PART V: UNEMPLOYMENT ● Structural unemployment can

Unemployment, according to the arise for two distinct reasons.

OECD (Organisation for Economic ● Suppose the number of
Co-operation and Development), is workers looking for work
persons above a specified age equals the number of jobs
(usually 15) not being in paid available so that there is no
employment or self-employment but imbalance between the
currently available for work during numbers being supplied and
the reference period. demanded.
● Structural unemployment can
TYPES OF UNEMPLOYMENT still arise if the kinds of
● FRICTIONAL persons looking for work do
● STRUCTURAL not "fit" the jobs available. At
● CYCLICAL any time, some sectors the
economy are growing and
FRICTIONAL other sectors are declining.
UNEMPLOYMENT ● If skills were perfectly
● arises because both workers transferable across sectors, the
and firms need time to locate laid-off workers could quickly
each other and to digest the move to the growing sectors.
information about the value of ● To reduce this type of
the job match. unemployment, therefore, the
● It is sometimes called search government would have to
unemployment and can be provide training programs that
voluntary, based on the would "inject" the displaced
circumstances of the workers with the types of skills
unemployed individual. that are now in demand.

STRUCTURAL CYCLICAL UNEMPLOYMENT –

UNEMPLOYMENT ARISES DUE TO UPS AND
● The type of unemployment DOWNS OF BUSINESS CYCLES.
that creates a great deal of
concern, and that dominates
the policy discussions, is
structural unemployment.

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PART VI: URBANIZATION Agglomeration economies - Cost
Urbanization – is the process advantages to producers and
through which cities grow, and higher consumers from location in cities and
and higher percentages of the towns, which take the forms of
population comes to live in the city. urbanization economies and
● It is also the process by which localization economies.
large numbers of people
become permanently 2 forms of Agglomeration
concentrated in relatively small economies
areas, forming cities. ● Urbanization economies -
● Urbanization rates rise as long Agglomeration effects
as the population in the urban associated with the general
areas exceeds the population growth of a concentrated
growth in the rural areas. geographic region.
● Japan is the most urbanized, ● Localization economies -
while Burundi is the least Agglomeration effects
urbanized. captured by particular sectors
● Developing countries of today of the economy, such as
are more urbanized than finance or autos, as they grow
developed countries. (Todaro within an area
and Smith, 2015) ● Congestion ‐ An action taken
by one agent that decreases the
Definition of terms incentives for other agents to
Urban bias. The notion that most take similar actions. Compare
governments in developing countries to the opposite effect of a
favor the urban sector in their complementarity.
development policies, thereby
creating a widening gap between the Urban Giantism Problem
urban and rural economies. Urban giantism is a phenomenon of
urban settlements growing
Rural-urban migration. The disproportionately large in size due to
movement of people from rural rapid migration of people from other
villages, towns, and farms to urban areas to.
centers (cities) in search of jobs. ● Urban bias is a serious issue
in many developing nations.

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 Urbanization is taking place at ● Decentralize authority to cities
a rapid pace. Everything is and neighborhoods
centered in the cities.
First-city bias
Causes of urban giantism: ● A form of urban bias that has
● Import substitution and often caused considerable
industrialization, “bread and distortions.
circuses,” hub and spoke ● The country’s largest or first
transport system, and (“first-place”) city receives a
compounding effect of locating disproportionately large share
the national capital in the of public investment and
largest city. incentives for private
● The urban informal sector is investment in relation to the
being promoted because of country’s second-largest city
surpluses, creation of jobs, use and other smaller cities.
of technology, and the ● As a result, the first city
recycling of waste materials. receives a
There is also access to training, disproportionately—and
and more benefits are given to inefficiently—large share of
the poor, especially women. population and economic
activity.
What are the strategies to
implement to solve the problems of Migration has five-policy
urban giantism and migration? implications:
● Create an urban-rural balance 1) Urban bias (more jobs in urban
● Expand small-scale, labor than in rural) leads to more
intensive industries rural-urban migration
● Eliminate factor price 2) Imbalances in expected income
distortions opportunities is crucial
● Choose appropriate 3) Indiscriminate educational
labor-intensive technologies of expansion fosters increased migration
production and unemployment
● Modify the linkage between 4) Wage subsidies and scarcity factor
education and employment pricing can be counterproductive
● Reduce population growth

3
5) Programs of integrated rural Purpose of agricultural
development should be encouraged ● to provide sufficient
low-priced food and manpower
Part VII: Environmental issues to the expanding industrial
concerning Agricultural economy
transformation and its relation to ● the leading sector in the
economic development economic development of
● Agriculture has been the way developing countries
of life of most of the citizens ● The two-sector model of Lewis
of the developing nations. “is an example of a theory of
● This livelihood has been development that places heavy
passed on from one generation emphasis on rapid industrial
to another, and has tied the growth, with an agricultural
families so close that if sector fueling this industrial
possible, can just continue to expansion by means of its
be passed on. cheap food and surplus labor.”
● However, modernization and ● Agriculture has the ability to
industrialization stopped this keep pace with the population.
dream of having a simple and ● It might have even falsified the
happy life. Malthusian trap that explains
● Agriculture is mostly centered population increases faster
in the rural areas. than food supply.
● Much can be discussed about ● Countries have implemented
the sources of income in the programs to solve the problem
countryside. Farming is the of hunger.
best foundation of ● They even implement
industrialization. programs to protect the
● The resources and the produce environment and natural
are significantly needed by the resources.
industrial sector. ● One of this is the Green
Revolution, which is the boost
in grain production associated
with the scientific discovery of
new hybrid seed varieties of
wheat, rice, and corn that have

4
 resulted in high farm yields in Part VIII: Globalization, Free Trade
many developing countries. and other Global issues pervading
developing Economies.
Three agrarian systems: (Todaro “Globalization is the word used to
and Smith, 2013) describe the growing
● agriculture-based countries, interdependence of the world’s
agriculture is still a major economies, cultures, and populations,
source of economic brought about by cross-border trade
growth—although mainly in goods and services, technology,
because agriculture makes up and flows of investment, people, and
such a large share of GDP information.
● most of the world’s rural
people live in what the report THREE PERIODS OF
categorizes as transforming GLOBALIZATION
countries ● 1870–1914
● urbanized countries, ● 1945–1980
rural-urban migration has ● 1980 to the present
reached the point at which
nearly half, or more, of the 1870–1914
poor are found in the cities, ● This period resulted from the
and agriculture tends to Industrial Revolution in
contribute even less to output Europe and the opening up of
growth. new, resource-rich, but
Requirements for agricultural and sparsely populated lands in
rural development North America (the United
● improving small scale States and Canada), South
agriculture America (Argentina, Chile,
● provide necessary incentives and Uruguay), Australia and
● land reform New Zealand, and South
● supportive government Africa.
policies ● These lands received millions
of immigrants and vast
amounts of foreign
investments, principally from

5
 England, to open up new lands telecommunications and
to food and raw material transportation
production. ◦massive international capital flows
● These so-called regions of resulting from elimination of most
recent settlement grew rapidly restrictions on their flow across
during this period by exporting national boundaries, as well as by the
increasing amounts of food participation of most countries of the
and raw materials to Europe in world.
exchange for manufactured
goods. INTERDEPENDENCE
● This period of modern ● the ratio of imports and exports
globalization came to an end of goods and services to gross
with the breakout of World domestic product (GDP)
War I in 1914. ● GDP = C + I + G + (X-M)
● The GDP refers to the total
1945–1980 value of all goods and services
● It was characterized by the produced in the nation in a
rapid increase of international year.
trade as a result of the
dismantling of the heavy trade GRAVITY MODEL
protection that had been put in ● It postulates that (other things
place during the equal), the bilateral trade
● Depression that started in the between two countries is
United States in 1929 and proportional, or at least
during World War II. positively related, to the
● Stagnation + inflation = product of the two countries’
stagflation GDP’s and to be smaller the
greater the distance between
1980 to the present the two countries (just like in
The present globalization revolution Newton’s law of gravity in
(since 1980) is: physics).
◦its speed ● That is, the larger (and the
◦depth more equal in size) and the
◦immediacy resulting from the closer the two countries are,
tremendous improvements in the larger the volume of trade

6
 between them is expected to Asian governments and
be. corporations.
● Example: It is expected that ● During the 1980s, Japan
the United States to be trading invested a large chunk of its
more with its neighbors huge export earnings in
Canada and Mexico than with financial assets and real estate
similar but more distant and to set up corporate
nations, and more with large subsidiaries in the United
economies such as China, States.
Japan, and Germany than with
smaller ones. PURPOSE OF IE
CAPITAL FLOW ● to predict and explain
● Freely flowing across national ● examines the basis for and the
boundaries than people gains from trade,
● Financial or portfolio capital ● examines the effectiveness of
(bank loans and bonds) macroeconomic policies under
generally move to nations and different types of international
markets where interest rates monetary arrangements or
are higher, and foreign direct monetary systems
investments in plants and firms
flows to nations where ASSUMPTIONS OF IE
expected profits are higher. ● a two-nation, two-commodity,
● This leads to the more efficient and two-factor world
use of capital and generally ● no trade restrictions to begin
benefits both lenders and with
borrowers. ● perfect mobility of factors
● During the 1970s, Middle within the nations but no
Eastern nations deposited a international mobility
great deal of their huge ● perfect competition in all
earnings from petroleum commodity and factor markets
exports in New York and ● no transportation costs.
London banks.
◦which then lent (recycled) CHALLENGES OF IE
them to Latin American and ● Slow Growth and High
Unemployment in Advanced

7
 Economies after “the Great
Recession” THEORY OF COMPARATIVE
● Trade Protectionism in ADVANTAGE
Advanced Countries in a ● Ricardo presented his Law of
Rapidly Globalizing World Comparative Advantage in his
● Excessive Fluctuations and book “Principles of Political
Misalignment in Exchange Economy and Taxation” in
Rates and Financial Crises 1817.
● Structural Imbalances in ● “According to the law of
Advanced Economies and comparative advantage, even if
Insufficient Restructuring in one nation is less efficient than
Transition Economies (has an absolute disadvantage
● Deep Poverty in Many with respect to) the other
Developing Countries nation in the production of
● Resource Scarcity, both commodities, there is still
Environmental Degradation, a basis for mutually beneficial
Climate Change, and trade.
Unsustainable Development ● The first nation should
specialize in the production
THEORY OF ABSOLUTE and export of the commodity
ADVANTAGE in which its absolute
● According to Smith, if two disadvantage is smaller (this is
countries trade voluntarily, the commodity of its
each of them should gain from comparative advantage) and
the trade. Because if one does import the commodity in
not gain, the other one will not which its absolute
engage in trade anymore. disadvantage is greater (this is
● The Theory of Absolute the commodity of its
Advantage states that countries comparative disadvantage).”
can gain from trade if they do (Salvatore, 2013)
specialization of products ● Arnold (2015) describes it as
produced, and export them to “The situation where someone
other countries. can produce a good at lower
● Physiocracy – opportunity cost than someone
● Mercantilism – else can.”

8
 that don't affect the nation's
Trade Theory economic output.
● ”International trade theory is a ● A country's balance of
sub-field of economics which payments tells you whether it
analyzes the patterns of saves enough to pay for its
international trade, its origins, imports.
and its welfare implications. ● It also reveals whether the
● International trade policy has country produces enough
been highly controversial since economic output to pay for its
the 18th century. International growth.
trade theory and economics ● A balance of payments deficit
itself have developed as means means the country imports
to evaluate the effects of trade more goods, services, and
policies. capital than they export.
● A balance of payments
Balance of payments surplus means the country
● The balance of payments is the exports more than it imports. It
record of all international trade provides enough capital to pay
and financial transactions for all domestic production.
made by a country's residents. The country might even lend
● The balance of payments has outside its borders.
three components—the current ● The current and capital
account, the financial accounts are two components
account, and the capital of a nation's balance of
account. payments.
● Current accounts measure ● The current account is the
international trade, net income difference between a country's
on investments, and direct savings and investments.
payments. ● A country's capital account
● The financial account records the net change of
describes the change in assets and liabilities during a
international ownership of certain period of time.
assets.
● The capital account includes
any other financial transactions

9
Stabilization policies Definition of terms
● A coordinated set of mostly 1. Debtors’ cartel
restrictive fiscal and monetary ○ A group of
policies aimed at reducing developing-country
inflation, cutting budget debtors who join
deficits, and improving the together to bargain as a
balance of payments. group with creditors.
2. Restructuring
Four basic components to the ● Altering the terms and
typical IMF stabilization program: conditions of debt
1. Abolition or liberalization of repayment, usually by
foreign-exchange and import controls lowering interest rates or
2. Devaluation of the official extending the repayment
exchange rate period.
3. A stringent domestic anti-inflation 3. Brady Plan
program consisting of ● A program launched in
◦(a) control of bank credit to raise 1989, designed to reduce
interest rates and reserve the size of outstanding
requirements; developing-country
◦(b) control of the government deficit commercial debt
through curbs on spending, including through private debt
in the areas of social services for the forgiveness procured in
poor and staple food subsidies, along exchange for IMF and
with increases in taxes and in World Bank debt
public-enterprise prices; guarantees and greater
◦(c) control of wage increases, in adherence to the terms
particular abolishing wage indexing; of conditionality
◦(d) dismantling of various forms of 4. Debt-for-equity swap
price controls and promoting freer ● A mechanism used by
markets indebted developing
4. Greater hospitality to foreign countries to reduce the
investment and a general opening up real value of external
of the economy to international debt by exchanging
commerce equity in domestic
companies (stocks) or

10
 fixed-interest ● Other terms: decline, refuse,
obligations of the reject
government (bonds) for
private foreign debt at The Global Financial Crisis
large discounts. ● has been affecting countries
around the world.
5. Debt-for-nature swap ● It is like a domino effect when
● The exchange of foreign a recession occurs in one
debt held by an country.
organization for a larger ● The recession in 2007 was a
quantity of domestic considered great recession
debt that is used to following the Great Depression
finance the preservation of the 1930s.
of a natural resource or ● The causes of financial crisis
environment in the are financial deregulation and
debtor country. international trade imbalances.
6. Debt repudiation
● The 1980s fear in the
developed world that
developing countries
would stop paying their
debt obligations.

Repudiation of a debt
● Implies that the debt is just,
and that its payment is denied,
not because of sufficient legal
defense, but to take advantage
of the rule that a sovereign
state cannot be sued by
individuals.
● the refusal of public
authorities to acknowledge
or pay a debt.

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