Economics Theme 4

Explain the characteristics of deglobalisation (5 marks)

Deglobalisation refers to a global decline in trade, foreign direct investment and subsequently a decline in global growth . In March 2009 the world economy shrank by 0.5% despite being projected to grow by 2.2% by the IMF. This was due to the global recession and collapse of financial markets impeding countries ability to trade goods and services. As a result, there has been an increase in protectionism as economies try to re-establish their domestic markets, this will lead to further reductions in global trade, already down by 7% in January 2009. Deglobalisation could also lead to a fall in tourism and migrant flows

Explain why some countries may experience a more severe recession than others (8 marks)

Some countries could experience a more severe recession than others due to their reliance on trade as a proportion of GDP and driver of economic growth. For example, Singapore, exports are 164% of GDP, in a global recession foreign demand for exports will decrease as foreign incomes decrease, providing imports are normal luxury goods or they are relatively price elastic. (diagram) Consequently, as capital flows decreased Singapore s economy shrank by 17%. This would have been worsened by a potential negative multiplier effect. Countries that rely on free trade, such as Taiwan where exports make up 60% of its GDP saw a fall in GDP by 11% during the crisis. Similar richer countries such as Japan and Germany that export capital goods, cars and electronics goods with high =YED figures will see larger decreases in GDP. When trade makes up a large proportion of GDP, a decrease in foreign demand because of a recession leading to lower global incomes will lead to a large shift left in AD, if not offset by increases in Government Spending, Consumption or Investment at the same time.

However, a country may not experience a more severe recession than another country if it is dependent on exporting for growth if it has effective and responsive shock absorbers in place. E.g in the 2008 banking collapse America used Expansionary monetary policy and the UK lowered interest rates to 0.25%. This was to increase injections into the circular flow of income as consumption would increase because there was a decreased incentive to save. Automatic stabilisers may also reduce the impacts of the recession. For example, during low AD, lower incomes mean more people qualify for benefits so the government will subsidise low incomes and higher unemployment with more welfare payments (transfer payments) An injection into the circular flow of income as Government spending is a component of AD.

Examine the possible effects of the global recession on countries with well established tourist industries (10 marks)

One impact of a recession on countries with well-established tourist industries such as Jamacia who saw visitors fall by 33% could be a negative multiplier effect. As seen in the diagram the withdrawal from the circular flow of income, foreign tourist consumption causes AD to shift left, however AD decreases more than proportionally do the decrease in consumption (AD2 to AD3) Due to the following reasons. Countries with tropical and temperate climates such as Jamacia have a comparative advantage in tourism, they are able to host tourist activities at a lower opportunity cost relative to other countries. Due to this specialism, a large proportion of the economy may be employed in tourism, especially if the country is a LIDC or an EDC with a majorly unskilled uneducated workforce, tourist industries have low barriers to entry and therefore the supply of labour will be relatively elastic to the tourist industry, meaning when there is a reduction in tourists in Jamacia, seasonal and cyclical unemployment can arise. Unemployment due to empty hotels can mean peoples standard of living and quality of life decreases. This is because they have lower disposable incomes to purchase essential goods which can affect their welfare. Income inequality may increase also as people who aren t dependant on the tourism industry for a living may see a proportionally less decrease in their income due to the global recession, they could work for the government for example. Another impact would be that the government could see a fiscal deficit arise This is because the of automatic stabilisers. In a recession when unemployment is high (seasonal cyclical) government transfer payments will be high, unemployment benefit payments will increase, an injection into the circular flow of incomes as gov spending is a proportion of AD. And therefore, real GDP will increase, reducing the negative output gap. However, this spending comes with an opportunity cost, spending on education or healthcare was foregone. Things which could increase LRAS and the productive potential of the economy in the long run. A fiscal deficit will mean large debt repayments as imports will have to be financed with foreign currency loans. This can burden future generations, constricted by debt repayment as a high proportion of GDP.

However, government debt may not be an issue if there is high rates of inflation coming out of the negative output gap, inflation reduces the real size of debt. Furthermore, a fiscal deficit can be offset by austerity. Reductions in future government spending on non-essential services accompanied by an increase in tax rates will lead to less gov expenditure and more gov revenue. This does depend on the rate of tax however as the Laffer curve suggests at higher tax rates the tax revenue will decrease as people choose not to work. In addition, EDCs such as Jamacia s large informal economies may not see as much tax revenue as there Is potential for so a fiscal deficit couldn t be reduced.

Furthermore, seasonal cyclical unemployment and a decrease in living standards may not arise as perhaps locals know the unreliability of tourist industries and therefore have savings (a high mpm) and secondary incomes. Such as harvesting agricultural crops to export in world markets. Size of tourism as a proportion of GDP, length of recession, YED for tourism, depreciation in currency may correct fiscal defecit.