Openness and Income - Assignment Example

MACRO AND MICROECONOMICS Question one OPENNESS AND INCOME Correlation coefficient from the excel (0.448513066) In 2005 income and openness exhibit a positive correlation between them. This means there was a positive relationship between income and the level in openness. A positive increase in income will result to a positive increase level of openness. That is if the level of per capita income increases then the ration (export+ imports)/GDP will increase. For example if we take two sample countries i.e. Brazil and Cuba. The real GDP per capita for Brazil and Cuba in 2005 are 7524.542969 and 9142.791016 respectively. The resultant openness is 26.66373062 and 102.4046021 respectively. The per capita income of Cuba is greater than that of Brazil and that explains the reason behind high openness in Cuba as compared with Brazil. This confirms and justifies the correlation coefficient above. This pattern is experienced across most country used in the study. Regression table 1   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 3785.376 956.6509 3.956905 0.000104 1899.402 5671.351 1899.402 5671.351 X Variable 1 52.10041 10.00174 5.209135 4.55E-07 32.38264 71.81819 32.38264 71.81819 From the table above we can deduce a regression line between per capita income and openness as shown below: Y=3785.376 + 52.10041X; where Y is the level of openness and X is the per capita income. The coefficient 3785.376 is the constant. In interpreting the regression coefficient; an increase in per capita by one unit will result to increase in openness by 52.10041. This supports the earlier correlation results that showed that openness and per capita income exhibit a positive relation across the countries in 2005. However, the correlation and regression gives general conclusions. The fact is that several open countries have high level of income compared to their closed counterparts. Open economies have fewer difficulties in servicing external liabilities, and inadequate incentive to break a promise on external debt, hence making a turnaround in capital flows less likely. The scatter plot below also indicate a similar scenario Figure 1 QUESTION TWO Regression table 2   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 8.886187 1.351607 6.574536 3.83E-10 6.221657 11.55072 6.221657 11.55072 X Variable 1 0.402627 0.093752 4.294587 2.68E-05 0.217806 0.587448 0.217806 0.587448 The regression line is represented by Y=8.886187 + 0.402627X where Y is the level of domestic savings and X is the level of domestic investment. An increase in investment by investment by one unit will increase the level of domestic savings by 0.402627 units. Correlation The correlation coefficient between savings and investment in 2005 is 0.284764. This shows a positive relationship between domestic savings and domestic investments in 2005. The correlation and regression results show the general relationship that can be deduced from the analysis of the available data. However, some specific relationship can be also be deduced from the data. Out of 110 countries that had no domestic investment, 63 of them had no domestic savings. For example, Liberia, Libya, St. Lucia, Liechtenstein among others had no domestic levels in 2005, and their resultant domestic savings were also zero. However, some countries like Kuwait had zero domestic investment with 57.04595947 savings rate. This shows that domestic savings are not solely influenced by the level of domestic investments in the economy but other factors such as government spending, foreign direct investment, monetary and fiscal policies among others. With perfect capital flows, there should be no correlations between domestic investments and domestic savings. However, this is not the case from this study because the correlation coefficient says otherwise. From the analysis it is evident that most countries exhibit high investments hence high domestic rates. Government’s activities such as imports and exports taxations make it difficult to achieve perfect capital flows hence there will always be a correlation between domestic investments and domestic savings. A country needs to depend on the production of exports as a source of forex so as to reduce and service external debts. Countries that had large exports from the data given serviced their debts more easily because debt servicing absorbed small fraction of their total export proceeds. In order for these countries to generate the necessary forex to service their external debts incase of capital flows interruptions, they need to shift their exports towards exports sector. They can also achieve this through compressing of their imports. However, compressing imports can be very expensive for a closed economy. Figure 2 Figure 3 Question 3 Overall, foreign direct investment has a positive impact on economic growth of most countries with high levels of openness to international trade, education levels, lower population growth and proper stock market development. FDI is a vital indicator to boost the economic growth of most countries. FDI has been on an increasing trend for most countries during the period 1970-2005. Inflows of FDI into developing countries have increased by an average of 15% during this period. Additionally; taking a case of a country like Kenya, FDI is now the largest and the most stable source of private capital economies in transition and the developing economies, which accounting for almost 50% of all capital flows. However, the data shows that less developed nations have greater expectation on FDI. Foreign direct investment is considered as a way for attaining technology, skills, managerial and organizational expertise. However, it is unfortunate that the recent chunk of the inflow has been directed to a limited number of nations. The data shows that from an annual average of $60 billion for the period 1970-1986, FDI has seen tremendous growth to over $450 billion from 1990-2005. China is the largest developing country that has most FDI since 1992. Around 35% of foreign direct investments that flowed to developing countries went to China. The openness of an economy is vital in terms of trade liberalization. The more economies encourage more FDI. However, other than liberalization of trade, financial liberalization also played a vital role in sustaining capital inflows. Countries with high inflows of foreign direct investments experienced increased demand for skilled labor that make them move towards to a more labor extensive economies hence creation of more employment opportunities. The influence of foreign direct investments on economic growth depends on the condition of the recipient country. The conditions are measured in relation to the role of financial development and human capital of a recipient country. Therefore, it becomes clear from the data that financial system and development of human capital positively contribute to technological advancement. Government policies such as regulations of labor market, discouragement of free market also affects the flows of FDI. But overall, countries with high flows of FDI are characterized by high economic growth. Figure 4 The graph above shows that production is high in countries with high FDI Question 4 The level of openness is of great importance in relation to the technological status of the economy. Countries that are open to international trade are more developed in terms of technology than their closed counterparts. Foreign direct investments, absorptive capability, technology spillovers and economic growth are both positively related to the level of openness in an economy. Openness of an economy will attract FDI. Most foreign investments will be accompanied with advance technology compared especially in developing countries. This technology will spread across the labor market as the employees need to be trained on how to apply the current technologies in order to be efficient on their work. Technology in itself acts like a market; whereby its spread is influenced by forces of demand and supply. Technology tends to move from an area in which it is highly concentrated to an area where it is low concentrated. Therefore, from the data it is evident that technology has improved in developing countries as compared to developed countries with high level of technology. This encourages technology spillover and movement of technology between different countries. For this reason, open economies tend to attract more technological development as compared to the closed economies. As a result, the level of technology is high in open economies as compared to closed economies; hence it is right to argue that openness is a great determinant of transfer of technology. This is also shown in the graph below: Figure five Question 5 and 6 Figure 6:Scatter-plot Countries that exposes high taxes on towards other trading partners have less trading volume compared to those with less tax restrictions. One of the obstacles to international trade is the trade taxes. Just like individual consumers, countries maximize their utilities. In this case, the utility of most countries is achieving a positive or balanced balance of trade. Therefore, most countries will try to minimize their imports while at the same time maximizing their exports. To achieve this, they can encourage domestic productions while at the same time limiting foreign based imports. To limit imports, countries may impose some taxes to their trading partners. However, high taxes will discourage their trading partners from trading with them. In a global context; developed economies are the main trading partners of poor or developing countries. Developed countries mostly imports raw materials from developing countries in low prices. The developing economies on their side import finished products from these developed countries. Globalization has resulted to more open economies and thereby encouraging trade between countries; especially between developed and developing economies. However, developed economies tend to benefit most from globalization than their developing counterparts. This is because most trade unions and international decisions towards international trade are mainly made by these developed economies. For example, EU as a trading block has more bargaining power than AU when it comes to international trade decisions. These developed countries also exploit developing countries in that they trade with finished products at expensive prices as compared to developing countries that mainly trade in raw materials that fetch low prices at international markets. Therefore, as much as globalization has helped transform many economies; the fact is developed economies have benefited more to it as compared to their poor counterparts. Read More