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Global Economy - Coggle Diagram

- - - - With floating exchange rate
        
        At the equilibrium of the exchange rate,
        sum of debits=sum of credits
        for both countries
        
        When demand for imports from country A increase, it creates a current account surplus.
        At the equilibrium of the exchange rate,
        sum of debits=sum of credits
        for both countries
      - with fixed exchange rate
- - - - Free trade are determined entirely by the demand and supply forces
        
        Should a country export or import a good?
        Its depends on the domestic price of goods before trade, compared with the price of the goods in the world market
        
        When a country should import a good?
        Under free trade, when the world price is lower than the domestic price, the goods will be imported
        
        When a country should export a good?
        Under free trade, when the world price is higher than the domestic price, the good will be exported
        
        Diagram on **PAGE 435
  - - - Benefit
        
        Global reallocation of resources where it use by the most efficient producers
        
        Both countries become better off due to specialisation
        
        Increase consumption and production in each country
    - - Formula Opportunity cost
        Opportunity cost = Sacrifice of one good / Gain
      - Theory of comparative advantage
        
        case of parallel PPCs
        Two countries face identical opportunity costs for the two goods. There is no country that has a comparative advantage in the production of any good. There would be no point in trading
        
        Absolute advantage as a special case of comparative advantage
        countries gain from specialization and trading as long there is different relative cost of production
      - Source of comparative advantage
        
        possibility of increased production and consumption through specialisation is possible because countries can make use of differences in factor endowments
        
        ex of factor endowments is quantities and quality of factors of production and levels of technology
      - Strength
        
        Increase global production & consumption
        
        Improved global allocation of resources
        
        trade liberalisation
      - Limitation
        
        Unrealistic assumptions
        
        Technology is assumed to be fixed
        New technologies are continuously being introduced
        
        Perfect mobility of factor of production
        There are costs when production switches from one product to another product
        
        Full employment of all resources
        
        there is often very high unemployment and underemployment of labour
        
        Free trade
        There are always have strong government intervention in markets that influences quantities of imports and exports
        
        Homogenous product
        
        Rarely happen in the real world
        
        Transportation cost are ignored
        
        There are costs of transportation for imports and exports that change relative to prices
        
        may limit the benefits of specialisation
        
        Factor of production are assumed to be fixed
        
        factor of production, factor endowments, labour and capital move from country to country, states to states
        
        Not allow necessary structural changes to occur in an economy due to specialisation
        
        As economy grows and develops
        
        major changes in its structural economy will occur
        
        agricultural sector become less important
        
        manufacturing and services become more important
        
        important for developing countries
        
        however due to specialisation, they would have to go on producing and exporting the same product
        
        would not allow the necessary structural changes in the economy
        
        Trade on the basis lead to excessive specialisation
        
        may lead to too much specialisation
        
        make countries vulnerable if they become too dependent on exports
        
        if there is fall in exports due to global recession
        
        fall in export prices due to declining demand
        
        falling revenues from export
        
        falling income
        
        economic decline
        primary products has strong price fluctuations
        
        unstable export revenues
        
        negative impacts on the economy
        
        rich man theory
- - - - Appreciate
        
        Demand curve shift to the right
        
        Supply curve shift to the left
        
        Depreciate
        
        Demand curve shift to the left
        
        Supply curve shift to the right
      - Diagram Analysis Floating
        
        The initial exchange rate equilibrium is found at P1 Q1
        
        When Europeans visit the USA, they demand US$ and supply
        Euros.
        
        The increased demand for the US$ shift the demand curve to the right which results in the value of the $appreciating from P1 to P2 in the USP market and a new market equilibrium forms at P2Q2
        
        The Increased supply of the euro shift the supply curve to the right which results in the value of the Euro depreciating from P1 to P2 and a new market equilibrium forms at P2 Q2
  - - - Revaluation
        Occurs if the Central Bank decides to change peg and increase the strength of its currency
        
        Devaluation
        Occurs if the Central Bank decide to change the peg and decrease the strength of its currency
      - Diagram Analysis
        
        The HK$/US$ market is shown by two market diagrams - one for the HK$ market on the left and one for the US$ market on the right
        
        The initial exchange rate equilibrium is found at HK$ 7.75 = US$ 1
        
        When Hong Kong firms import goods form the USA, they demand US$ to pay for them and supply HK$
        
        This Impacts the market for each currency - the US$
        
        To maintain the fixed exchange rate at HK$ 7.75 = US$1, the Hong Kong Monetary Authority intervenes in the forex market by using US$ form its foreign reserves to buy HK$
  - - - Diagram Analysis
        
        China has not released their currency band, however the value seems to flunctuate up around a value of 1US$ = 6.75 CNY
        
        The initial market equilibrium is found at ER1 Q1
  - - - Supply
        
        Speculation
        
        Interest rates
        
        Relative growth rate
        
        Outward flow remittance
        
        Domestic demand for imported goods and services
        
        Reate of inflation relative to other countries
        
        Outward FDI and Portfolio Investment
        
        Central Bank intervention to decrease the value of money
        
        Consequences of Foreign Exchange rate flunctuations
        
        Likely impact on the macro economy of a currency depreciation
        
        Likely impact on the macro economy of a currency appreciation
      - Interest Reats
        
        Relative growth rates
        
        Central Banks intervention to increase the value of a currency
        
        Inward Flow remintance
        
        Foreign demand for exported goods and services
        
        The rate of inflation relative to other countries
        
        Inward FDI and Portfolio investment
  - - - A stronger exchange rate make imports cheaper and exports more expensive
        
        A weaker exchange rate makes imports more expensive and export cheaper
    - - Changes in the financial account can impact the exchange rate:-
        
        when there is an inflow of foreign investment into a country, it increase the demand for the country's currency. potentially leading to an appreciation of the exchange rate
        
        Conversely, when there is an outflow of domestic investment to other countries, it increase the supply of the country's currency in the foreign exchanges market , potentially leading to a depreciation of the exchange rate
      - The exchange rate influences the attractiveness of a country for foreign investment
        
        A stronger exchange rates makes foreign investment more expensive in terms of the investor's home currency potentially reducing the appeal of investing in that country
        
        A weaker exchange rate can make a country's assets more affordable for foreign investors, potentially increasing the attractiveness of investing in that country
- - - - efficient resource allocation
        
        priotitization
        
        innovation
        
        finding new ways to use resources more efficiently
        
        deciding which needs are important
        
        making the best use of limited resources
        
        practice of using resources in the most effective way possible to maximize societal welfare
    - - Collective self-governance: a system where communities manage their own resources through cooperation and shared decision-making
        
        pros
        
        local communities often have detailed knowledge of their resources
        
        promotes community engagement and ownership
        
        can lead to a more tailored solutions for local problems
        
        cons
        
        disagreements within the community on resource allocation
        
        potential for confrontations between different interest groups
        
        lack of expertise in complex environmental or economic issues
      - PUBLIC AND MERIT GOODS
        
        public goods
        
        merit goods
        
        goods or services that society believes are important and should be available to all, regardless of ability to pay
        
        GOVERNMENT PROVISION OF GOODS AND SERVICES
        
        advantages
        
        ensures equitable access to essential services
        
        1 more item...
        
        disadvantages
        
        potential for inefficiency and bureaucracy
        
        1 more item...
        
        goods/services that are non-excludable and non-rivalrous
        
        CIRCULAR ECONOMY
        
        a basic economic model showing how money flows between households and firms in the economy
        
        limitations
        
        it doesn't account for resource depletion
        
        it assumes infinite economic growth is possible
        
        eliminating waste and pollution
        
        recirculating products and materials
        
        regenerating nature
        
        INTERNATIONAL AGREEMENTS IN SUSTAINABLE DEVELOPMENT
        
        the process of countries working together to address global challenges that cannot be solved by individual nations alone
        
        framework of collective action, shared goals and targets, mechanisms for monitoring and enforcement
        
        climate change, biodiversity loss, ocean pollution
        
        EVALUATING SUSTAINABLE DEVELOPMENT STRATEGIES
        
        government intervention
        
        actions taken by the government to influence the economy or address market failures
        
        1 more item...
        
        regulating pollution and resource use
        
        providing public and merit goods
        
        incentivizing sustainable practices through taxes and subsidies
        
        effectiveness
        
        challenges
        
        1 more item...
        
        can lead to more sustainable resource management when communities are well-informed and motivated
- - - - improvements in living standards, health, education and overall well-being
  - - - deter foreign and domestic investment
        
        disrupt economic activities
        
        lead to frequent policy changes
      - limited access to capital
        
        stifle entrepreneurship and innovation
        
        limit business expansion and job creation
        
        hinder technological advancements
        
        environmental degradation
        
        deforestation can lead to soil erosion and loss of biodiversity
        
        air and water pollution can cause health problems, reducing productivity
        
        climate change can disrupt agriculture and increase natural disasters