FPT UNIVERSITY – IBI101

FPT UNIVERSITY - CAN THO CAMPUS

GROUP ASSIGNMENT
Course: Introduction to International Business – IBI101

Can Tho, July 2024

 TABLE OF CONTENTS

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a. What is the difference between economic development and economic growth? Give examples of
how each of these concepts can be measured and what are some of the roadblocks to Economic
development........................................................................................................................................2
b. What is the difference between economic growth, inclusive growth, sustainable growth,
economic development, and sustainable economic development?.......................................................5
2. Describe the differences between Absolute PPP and Relative PPP. Explain why Relative PPP
is useful when comparing countries that base their price levels on different product baskets......8
3. References:........................................................................................................................12

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Chapter 3: National Differences in Economic Development
1.

a. What is the difference between economic development and economic

growth? Give examples of how each of these concepts can be measured
and what are some of the roadblocks to Economic development.

- ECONOMIC GROWTH:
 Definition: Economic growth refers to the increase in the market value of goods and
services produced by an economy over time.

 Usually measured by the growth rate of Gross Domestic Product (GDP), which
represents the total monetary value of all finished goods and services produced
within a country's borders over a specific period.

o For example, After World War II, the United States experienced strong
economic growth. U.S. GDP proliferated thanks to booming industrial
production, rising personal consumption, and stimulating government
economic policies. The 1950s are considered the golden age of US economic
growth with an average annual GDP growth rate of about 4%.

- ECONOMIC DEVELOPMENT:
 Definition: Economic development encompasses broader and more qualitative
improvements in the economy and society. It includes advances in technology,
industrial capacity, infrastructure, health care, education, and other factors that
contribute to improvements in the standard of living and general well-being of
people.

 Economic development considers not only GDP growth but also social progress,
reduced inequality, environmental sustainability, and improvements in human capital
(education and health care).

o For example, South Korea is often cited as a model of economic

development. Starting in the 1960s, the country underwent rapid
industrialization and modernization, transforming from a primarily agrarian
society into a major global economic power. Significant investments in
education and technology led to a highly skilled workforce, while
improvements in infrastructure and health care enhanced the quality of life
for its citizens. By the 1990s, South Korea had achieved significant economic
development, with a high standard of living, reduced poverty, and increased
life expectancy.

- TWO WAYS TO MEASURE ECONOMIC DEVELOPMENT ARE:

1. Gross Domestic Product (GDP) per capita:
 Definition: GDP per capita, also known as gross domestic product per capita, is a
measure of a country's GDP on a per-person basis. It is calculated by dividing a
country's GDP by its population.

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 2. Purchasing Power Parity (PPP) involves adjusting GDP for purchasing power:
 Definition: PPP is one of the bases for comparing and measuring the ability of each
currency to buy the same goods and services between countries with unstable or
widely differing exchange rates. PPP is also used to compare the income and living
standards of people in different countries.

- THE MAIN FACTORS THAT DETERMINE THE LEVEL OF ECONOMIC

DEVELOPMENT OF A COUNTRY ARE:
1. Average life expectancy at birth:
 Meaning: Average life expectancy at birth reflects the living conditions and health
care of people in a country. Higher average life expectancy is often associated with
higher levels of economic development.

o For example, Japan has an average life expectancy at birth of 84.2 years,
which is much higher than many other countries, reflecting its developed
economy and quality health care system.

2. Education level:
 Meaning: The education level of the population, especially the proportion of the
population with higher education, affects labor productivity and innovation capacity,
thereby promoting economic development.

o For example, Canada has a university education attainment rate of 56.7%,

much higher than many other countries, helping maintain Canada's stable
economic development.

3. Average income:
 Meaning: The average income of a population reflects the level of economic
development and the ability to meet basic needs of life.

o For example, Switzerland has an average annual income of over $80,000,

which is much higher than many other countries, indicating a highly
developed economy.

 The United Nations uses these indicators to construct the Human Development Index
(HDI), a method of measuring a country's level of development based on factors such as
life expectancy, education level, and income.

- SOME OF THE ROADBLOCKS TO ECONOMIC DEVELOPMENT:

1. Political Instability:
 Impact: Frequent changes in government, civil unrest, and corruption can create an
uncertain business environment. This unpredictability can deter both domestic and
foreign investments, as investors seek stable conditions to ensure the safety and
profitability of their investments.

o For example, Countries experiencing coups, civil wars, or high levels of

corruption may struggle to attract and retain business investments.

2. Poor Infrastructure:

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  Impact: Infrastructure, including transportation systems (roads, railways, ports),
energy supply, and communication networks, is essential for economic activities.
Poor infrastructure can increase costs and reduce efficiency for businesses, limiting
their ability to compete domestically and internationally.

o For example, Inadequate power supply leading to frequent blackouts, poor

road conditions causing delays in transportation, and lack of internet
connectivity hindering communication and e-commerce.

3. Low Human Capital:

 Impact: Human capital refers to the skills, education, and health of the workforce. A
workforce with low levels of education and skills is less productive and less
innovative. This can slow technological advancement and economic growth.

o For example, Countries with low literacy rates, poor educational facilities,
and limited access to vocational training programs may struggle to develop a
competent workforce.

4. Health Issues:
 Impact: High prevalence of diseases and poor health can reduce the productivity of
the workforce and increase healthcare costs. Illnesses can lead to absenteeism,
reduce the working lifespan of individuals, and create a financial burden on both
families and the state.

o Examples, High rates of infectious diseases like malaria or HIV/AIDS,

malnutrition, and lack of access to healthcare services.

5. Inefficient Institutions:
 Impact: Strong legal and financial institutions are critical for the enforcement of
contracts, protection of property rights, and the provision of financial services. Weak
institutions can lead to legal uncertainty, difficulty in accessing credit, and a lack of
trust in the economic system.

o Examples, Corruption in the judicial system, complex bureaucracy, and

unreliable banking systems can deter business operations and investments.

6. Geographic Challenges:
 Impact: Geographic features can significantly affect a country’s ability to engage in
trade and economic activities. Landlocked countries, for instance, face higher
transportation costs and may depend on neighboring countries for access to ports and
trade routes.

o Examples, Countries with challenging terrains, such as mountainous regions

or those prone to natural disasters, may have difficulties in building and
maintaining infrastructure.

7. Economic Policies:
 Impact: Economic policies play a crucial role in shaping the business environment.
Overly restrictive policies, such as high tariffs, excessive regulation, and
protectionist measures, can stifle economic activities. Conversely, policies that
encourage competition, innovation, and investment can spur economic development.

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 o Examples, Protectionist trade policies that limit imports and exports, high
tax rates that discourage entrepreneurship, and restrictive labor laws that
reduce flexibility in the labor market.

 These factors collectively contribute to the challenges faced by countries in achieving

sustainable economic development. Each country’s specific circumstances will dictate
which of these roadblocks are most significant.

b. What is the difference between economic growth, inclusive growth,

sustainable growth, economic development, and sustainable economic
development?

- THE DIFFERENCES BETWEEN ECONOMIC GROWTH, INCLUSIVE GROWTH,

SUSTAINABLE GROWTH, ECONOMIC DEVELOPMENT, AND SUSTAINABLE
ECONOMIC DEVELOPMENT ARE:

DEFINITION: CHARACTERISTICS: IMPLICATIONS EXAMPLES:

FOR BUSINESS:
Economic Economic  Quantitative:  Businesses After World
Growth growth refers to Focuses on the might experience War II, the
the increase in numerical increase in higher demand for United States
the production economic output. their products and experienced
of goods and services. strong
services in an  Measurement: economic
economy over a Primarily measured  Potential for growth. U.S.
while, typically using GDP, GNP, and higher profits and GDP
measured by other financial investments. proliferated
the rise in indicators. thanks to
Gross Domestic booming
Product (GDP)  Scope: Does not industrial
or Gross necessarily consider the production,
National distribution of wealth or rising personal
Product (GNP). the environmental consumption,
impact. and
stimulating
government
economic
policies. The
1950s are
considered the
golden age of
US economic
growth with an
average annual
GDP growth
rate of about
4%.

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Inclusive Inclusive  Equitable: Focuses  Promotes a In Brazil,
Growth growth is on reducing inequality more stable and policies such
economic and ensuring that all equitable market as Bolsa
growth that is parts of society benefit environment. Família have
distributed from economic growth. been
fairly across  This can lead implemented
society and  Measurement: In to a larger and to ensure that
creates addition to GDP, more diverse economic
opportunities measures include consumer base. growth
for all segments income distribution benefits poorer
of the metrics, poverty rates,  May involve families,
population, access to education and corporate social reducing
particularly the healthcare, and responsibility poverty and
disadvantaged. employment (CSR) initiatives inequality
opportunities. and inclusive while
business practices. stimulating the
 Scope: Emphasizes economy by
social inclusion and increasing
equal access to consumer
economic resources and spending.
opportunities.

Sustainable Sustainable  Long-term: Focuses  Encourages Denmark’s

Growth growth is on the long-term health businesses to approach to
economic of the economy and adopt eco-friendly sustainable
growth that environment. practices and growth
meets the needs sustainable includes a
of the present  Measurement: resource strong focus
without Includes GDP along management. on renewable
compromising with environmental energy,
the ability of sustainability indicators  May involve particularly
future like carbon footprint, investment in wind power,
generations to resource usage, and renewable energy, which has
meet their own biodiversity waste reduction, allowed it to
needs. It preservation. and sustainable reduce carbon
integrates supply chains. emissions
economic,  Scope: Balances significantly
environmental, economic development  This can lead while
and social with environmental to innovation and maintaining
dimensions. protection and social new market economic
equity. opportunities in growth.
green technologies
and services.

Economic Economic  Qualitative: Focuses  The South Korea’s

Development development on qualitative development of transformation
encompasses improvements in infrastructure and since the
broader and economic and social technology can 1960s from an
more indicators. create new agrarian
qualitative business economy to a
improvements  Measurement: opportunities. high-tech
in the economy Includes GDP growth, industrial

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 and society. It human development  Improved powerhouse,
includes indices, literacy rates, health and with
advances in life expectancy, and education can significant
technology, other social progress result in a more investments in
industrial metrics. skilled and education and
capacity, productive technology,
infrastructure,  Scope: Broadly workforce. demonstrates
healthcare, considers social, comprehensive
education, and economic, and political  Potential for economic
other factors aspects, aiming for long-term stable development.
that contribute holistic improvement. growth
to environments
improvements conducive to
in the standard investment.
of living and
general well-
being of
people.

Sustainable Sustainable  Balanced: Focuses  Encourages the Costa Rica’s

Economic economic on balancing economic, adoption of commitment to
Development development environmental, and sustainable sustainable
integrates social goals. practices and economic
economic technologies. development is
growth with  Measurement: Uses evident
environmental indicators such as GDP,  May require through its
protection and Human Development adherence to extensive use
social equity, Index (HDI), carbon stricter of renewable
ensuring that footprint, resource environmental and energy
progress today efficiency, and social social standards. sources,
does not equity measures. reforestation
compromise the  This can lead programs, and
ability of future  Scope: Emphasizes to innovation in emphasis on
generations to long-term sustainability green products eco-tourism,
meet their in economic activities, and services, which support
needs. policies, and offering new economic
development practices. market growth while
opportunities. preserving the
environment.

 COMPARISON:

 Economic Growth is primarily quantitative, focusing on increasing GDP without

necessarily considering the distribution of wealth or environmental impacts.

 Inclusive Growth ensures that economic benefits are fairly distributed across all
segments of society, aiming to reduce inequality.

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  Sustainable Growth integrates economic, environmental, and social dimensions,
aiming for long-term sustainability.

 Economic Development includes qualitative improvements in technology,

infrastructure, healthcare, and education, targeting overall societal well-being.

 Sustainable Economic Development merges the goals of economic development

with sustainability, ensuring that growth today does not compromise future needs.

2. Describe the differences between Absolute PPP and Relative PPP. Explain
why Relative PPP is useful when comparing countries that base their price
levels on different product baskets

- PURCHASING POWER PARITY (PPP):

 Definition: Purchasing Power Parity (PPP) is a method used to determine the
relative value of different countries' currencies by comparing the prices of identical
goods in those countries. Essentially, PPP is the ratio of the price of a specific basket
of goods in one location to the price of the same basket in another location.
Differences between PPP-based exchange rates and actual market exchange rates can
arise due to tariffs and other transaction costs.

 PPP is a useful tool for comparing the economic performance of different countries
in terms of their gross domestic product (GDP), labor productivity, and actual
individual consumption. It can also be used to analyze price convergence and
compare living costs between locations. The Organization for Economic Co-
operation and Development (OECD) calculates PPP using a basket of goods that
includes around 3,000 consumer items and services, 30 government occupations, 200
types of equipment goods, and about 15 construction projects.

 In addition to using per capita GDP adjusted by PPP to measure economic

development, Nobel Prize-winning economist Amartya Sen posits that economic
development should be seen as a process of expanding the real freedoms that people
enjoy. This encompasses eliminating major barriers to freedom, such as poverty,
tyranny, and the neglect of public infrastructure, and ensuring the availability of
basic healthcare and education.

o For example, a hamburger costs 3.57 USD in the US and 2.29 GBP in the
UK. If the current exchange rate is 1 GBP = 2 USD, then according to PPP it
should be 1 GBP = 1.56 USD (3.57 USD / 2.29 GBP), suggesting that
sterling may be undervalued relative to USD.

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 (Source: MBA Mondays)

- PURCHASING POWER PARITY (PPP) IS DIVIDED INTO 2 TYPES:

 Absolute Purchasing Power Parity (APPP).

 Relative Purchasing Power Parity (RPPP).

 Two key theories in international economics describe the relationship between exchange
rates and price levels. Here's a detailed explanation of their similarities and differences
with references:

ABSOLUTE RELATIVE
PURCHASING POWER PURCHASING POWER
PARITY (APPP) PARITY (RPPP)
DEFINITION: Absolute Purchasing Power Relative Purchasing Power
Parity (APPP) is an Parity (RPPP) is an
economic theory that posits economic theory that
that in the absence of extends the concept of
transportation costs and trade APPP by accounting for
barriers, the exchange rate changes in price levels over
between two countries' time. It suggests that the rate
currencies should equal the of change in the exchange
ratio of the countries' price rate between two currencies
levels. Essentially, a given is proportional to the
basket of goods should cost difference in the inflation
the same in both countries rates of the two countries.
when prices are expressed in This means that the
a common currency. currency of the country with
higher inflation will
depreciate relative to the

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 currency of the country with
lower inflation.

SIMILARITIES:  Fundamental Concept: Both APPP and RPPP are

grounded in the idea that exchange rates should adjust to
reflect the relative purchasing power of different currencies.
This means that after adjusting for the exchange rate,
identical goods should cost the same in different countries.

 Focus on Price Levels: Both theories use price levels as

a basis for determining exchange rates. APPP focuses on
absolute price levels, while RPPP focuses on changes in
price levels (inflation rates) over time.

 Ideal Conditions: Both theories assume ideal conditions

such as the absence of transportation costs, tariffs, and other
trade barriers. They also assume identical goods and
services are available in both countries.

Scope and This is a static concept that This is a dynamic concept

DIFFERENCES: Application: asserts the exchange rate that takes into account
between two countries is changes in price levels over
equal to the ratio of their time. It suggests that the rate
price levels. It implies that a of change in the exchange
basket of goods should have rate between two currencies
the same price in both is proportional to the
countries when measured in difference in the countries'
a common currency. inflation rates.

Assumptions Assumes no transportation More realistic as it considers

and Realism: costs, trade barriers, or changes in price levels due
differences in consumption to inflation. It assumes that
patterns. These assumptions while absolute price levels
are often unrealistic, limiting may not be equal, the
their practical application. exchange rate will adjust to
reflect relative changes in
inflation rates between
countries.

Practical Often used as a theoretical Frequently used in

Use: benchmark for comparing forecasting and analyzing
purchasing power and cost of long-term trends in
living across countries. exchange rates, as it
incorporates the effects of
inflation and provides
insights into how exchange
rates adjust over time.

EXAMPLES: If a basket of goods costs If the inflation rate in the

$100 in the US and £70 in US is 2% and in the UK is
the UK, then according to 5%, RPPP suggests that the
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 APPP, the exchange rate US dollar should appreciate
should be $1.43/£ (100/70). relative to the British pound
If the actual exchange rate is by approximately 3% per
different, APPP suggests that year to offset the inflation
arbitrage opportunities will differential.
exist until the exchange rate
adjusts to this level.

 Both Absolute and Relative PPP offer frameworks for understanding the relationship
between exchange rates and price levels. However, Relative PPP provides a more
dynamic and realistic approach by incorporating inflation rates, while Absolute PPP
serves as a foundational theory with limited practical application due to its unrealistic
assumptions.

- THE REASON WHY RELATIVE PPP IS USEFUL WHEN COMPARING

COUNTRIES THAT BASE THEIR PRICE LEVELS ON DIFFERENT PRODUCT
BASKETS:

 Relative Purchasing Power Parity (PPP) is particularly useful for comparing countries
that use different product baskets because it adjusts for inflation rates over time, offering
a more dynamic and flexible approach than Absolute PPP.

 Absolute PPP posits that the exchange rate between two countries should equal the ratio
of the countries' price levels of a fixed basket of goods and services. However, this
method can be limited when comparing countries with vastly different consumption
patterns and economic structures, as it assumes identical baskets of goods and services,
which is often unrealistic.

 Relative PPP, on the other hand, considers the rate of change in price levels (i.e.,
inflation rates) between two countries rather than the absolute price levels themselves.
This method acknowledges that different countries may experience varying rates of
inflation due to differences in economic conditions, policies, and market structures.
Therefore, the relative change in exchange rates should reflect the relative change in
inflation rates between the two countries.

 This makes Relative PPP particularly advantageous for several reasons:

1. Flexibility: It allows for comparison between countries with different consumption

patterns, as it does not require identical baskets of goods and services.

2. Dynamic Adjustment: It provides a way to account for inflationary changes over

time, making it useful for long-term economic comparisons.

3. Practical Application: In the real world, prices of goods and services are constantly
changing due to inflation, supply and demand dynamics, and other economic factors.
Relative PPP offers a more realistic approach by focusing on these changes rather
than static price levels.

o For example, if Country A has an annual inflation rate of 5% and Country B has an
annual inflation rate of 2%, Relative PPP suggests that Country A’s currency should
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 depreciate relative to Country B’s currency by approximately 3% per year (the
difference in inflation rates) to maintain purchasing power parity over time.

 This approach is supported by various studies and institutions, including the

International Monetary Fund (IMF) and academic research, highlighting its practicality
and relevance in modern economic analysis.

 By using Relative PPP, economists, and policymakers can better understand and
compare the economic conditions of countries with differing price structures, making it
an invaluable tool for international economic analysis.

3. References:

(1) Wikipedia contributors. (2024, July 4). Purchasing power parity.

Wikipedia. https://en.wikipedia.org/wiki/Purchasing_power_parity

(2) Y Í. (2020, May 20). Ngang giá sức mua tương đối (Relative Purchasing Power Parity -

RPPP) là gì? Vietnambiz. https://vietnambiz.vn/ngang-gia-suc-mua-tuong-doi-relative-

purchasing-power-parity-rppp-la-gi-2020052011532463.htm

(3) Singh, M. (2021, November 21). What is Purchasing Power Parity? Theory: Absolute,

Relative. Investortonight. https://investortonight.com/purchasing-power-parity-theory/

(4) Officer, L. H. (2022). Absolute and relative purchasing power parity. In Springer eBooks

(pp. 85–100). https://doi.org/10.1007/978-3-030-95925-8_5

(5) Purchasing power parity: Weights matter. (2018, June 15). IMF.

https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Purchasing-

Power-Parity-PPP

(6) https://scholar.harvard.edu/files/haidar/files/jih-currency_valuation_and_ppp-

published_version-2011_1.pdf?m=1440105621#:~:text=URL%3A%20https%3A%2F

%2Fscholar.harvard.edu%2Ffiles%2Fhaidar%2Ffiles%2Fjih
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