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Primary sector Sector of an economy which covers the extraction of raw materials, such as precious metals, wheat and coal. Benefits of FDI Capital inflows create higher output and jobs. Capital inflows can help finance a current account deficit. Long term capital inflows are more sustainable than short term portfolio inflows. e.g. in a credit crunch, banks can easily withdraw portfolio investment, but capital investment is less prone to sudden withdrawals. Recipient country can benefit from improved knowledge and expertise of foreign multinational. Investment from abroad could lead to higher wages and improved working conditions, especially if the MNCs are conscious of their public image of working conditions in developing economies. Previous Play Next Rewind 10 seconds Move forward 10 seconds Unmute 0:00 / 0:15 Full screen Brainpower Read More Negatives of FDI Gives multinationals controlling rights within foreign countries. Critics argue powerful MNCs can use their financial clout to influence local politics to gain favourable laws and regulations. FDI may be a convenient way to bypass local environmental laws. Developing countries may be tempted to compete on reducing environmental regulation to attract the necessary FDI. FDI does not always benefit recipient countries as it enables foreign multinationals to gain from ownership of raw materials, with little evidence of wealth being distributed throughout society. Multinationals have been criticised for poor working conditions in foreign factories (e.g. Apple's factories in China). Millennium Development Goals 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. Advantages of Microfinance Fill a savings gap - by allowing small firms and individuals access to finance which they previously did not have, thus allowing them to make investments and start/grow a business. Relieve poverty - by promoting avenues of profit, which acts as income for entrepreneurs, and growing small scale businesses which may consequently take on a greater number of workers and so reduce unemployment and increase incomes. Provides low interest rates, where interest rates may previously have been high due to exploitative large scale international banks, or loan sharks. As a result, private individuals and small firms are not burdened with high levels of debt which may not be repayable or have a high opportunity cost. Can empower women in developing countries, thus potentially also increasing the productive potential of the economy, as women who may have been previously economically inactive are now incentivised to act entrepreneurially. Disadvantages of Microfinance Entrepreneurial ventures are not always successful - in fact they are more often unsuccessful. Consequently, loans may not be repaid, or debt burdens many limit income of individuals (this may be especially detrimental in a developing economy where incomes are already low and may consequently increase poverty). Lenders may exploit borrowers with extortionate interest rates - especially if there is a lack of competition in the financial sector in developing economies. Loans may not be large enough to alleviate poverty -> Loans may be misused - individuals may use loans (or a large proportion) for immediate consumption and not entrepreneurship and investment. Secondary sector Sector of an economy which covers the production of goods (manufacturing) - where raw materials are turned into goods. Tertiary sector Sector of an economy which covers the supply of services, such as financial services and restaurants. Economic growth The expansion of the productive potential of the economy. Short run economic growth An increase in actual GDP. Long run economic growth The expansion of the productive capacity of an economy. Rise in economic growth Increase in national output. Recession Occurs when GDP fall for two consecutive quarters. Economic development Todaro's three objectives of development: Freedom to make economic and social choice. Increased living standards. Increased availability of life sustaining goods and services. Sustainable development Development that meets the needs of the present without compromising the needs of the future. Development which ensures the capital stock does not decline over time. Sustainable growth Economic growth which can be maintained in the long run. Factors contributing to economic growth and development Trade liberalisation. Promotion of FDI. Privatisation. Development of human capital. Infrastructure development. Development of tourism. Development of primary industries. Fairtrade schemes. Overseas Development Assistance (ODA). Debt relief. Difficulties with comparing/measuring economic growth and GDP GDP does not give an indication for the distribution of income. Large hidden economies, such as the black market, which are not accounted for in GDP. This can make GDP comparisons misleading and difficult to compare. Factors which cause economic growth Increase in aggregate demand (AD=C+I+G+(X-M)). Supply side measures (which shift the long run aggregate supply curve - LRAS). Aggregate Demand (AD) Overall demand within the economy. Aggregate demand (AD) = C + I + G + (X-M). Benefits of economic growth Income increases - higher (material) living standards. Consumer confidence up - increases consumption and leads to higher living standards. Firms' profits increase and business confidence rises - increased investment, which leads to improved productivity, which increases the economy's PPF, lowers average costs in the long run, increases efficiency and provides greater quality goods and services at lower prices. Firm's may grow - benefit from economies of scale. Improvement of Government budget position - due to higher taxes and lower welfare payments - may result in government more willing and able to spend on infrastructure, healthcare and education. Development of greener more sustainable technology. Public services may improve. Costs of economic growth Rise in wealth inequality. Demand-pull inflation - could result in menu costs, shoe leather costs, falling exports, reduced confidence...(see negative impacts of inflation). Law of diminishing returns - benefit of consumption may not last/be great. Environmental degradation. Consequences of a recession Negative economic growth. Unemployment rises.