OF TRADE

This refers to the rate at which the country’s export exchanges with those from other country. That is:

It determine the value of export in relations to import so that a country can know whether its trade with the other country is favourable or unfavourable
Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange from other countries
For example;
Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan government exporting and importing to and from china, and China also importing and Exporting from and to Kenya.

Calculate the Terms of trade for;

Kenya
China

BALANCE/IMBALANCE OF TRADE

Factors that may lead to either favourable or unfavourable terms of trade

The country is experiencing a favourable terms of trade if:

The prices of imports decline and those of export remains the constant
The prices of imports declines while those of exports increase
The price of imports remains constant while those of exports increase
The prices of import and export increases but the rate of increase in export is higher
Both prices decrease but the decrease in import prices is higher

The country will experience unfavourable terms of trade if;

Prices of import increases while those of exports decline
Prices of import remains constant while those of export declines
Prices of import increase as the export remains constant
Both prices increase, but for imports increases at a higher rate than export
Both prices decrease, but for export decreases at a higher rate than import

Reasons for differences in terms of trade between countries

The terms of trade may differ due to:

The nature of the commodity being exported. If a country exports raw materials, or unprocessed agricultural products, its terms of trade will be unfavourable, as compared to a country that exports manufactured goods
Nature of the commodity being imported. A country that imports manufactured goods is likely to have unfavourable terms of trade as compared to that which imports raw materials or agricultural produce
Change in demand for a country’s export. An increase in demand for the country’s export at the world market will make it have favourable terms of trade as compared to those with low demand at the world market
Existing of world economic order favouring the products from more developed countries. This may make the developing countries to have deteriorating terms of trade
Total quantity supplied. A country exporting what most countries are exporting will have their products trading at a lower price, experiencing unfavourable terms of trade as compared to a country that export what only few countries export
Trade restrictions by trading partners. A country with no trading restrictions is likely to import more products, leading to unfavourable terms of trade, as compared to if it impose trade restrictions

Balance of trade

This is the difference between value of country’s visible exports and visible imports over a period of time. If the value of visible/tangible export is higher than the value of visible/tangible imports, then the country experiences favourable terms. If less than the invisible value, then the country is experiencing unfavourable. The country is at equilibrium if the value of visible export and import is the same,

BALANCE OF PAYMENT

This is the difference in the sum of visible and invisible export and the visible and invisible imports. If positive then it means the country is having favourable terms, while if negative, then it means unfavourable It goes beyond the balance of trade in that it considers the following

The countries visible/tangible export and import of goods (visible trade)
The countries invisible/services exported and imported in the country (invisible trade)
The inflow and outflow of investment (capital goods)

Balance of Payment account

This is the summary showing all the transactions that have taken place between a particular country and the rest of the world over a period of time. The transaction may arise from

The export of visible goods
The import of visible goods
The export of invisible goods/services
The import of invisible goods/services
Flow of capital in and out of the country

Components of balance of payments account

The balance of payment account is made up of the following

Balance of payment on current account
1. Balance of payment on capital account
2. Official settlement account/Cash account/foreign exchange transaction account

Balance of payment on current account

This is the account that is used to determine the difference between the value of the country’s visible and invisible imports and exports. That is

In the account, the payments for the visible and invisible imports are debited while the receipts from visible and invisible exports are credited that is

For example;
A given country had the following values of visible and invisible export and import during the year 2004 and 2005

Required;
Prepare the country’s balance of payments on current account for the years 2004 and 2005 and comment on each of them.

Balance of payments on capital account

This account shows the summary of the difference between the receipt and payments on the investment (capital). Receipts are income from investments in foreign countries while payments are income on local investments by foreigners paid out of the country. The capital inflow includes investments, loans and grants from foreign donors, while capital outflow includes dividends paid to the foreign investors, loan repayments, donations and grants to other countries. In the account the payments are debited, while the receipts are credited. That is;

The official settlement account

This account records the financial dealings with other countries through the IMF. It is also called the foreign exchange transaction account, and is always expected to balance which a times may not be the case. That is;

In case of surplus in the balance of payment, the central bank of that country creates a reserve with the IMF and transfer the surplus to the reserves account.
In case of a deficit in the balance of payment, the central banks collect the reserves from the IMF to correct the deficit, and incase it did not have the reserves, the IMF advances it/give loan

Balance of payment disequilibrium

This occurs when there is either deficit or surplus in the balance of payments accounts. If there is surplus, then the country would like to maintain it because it is favourable, while if deficit, the country would like to correct it.

Causes of balance of payment disequilibrium

It may be caused by the following;

Fall in volume of exports, as this will reduce the earnings from exports leading to a deficit.
Deteriorating in the countries terms of trade. That is when the countries exports decreases in relation to the volume of imports, then her payments will higher than what it receives.
Increasing in the volume of import, especially if the export is not increasing at the same rate, then it will import more than it exports, leading to a disequilibrium
Restriction by trading partners. That is if the trading partners decides to restrict what they can import from the country to a volume lower than what the country import from them, it will lead to disequilibrium
Less capital inflow as compared to the out flow, as this may lead to a deficit in the capital account, which may in turn leads to disequilibrium.
Over valuation of the domestic currency. This will make the country’s export to very expensive as compared to their import, making it to lose market at the world market
Devaluation of the currency by the trading partner. This makes the value of their imports to be lower, enticing the country to import more from them than they can export to them.

Correcting the balance of payment disequilibrium

The measures that may be taken to correct this may include;

Devaluation of the country’s currency to encourage more exports than imports, discouraging the importers from importing more into the country.
Encouraging foreign investment in the country, so that it may increase the level of economic activities in the country, producing what can be consumed and even exported to control imports
Restricting the capital outflow from the country by decreasing the percentage of the profits that the foreigner can repatriate back to their country to reduce the outflow
Decreasing the volume of imports. This will save the country from making more payments than it receives. It can be done in the following ways;
1. Imposing or increasing the import duty on the imported goods to make them more expensive as compared to locally produced goods and lose demand locally
2. Imposing quotas/total ban on imports to reduce the amount of goods that can be imported in the country
3. Foreign exchange control. This allows the government to restrict the amount of foreign currencies allocated for the imports, to reduce the import rate
4. Administrative bottlenecks. The government can put a very long and cumbersome procedures of importing goods into the country to discourage some people from importing goods and control the amount of imports
Increasing the volume of exports. This enable the country to receive more than it gives to the trading partners, making it to have a favourable balance of payment disequilibrium. This can be done through;
1. Export compensation scheme, which allows the exporter to claim a certain percentage of the value of goods exported from the government. This will make them to charge their export at a lower price, increasing their demand internationally
2. Diversifying foreign markets, to enable not to concentrate only on one market that may not favour them and also increase the size of the market for their exports
3. Offering customs drawbacks. This where the government decides to refund in full or in part, the value of the custom duties that has been charged on raw materials imported into the country to manufacture goods for export
4. Lobbying for the removal of the trade restriction, by negotiating with their trading partners to either reduce or remove the barrier put on their exports

Terms of sales in international trade

Here the cost trading which includes the cost of the product, cost of transporting, loading, shipping, insurance, warehousing and unloading may be expensive. This makes some of the cost to be borne by the exporter, as some being borne by the importer. The price of the goods quoted therefore at the exporters premises should clearly explain the part of the cost that he/she is going to bear and the ones that the importer will bear before receiving his/her goods. This is what is referred to as the terms of sale
Terms of sales therefore refers to the price quotation that state the expenses that are paid for by the exporter and those paid for by the importer.
Some of the common terms include;

Loco price/ex-warehouse/ex-works. This states that the price of the goods quoted are as they are at the manufacturers premises. The rest of the expenses of moving the good up to the importers premises will be met by the importer
F.O.R (Free on Rail). This states that the price quoted includes the expenses of transporting the goods from the seller’s premises to the nearest railway station. Other railways charges are met by the importer
D.D (Delivered Docks)/Free Docks. This states that the price quoted covers the expenses for moving the goods from the exporter’s premises to the dock. The importer meets all the expenses including the dock charges
F.A.S (Free Along Ship). States that the price quoted includes the expenses from the exporter’s premises to the dock, including the loading expenses. Any other expenses are met by the importer
F.O.B (Free on Board). States that the price quoted includes the cost of moving the goods up to the ship, including loading expenses. The buyer meets the rest of the expenses
C&F (cost & freight). The price quoted includes the F.O.B as well as the shipping expenses. The importer meets the insurance charges
C.I.F (Cost Insurance & freight). The price includes the C&F, including the insurance expenses
Landed. The price includes all the expenses up to the port of destination as well as unloading charges
In Bond. The price quoted includes the expenses incurred until the goods reaches the bonded warehouse
Franco (Free of Expenses). The price quoted includes all the expenses up to the importer’s premises. The importer does not incur any other expenses other than the quoted price
O.N.O (Or Nearest Offer). This implies that the exporter is willing to accept the quoted price or any other nearest to the quoted one

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INTRODUCTION, ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL TRADE

17/2/2019

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INTRODUCTION & MEANING OF INTERNATIONAL TRADE

A trade involving the exchange of goods and services between two or more countries is referred to as international trade.
If the exchange is between two countries only, then it is referred to as bilateral trade, but if it is between more than two countries then it is referred to as multilateral trade.

ADVANTAGES

It enable the country to get access to wider range/variety of goods and services from other countries
It enable the country to get what it does not produce
It helps in promoting peace among the trading countries
It enable the country to specialize in it’s production activities where they feel they have an advantage
It earns the country revenue through taxes and licenses fees paid by the importers and exporters in the country
It enable the country to dispose of its surplus goods and services thereby avoiding wastage
It creates employment opportunities to the citizens of that country either directly or indirectly
It may lead to the development of the country through importation of capital goods in to the country
It encourages easy movement of factors of production across the boarders of the countries involved
It enable countries to earn foreign exchange which it can use to pay for its imports
A country may be able to obtain goods and services cheaply than if they have been produced locally
During hard times or calamities such as wars, the country is able to get assistance from the trading partners
It brings about competition between the imported and locally produced goods, leading to improvement in their quality
It gives the country an opportunity to exploit fully its natural resources, due to increased market

DISADVANTAGES

It may lead to collapse of the local industries, as people will tend to go for the imported goods. The collapse may also lead to loss of employment
It may also lead to importation of harmful foods and services such as drugs and pornographic materials
May lead to over depending on imported commodities especially the essential ones, making the country to be a slave of the other countries, interfering with their sovereignty
It may make the country to suffered during emergencies if they mainly rely on the imported goods
May make the country to suffer from import inflation
May lead to acquisition of bad culture from other countries as a result of their interactions
May lead to unfavorable balance of payment, if the import is higher than exports

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TYPES, CAUSES, CONTROL AND CONSUMER PRICE INDEX IN INFLATION

14/2/2019

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TYPES, CAUSES, CONTROL AND CONSUMER PRICE INDEX IN INFLATION

Introduction

Inflation refers to an economic situation where the demand for goods and services in the economy is continuously increasing without corresponding increase in supply which pushes the general prices up. The opposite of inflation is called deflation.
Inflation is measured by considering the Consumer Price Index (C.P.I) which involves comparison of prices of certain goods and services for two different periods.
In constructing the C.P.I;

A basket of commodities is selected which includes selecting the generally consumed commodities by average consumers.
Choosing the base period which should be a period when the prices were fairly stable.
The price of commodities both in the current period (P1) and base period (P2)

Types and causes of inflation

Inflation is classified in relation to its causes.

Demand pull inflation

This is a type of inflation caused by excessive demand for goods and services without a corresponding increase in production resulting into rise in prices.

Causes of demand pull inflation

Increase in population; increased number of people in a family calls for increased demand of goods and services thus fueling demand-pull inflation.
Increase in government expenditure; The government expenditure has the effect of making money available to people thus increasing the aggregate demand for goods and services.
A fall in the level of savings; this increases the consumer expenditure on goods and services which brings pressure on the available goods and services thereby pulling up prices.
Effects of credit creation by the commercial banks; when banks lend more money to the public, their purchasing power increases hence increasing demand which in turn leads to increase in the prices.
Consumers’ expectation of future price increases; when consumers expect the prices of goods and services to increase in the future, they will buy more in the present thus increasing the demand thus fueling demand-pull inflation.
General shortages of goods and services; Any shortage in goods caused by factors such as; adverse climatic conditions, hoarding, smuggling, withdrawal of firms from the industry and decline in level of technology calls for scramble for the available goods thus increasing their demand and prices.

Cost push inflation

This is a type of inflation caused by increase in cost of factors of production which translates to increased prices of goods and services.

Causes of cost push inflation.

Increase in wages and salaries; an increase in the wages and salaries may increase the cost of labor. The increased cost of labor may be reflected in the increased prices of commodities which in turn would cause wage push inflation.
Increase in cost of raw materials and other inputs; this increases the cost of production thus increased prices.
Increase in indirect taxes; this increases the cost of production and this causes firms to raise the prices of their product.
Increase in profit margin; If the business decides to raise its profit, it leads to an increase in the price of the commodities resulting to profit push inflation.
Reduction in subsidies; removal of a subsidy implies that the producer would produce at a higher cost that was being met by the subsidy. This increase cost is finally reflected in increased prices.

Imported inflation

This is a type of inflation which is caused by importation of high priced inputs of production such as; technology/machines, skilled human resources and crude oil.
This in turn increases the prices of locally produced goods which may lead to inflation.

Causes of imported inflation

Importation of expensive technology especially highly skilled labor.
Importation of expensive machines and equipment.
Importation of high priced oil.
The currency depreciating thus increasing the price of the country's imports.

LEVELS OF INFLATION

Mild / Creeping/Moderate Inflation; this slow rise in price level of not more than 5 % per annum. It is associated with some beneficial effects on an economy especially to firms and debtors.
Galloping /Rapid Inflation; this is a very rapid accelerating inflation characterized by a situation whereby the general prices levels increase rapidly.
Stagflation; this is an economic condition in which unemployment is high, the economy is stagnant, but prices are rising.
Hyper /Runway Inflation; this is when prices are rising at double or triple digit rates of 20%, 100%, 200%. The price levels are extremely high and under this situation people may lose confidence in the money as a medium of exchange and as a store of value.

Effects of inflation in an economy

Desirable effects of inflation

Mild inflation motivates people to work hard as they try to cope with the effects of the inflation in order to maintain their standards of living.
Mild inflation encourages proper utilization of resources with an attempt of avoiding wastage as much as possible.
Mild inflation increases investment especially in trading activities since sellers buy goods when prices are low and sell later when prices are higher.
It promotes creativity in an economy in terms of production in order to survive the effects of inflation.
It benefits debtors since they obtain goods on credit and pay for them in future at the old low prices.

Negative effects

It leads to reduction in profits as sales volumes reduce since inflation reduces the purchasing power of consumers resulting to low sales.
It wastes time as a lot of time is wasted in shopping around for reasonable prices and also firms may waste a lot of time adjusting their price lists to reflect new prices.
It leads to conflicts between employers and employees as firms are pressurized by employees and trade unions to raise wages and salaries to cope with inflation.
It leads to loss by creditors as they lend money when the value of money is high but at the time of payment is low since the value of money will have been eroded by inflation.
It leads to decline in standards of living as consumers’ purchasing power decrease and therefore one cannot lead the lifestyle he/she used to live before.
Leads to unemployment.
Discourages savings and investment since during inflation people tend to spend most of their earnings leaving little or nothing to save.
Leads to retardation of economic growth.
Worsens balance of payments position.

Control of Inflation

The govt. may adopt the following policies depending on their situation to reduce inflation to manageable levels. They include;

a) Monetary policy
This is a deliberate move by the govt. through the central bank to regulate and control the money supply in the economy which may lead to demand pull inflation. The policies include;

Increase rate of interest of lending to the commercial banks. This forces them to increase the rate at which they are lending to their customers, to reduce the number of customers borrowing money, reducing the amount of money being added to the economy
Selling of govt. securities in an open market operation (O.M.O). the selling of securities such as Bonds and Treasury bills mops money from the economy, reducing the amount of money being held by individuals
Increasing the commercial banks cash/liquidity ratio. This reduces their ability to lend and release more money into the economy, reducing their customers purchasing power
Increasing the compulsory deposits by the commercial banks with the central banks. This reduces their lending power to their customers, which makes their customers to receive only little amount from them, reducing the amount of money in the economy
Putting in place the selective credit control measures. The central bank may instruct the commercial bank to only lend money to a given sector of the economy which needs it most, to reduce the amount of money reaching the economy
Directives from the central banks to the commercial banks to increase their interest on the money being borrowed, to reduce their lending rates
Request by the central bank to the commercial banks (the moral persuasion) to exercise control on their lending rates to help them curb inflation.

b) Fiscal policy
These are the measures taken by the govt. to influence the level of demand in the economy especially through taxation process controlling government expenditure. They include;

Reducing govt. spending. This reduces the amount of money reaching the consumers, which is likely to increase their purchasing powers, leading to inflation
Increasing income taxes. This reduces the level of the consumers disposable income and lowering their spending levels, reducing the inflation
Reducing taxes on production. This reduces the cost of production, lowering the prices of goods reaching the market
Subsidizing the production. This reduces the cost of production in the economy, which in turn passes over the benefits to the consumers inform of reduced prices.
Producing commodities that are in short supply. This increases their availability to meet their existing demand in the market, controlling demand pull inflation

c) Statutory measures
These are laws made by the govt. to help in controlling the inflation. They include;

Controlling wages and salaries. This reduces the pressure put on the employers to meet high cost of labor for their production which in turn is just likely to lead to cost push inflation. It also minimizes the amount reaching the consumers as their income, to control their purchasing power and the level of demand, controlling the demand pull inflation
Price controls. This reduces the manufactures ability to fix their prices beyond a given level which may cause inflation due to their desire to receive high profits.
Restricting imports. This reduces the chances of high prices of imported goods impacting on the prices of the goods in the country (imported inflation) and making the manufactures to look for alternative source of raw materials for their production
Restricting the terms of hire purchase and credit terms of sales. This reduces the level of demand for those particular commodities in the economy which if not controlled may lead to demand pull inflation
Controlling exports. This ensures that the goods available in the local market are adequate for their normal demand. Shortage of supply of goods in the market is likely to bring about the demand pull inflation.

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INTRODUCTION TO INFLATION

8/2/2019

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Introduction to Inflation

What is inflation?

The rate at which the price of goods and services rise over a given period of time is referred to as inflation.
Inflation has a major effect on the economy of a country or can even impact the life of individuals on a daily basis.

Causes of Inflation

Increase money supply unaccompanied by proportionate increase in the output of goods and services.
Increase in government expenditure.
Abnormal speculation and hoarding goods to create artificial shortages hence raising prices of goods.
Uncontrolled increase in costs of productions.
Increase in profit margin.
Reduction in subsidy.

Measures Governments put in place to combat/control inflation

a) Monetary policy
This is a deliberate move by the government through the central bank to regulate and control the money supply in the economy which may lead to demand price inflation. The policies include:

Increase rate of interest of lending to the commercial banks. This forces them to increase the rate at which they are lending to their customers. to reduce the number of customers borrowing money. reducing the amount of money being added to the economy
Selling of government securities in an open market operation (o.m.o). The selling of securities such as Bonds and Treasury bills mops money from the economy. reducing the amount of money being held by individuals
Increasing the commercial banks cash/liquidity ratio. This reduces their ability to lend and release more money into the economy. reducing their customers' purchasing power
Increasing the compulsory deposits by the commercial banks with the central banks. This reduces their lending power to their customers. which makes their customers to receive only little amount from them. reducing the amount of money in the economy
Putting in place the selective credit control measures. The central bank may instruct the commercial bank to only lend money to a given sector of the economy which needs it most, to reduce the amount of money reaching the economy
Directives from the central banks to the commercial banks to increase their interest on the money being borrowed. to reduce their lending rates
Request by the central bank to the commercial banks (the moral persuasion) to exercise control on their lending rates to help them curb inflation.

b) Fiscal policy
These are the measures taken by the government to influence the level of demand in the economy through taxation process. They include

Reduced government spending. This reduces the amount of money reaching the consumers. Which is likely to increase their purchasing powers leading to inflation
Increasing income taxes. This reduces the level of the consumer’s disposable income and lowering their spending levels. reducing the inflation
Reducing taxes on production. This reduces the cost of production. lowering the prices of goods reaching the market
Subsidizing the production. This reduces the cost of production in the economy, which in turn passes over the benefits to the consumers inform of reduced prices.
Producing commodities that are in short supply. This increases their availability to meet their existing demand in the market, controlling demand pull inflation

c) Statutory Measures
These are laws made by the government to help in controlling the inflation. They include:

Controlling wages and salaries. This reduces the pressure put on the employers to meet high cost of labor for their production which in turn is just likely to lead to cost push inflation. It also minimizes the amount reaching the consumers as their income, to control their purchasing power and the level of demand. controlling the demand pull inflation
Price controls. This reduces the manufactures ability to fix their prices beyond a given level which may cause inflation due to their desire to receive high profits.
Restrictive imports. This reduces the chances of high prices of imported goods impacting on the prices of the goods in the country (imported inflation) and making the manufactures to look for alternative source of raw materials for their production
Restricting the tennis of hire purchase and credit terms of sales. This reduces the level of demand for those particular commodities in the economy which if not controlled may lead to demand pull inflation
Controlling exports. This ensures that the goods available in the local market are adequate for their normal demand, Shortage of supply of goods in the market is likely to bring about the demand pull inflation

Sampled KNEC KCSE Questions & Answers

2006 Q20 P1
State four factors that may cause inflation in an economy (4 marks)
2008 Q21 P1
Outline four measures that a government may put in place to reduce high inflation in a country. (4 marks)
2009 Q14 P1
Country x has been experiencing an upward trend in the price of petrol as a result of a rise in inflation. State four steps that can be taken to minimize expenditure on this (4 marks)

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INTRODUCTION TO ECONOMIC DEVELOPMENT AND PLANNING

Economic Growth

Economic Development

Underdevelopment

​Characteristics of Underdevelopment

Goals of Economic Development

Factor which may hinder development in a country

Development Planning

Need for economic planning

Problems encountered in development planning

Problems at the implementation stage

Trends in International Trade

International Financial Institutions

International Monetary Fund (I.M.F)

African Development Bank (A.D.B)

African Development Fund (A.D.F)

International Bank for Reconstruction and Development (World Bank)

Economic Integration

​Free Trade Area

​Custom union

​Common Market

Economic Union

Importance of economic integration

Free Trade Area

​Disadvantages of free trade area

Trade Restrictions

​Reasons for trade restrictions

​Advantages of trade restrictions

​Disadvantages of trade restriction

TERMS OF TRADE

BALANCE/IMBALANCE OF TRADE

Factors that may lead to either favourable or unfavourable terms of trade

Reasons for differences in terms of trade between countries

Balance of trade

BALANCE OF PAYMENT

Balance of Payment account

Components of balance of payments account

Balance of payment on current account

Balance of payments on capital account

The official settlement account

Balance of payment disequilibrium

Causes of balance of payment disequilibrium

Correcting the balance of payment disequilibrium

Terms of sales in international trade

INTRODUCTION & MEANING OF INTERNATIONAL TRADE

ADVANTAGES

DISADVANTAGES

TYPES, CAUSES, CONTROL AND CONSUMER PRICE INDEX IN INFLATION

Introduction

Types and causes of inflation

Demand pull inflation

​Causes of demand pull inflation

Cost push inflation

​Causes of cost push inflation.

Imported inflation

Causes of imported inflation

LEVELS OF INFLATION

Effects of inflation in an economy

Control of Inflation

Introduction to Inflation

What is inflation?

Causes of Inflation

Measures Governments put in place to combat/control inflation

Business Studies Notes Form 1 - 4

Categories

Archives

Author

Characteristics of Underdevelopment

Free Trade Area

Custom union

Common Market

Disadvantages of free trade area

Reasons for trade restrictions

Advantages of trade restrictions

Disadvantages of trade restriction

Causes of demand pull inflation

Causes of cost push inflation.