Emerging economies and the indicators of growth

Developed economies such as the UK typically grow at around 1–2% a year. Many emerging economies in Asia and Africa have grown far faster, expanding their middle classes and creating enormous new markets — which is why so many Western firms pursue market development there (Ansoff).

Indicators of growth and development:

• GDP per capita = GDP ÷ population. It shows average output (and therefore roughly average income) per person — a proxy for the ability to buy. But it is an average: it hides inequality, so a low figure may still conceal a large affluent middle class.
• Literacy — the skills and employability of the workforce, and a market's ability to engage with written marketing.
• Health (life expectancy, infant mortality) — a proxy for living standards and workforce productivity.
• Human Development Index (HDI) — a composite of income (GNI per capita), education and life expectancy, scored between 0 and 1. A broader picture of development than income alone.

Implications for business: new trade opportunities (a growing market to sell into and a competitive location to produce in) and changing employment patterns (manufacturing migrating to lower-cost economies, with services and higher-skilled work concentrating in developed ones).

Your turn — GDP per capita

Your turn — how fast is it doubling?

Interpreting GDP per capita

Exports, imports, specialisation and FDI

Exports are goods and services sold abroad; imports are those bought from abroad.

Specialisation and competitive advantage: countries and firms specialise in what they are relatively best at — cheap labour, natural resources, skills, technology, brand. Specialisation raises productivity, cuts costs and expands the total output available for trade. Each side gains by trading what it produces efficiently for what it does not.

Foreign direct investment (FDI) is investment by a firm into productive assets in another country — building a factory, buying a local company, opening stores. It is not the same as buying foreign shares; FDI buys control.

• For the investing firm: access to a growing market, lower production costs, proximity to raw materials, and a way inside a trading bloc's tariff wall.
• For the host country: jobs, capital, technology and skills transfer, and tax revenue — but also profit repatriation and the risk of local firms being driven out.

Why the world got smaller

• Trade liberalisation: decades of WTO agreements have cut tariffs and non-tariff barriers.
• Political change: the opening of China, the collapse of the Soviet bloc and market reforms in India brought billions of producers and consumers into the world economy.
• Reduced cost of transport and communication: containerisation collapsed shipping costs; the internet made coordinating a global supply chain almost free.
• The growing significance of transnational (global) companies, which organise production wherever it is cheapest and sell wherever demand is strongest.
• Increased investment flows (FDI) between economies.
• Migration, within and between economies, and the growth of the global labour force — which has increased the supply of labour and held down wage costs in tradable sectors.
• Structural change: economies shift from agriculture to manufacturing to services as they develop.

Protection, liberalisation or a driver?

Tap a card, then tap the category it belongs to.

Tariffs, quotas and other barriers

• Tariff: a tax on imports. It raises the price of the imported good, making domestic products relatively cheaper, and it raises revenue for the government.
• Import quota: a physical limit on the quantity that may be imported. It restricts supply, which pushes up the domestic price — but the government collects no revenue.
• Other trade barriers: government legislation (safety, labelling, technical or environmental standards used as disguised barriers) and domestic subsidies, which cut home producers' costs and let them undercut imports.

Effects on business: exporters face lower volumes and thinner margins; importers face higher input costs; domestic producers gain some protection but lose the competitive pressure that drives efficiency. Retaliation is common, and consumers pay higher prices with less choice.

Firms respond to protectionism by producing inside the barrier — FDI, a joint venture or a local licensing deal — which is one of the main reasons multinationals build factories in the markets they sell to.

Your turn — the effect of a tariff

Responding to a tariff

Trading blocs and their impact on business

A trading bloc is a group of countries that agree to reduce or remove trade barriers between themselves. Edexcel names the EU single market, ASEAN and NAFTA (now succeeded by the USMCA).

• Free trade area: no tariffs between members, but each keeps its own external tariffs.
• Customs union: no internal tariffs plus a common external tariff against non-members.
• Single market: a customs union plus the free movement of goods, services, capital and labour, with harmonised standards.

Impact on businesses inside the bloc: a much larger tariff-free market, economies of scale, easier access to labour and capital, and one set of standards to meet instead of many. But competition inside the bloc intensifies, and inefficient firms are exposed.

Impact on businesses outside: they face the common external tariff, which puts them at a cost disadvantage — a powerful incentive to invest inside the bloc.

Match the indicator

Tap an indicator on the left, then what it measures on the right.

Evaluating trading blocs

Winners and losers from globalisation

FDI and the host economy

The big ideas to know

You have covered growing economies, trade, FDI, protectionism and trading blocs for Theme 4.1. Press Finish to see your score.