Greater FDI = an injection into the economy which increases both AD and AS and consequent improvement in real GDP, GDP PER CAPITA, living standards, employment and the balance of payments.
FDI creates employment and real incomes should increase, allowing tax revenue to be collected from both the business’s profits and the income earned from employment leading to a redistribution of this income in the form of merit goods such as education and health care which would increase living standards as these are measures of development on the HDI.
Trade = by specialising according to its comparative advantage, would be able to improve resource allocation, consume outside its PPF and enjoy the benefits of lower prices, higher employment and higher rates of economic growth. Trade would also increase exports = increased AD = increased GDP = increased GDP PER CAPITA = better living standards and more access to life sustaining goods
FDI = an injection into the circular flow of income = multiplier effects for an economy = increased spending and employment creation = increase in disposable income allowing people to buy life sustaining goods
Why might globalisation NOT benefit developing economies? Make 3 – 4 of the following points:
Higher GDP does not guarantee that economic development takes place as the benefits of economic growth may be unequally distributed or may be concentrated in just one sector of the economy, resulting in few multiplier effects from the resource exporting sector so that the benefits of economic growth are not widely spread
Developing countries could be poor at collecting tax revenue an poor at distributing it in the form of merit goods so that people still do not have access to education and health care and their life expectancy does not increase – indicators on the HDI do not increase so there is growth but no development.
Globalisation does not bring significant benefits to developing economies because of the lack of access to developed economy markets as a result of continued existence of tariffs and subsidies of domestic producers – this is most often argued in the context of agricultural trade;
Limits to the benefits of trade created by the continued dominance of intra-regional and intra-industry trade rather than inter-regional and inter-industry trade;
If the growth is from the exports of natural resources, depletion of natural resources may lead to unsustainable development, so that there is an increase in the living standards of the current generation at the expense of future generations. In addition rapid economic growth through industrialisation and mass production can lead to pollution which harms the standard of living and also means GDP is unsustainable
The production of natural resources may be capital intensive, especially in extractive industries; this may mean that the employment effects are small or that the benefits of higher output accrue to MNCs in the form of profit rather than higher levels of household income
If the trade is in primary products a declining terms of trade traps developing countries in a low level of economic development and giving rise to balance of payments problems
The extent to which international trade promotes economic development in resource-rich economies depends on the ability of governments to extract tax revenue from the activities of MNCs and on good governance,
The benefits from trade are dependent on the terms of trade, which in turn depend on global commodity prices.