the syllabus says:
Examine the importance of loans, debt repayment, development aid, remittances, foreign direct investment and repatriation of profits in the transfer of capital between the developed core areas and the peripheries.
Key terms
Remittances - Transfers of money/goods by foreign workers to their home countries.
Loan - Money given for a certain period of time to another country, individual or group of people; the money is normally paid back over a period of time with interest.
Interest - A percentage of a total amount of money charged to the borrower. It is normally charged on the total amount per year. Failure to pay the interest usually means the borrower is charged interest on that money as well.
Debt repayment - The payment of money and/or other goods and services in order to reduce the amount of money owed to a creditor.
Debtor - A person/country owing money to another person/country.
Creditor - A person/country owed money from another person/country.
Foreign direct investment (FDI) - Direct investment of money by a company into a foreign country, as opposed to investments in shares of local companies by foreign entities.
Repatriation of profits - The movement of profits made in a business or investment in a foreign country, back to the country of origin. For example: if a U.S. corporation does business in France and makes a profit, it may wish to repatriate that money from France back to the U.S.
Capital - Financial or physical assets which can generate income, such as property or investments. Capital is one of the factors of production. It is the stock of man-made resources used in the production of goods and services. The other factors of production are land, labour and entrepreneurs.
Loan - Money given for a certain period of time to another country, individual or group of people; the money is normally paid back over a period of time with interest.
Interest - A percentage of a total amount of money charged to the borrower. It is normally charged on the total amount per year. Failure to pay the interest usually means the borrower is charged interest on that money as well.
Debt repayment - The payment of money and/or other goods and services in order to reduce the amount of money owed to a creditor.
Debtor - A person/country owing money to another person/country.
Creditor - A person/country owed money from another person/country.
Foreign direct investment (FDI) - Direct investment of money by a company into a foreign country, as opposed to investments in shares of local companies by foreign entities.
Repatriation of profits - The movement of profits made in a business or investment in a foreign country, back to the country of origin. For example: if a U.S. corporation does business in France and makes a profit, it may wish to repatriate that money from France back to the U.S.
Capital - Financial or physical assets which can generate income, such as property or investments. Capital is one of the factors of production. It is the stock of man-made resources used in the production of goods and services. The other factors of production are land, labour and entrepreneurs.
how big is the world economy?
Depending on how it's measured, this figure varies. It can look directly at the financial flows between countries, or it can total up the GNI of all the countries. The figure are weakened because of uncertainty over illegal and unreported activities such as the drugs trade. There are also many important assets that have no monetary value and are not 'owned' by anyone, but are highly important - such as the atmosphere. In 2011, the world economy as measured by the world's country economies put together, was around US$65 trillion. It's important to remember that in most cases, economies and global financial flows are measured in US dollars.
Who are the world's largest economies?
In 2013, the largest economies in the world with more than US$2 trillion were the United States, China, Japan, Germany, France, the United Kingdom, Brazil, Russia, Italy and India.
In 2013, the largest economies in the world with more than US$2 trillion were the United States, China, Japan, Germany, France, the United Kingdom, Brazil, Russia, Italy and India.
Who are the world's growing economies?
This section of the course is all about the relative importance of financial flows. It's often assumed in the media and by governments that economic growth is a good thing - and, for individuals and countries, it generally is. However, the video below from the Economist (published March 2014) shows that the reality on a global scale is complex.
This section of the course is all about the relative importance of financial flows. It's often assumed in the media and by governments that economic growth is a good thing - and, for individuals and countries, it generally is. However, the video below from the Economist (published March 2014) shows that the reality on a global scale is complex.
what is money?
The Crash Course video below gives a history of money and links it to modern debt. Debt repayments (and loans) are also part of Core 2.
An important note about currency and value
'Capital' literally refers to a collection of wealth, through either physical products (such as coal, or oil) or financial products such as money. Having capital means you have wealth that can be used to purchase things that are desired, so most countries follow policies aimed to increase their capital. Usually this involves trade between countries, which is an extremely complex issue. For example, country A may wish to purchase energy in the form of oil, while country B wishes to have a safe investment for a future pension fund. Rather than a direct trade, many different mechanisms are used to make the trade happen. This results in the financial flows of today's global economy.
As each country has it's own currency*, there has to be a way to decide how much of a currency is needed to pay for something in another currency. This is the exchange rate. Because these exchange rates can vary hugely in the course of a year or period of years, the US dollar is usually used as the world's 'benchmark' currency. That is, for most major transactions, the money will be measured in it's equivelant to the US dollar. This way, everyone knows how much they have actually paid for a product. The US dollar has become the world standard because it is the most stable currency.
When a country has a strong economy, it means that country have more valuable items. This means that it is worth more US dollars. Therefore, each unit of currency in that country can be used to purchase more US dollars. This means the currency is strong. If it is strong it means that if other countries want to buy products using that currency, they have to give up more of their own currency. In other words, the value of the currency in the strong economy has gone up.
However, in that country, the price of items e.g. bread might not have changed. A loaf of bread that cost RMB500 still costs about RMB500, even if the currency is strong compared to other countries. Because of this problem, the term PPP or Purchasing Power Parity is used. It means that the value of each currency is compared to the price of goods in that currency and adjusted. So, it might look as though a country in South America is very poor because it has a weak US dollar exchange rate, but the price that people pay for goods in that country is roughtly proportional to the amount they earn. They appear to be earning very little in US dollars, but they only have to pay a very small amount for their food and shelter etc, so the problems are not as severe as they might first look.
*Currency is a country's system of money. A good summary of the issues with money is in the Crash Course above!
As each country has it's own currency*, there has to be a way to decide how much of a currency is needed to pay for something in another currency. This is the exchange rate. Because these exchange rates can vary hugely in the course of a year or period of years, the US dollar is usually used as the world's 'benchmark' currency. That is, for most major transactions, the money will be measured in it's equivelant to the US dollar. This way, everyone knows how much they have actually paid for a product. The US dollar has become the world standard because it is the most stable currency.
When a country has a strong economy, it means that country have more valuable items. This means that it is worth more US dollars. Therefore, each unit of currency in that country can be used to purchase more US dollars. This means the currency is strong. If it is strong it means that if other countries want to buy products using that currency, they have to give up more of their own currency. In other words, the value of the currency in the strong economy has gone up.
However, in that country, the price of items e.g. bread might not have changed. A loaf of bread that cost RMB500 still costs about RMB500, even if the currency is strong compared to other countries. Because of this problem, the term PPP or Purchasing Power Parity is used. It means that the value of each currency is compared to the price of goods in that currency and adjusted. So, it might look as though a country in South America is very poor because it has a weak US dollar exchange rate, but the price that people pay for goods in that country is roughtly proportional to the amount they earn. They appear to be earning very little in US dollars, but they only have to pay a very small amount for their food and shelter etc, so the problems are not as severe as they might first look.
*Currency is a country's system of money. A good summary of the issues with money is in the Crash Course above!
Global capital flows: An introduction
The following information is based on 'Global Interactions' by Paul Guinness, page 57 onwards.
When a country has money, they want it to receive interest and grow into more money. This is done through the investment of money. Investment is generally done by those who have money like HICs. They invest in poorer economies where they can make greater profits, and thus more money.
The LIC and MIC gets benefits too. They receive the capital they need to develop their industries, to pay their workers' wages, and to invest the money they make in social programmes like health and education.
The globalized market has meant that over time, all countries have developed so this old model is less valid. In 1997 the balance of payments (the direction of capital flow) was even. By 2002, there wasa net flow towards the developed world of $229bn, and by 2006 it was $784.
This is largely because countries want to own currency of other countries. Most countries own US dollars because it is the world's most stable and important currency. As a result, governments in the developing world have bought US dollars and this is responsible for the current flow of capital. Countries like China especially have bought significnat amounts of US dollars. Buy buying US dollars, they are effectively swapping their own currency for US dollars, which means that they are lending the US their own money, because the US spends this money on defence, education, health and other government programmes. The result is that the US has less in reserve, while the countries who bought US dollars have more. This balance is reflected in the numbers above. The result is that HICs often owe more money than other countries. This doesn't matter too much because their economies are so large, they can pay it off relatively easily compared to a poorer country. They also have huge assets e.g. large companies, skilled workforces working in high profit industries, and excellent infrastructure.
When a country has money, they want it to receive interest and grow into more money. This is done through the investment of money. Investment is generally done by those who have money like HICs. They invest in poorer economies where they can make greater profits, and thus more money.
The LIC and MIC gets benefits too. They receive the capital they need to develop their industries, to pay their workers' wages, and to invest the money they make in social programmes like health and education.
The globalized market has meant that over time, all countries have developed so this old model is less valid. In 1997 the balance of payments (the direction of capital flow) was even. By 2002, there wasa net flow towards the developed world of $229bn, and by 2006 it was $784.
This is largely because countries want to own currency of other countries. Most countries own US dollars because it is the world's most stable and important currency. As a result, governments in the developing world have bought US dollars and this is responsible for the current flow of capital. Countries like China especially have bought significnat amounts of US dollars. Buy buying US dollars, they are effectively swapping their own currency for US dollars, which means that they are lending the US their own money, because the US spends this money on defence, education, health and other government programmes. The result is that the US has less in reserve, while the countries who bought US dollars have more. This balance is reflected in the numbers above. The result is that HICs often owe more money than other countries. This doesn't matter too much because their economies are so large, they can pay it off relatively easily compared to a poorer country. They also have huge assets e.g. large companies, skilled workforces working in high profit industries, and excellent infrastructure.