Economic Geographyis a part of Human Geography but, before we define it, let's talk about one of its elements: "economy".
Economic activity
Everytime I ask you what does economy mean, your answer is something related to "money" or "business". Money is an important issue for modern economies, however, is it possible to have an economy without money?
Wait! More complicated words??!! Yes. Let's explain them:
GOODS: Physical products, you can "touch" them (a table, a car, a slide of bread...)
SERVICES: Activities that satisfy any need but do not produce physical products (education, healthcare, hairdressing, transportation...)
Stages of economic activity
The three stages of economic activities are:
PRODUCTION: All the activities needed make services or to transform raw materials into goods.
DISTRIBUTION: Activities that get the goods or services to the consumer (transportation, commercialization).
CONSUMPTION: Acquisition of goods or services.
To sum up, economy is the set of activities that human beings make to satisfy its necessities, from the basic needs (food, water, shelter...) to the most superfluous desires.
Activities
Copy the above definitions in your notebook and do the following activities:
1. Learn and make sentences with the following words: goods, services, needs, raw materials.
2. What is the objective of economic activity?
3. Explain the stages of economic activity.
Economic Geography
So, now we can go back to the Economic Geography definition. It is the part of Human Geography that studies the spatial variation of human economic activities -production, distribution, and consumption-, with emphasis on resource endowments, population growth and movements, settlements, and all the economic relations (commerce or transport) from a local to a world scale.
According to its materials, its means and ends, activities are grouped into three large sectors:
Primary sector: Activities involved in the extraction and production of raw materials, such as farming, logging, hunting, fishing and mining.
Secondary sector: Manufacturing activities that transform raw materials into finished goods, suitable for use by other businesses, for export, or for sale to consumers.
Tertiary sector: A.K.A. service sector, consists of the production of services instead of end products.
4. Classify professionals by economic sectors: waitress, coal miner, pig farmer, physician, builder, car mechanic.
5. Explain your parents jobs to the class and classify them within the three sectors. Which sector is predominant? Is it consistent with the distribution of the Spanish workforce?
6. Discuss by groups: How would you consider housewives? Do they contribute to the economy?
Probably, you have heard something about "capitalism", maybe you have a few ideas of what it might be. In order we understand how capitalism works, let's talk first about economic agents and factors or production.
Economic agents
According on how they interact, we could classify economic activities in three main agents:
People (or labour or consumers): Provide work to companies and State in exchange for a salary, and use their incomes to buy goods, services and pay taxes.
Companies: Produce and distribute goods and services for economic benefit. They pay taxes for their profits.
State: It is supposed to represent the common interests. It develops economic policies (general rules about economic activities) and it can produce and distribute goods and services for the well-being of society. All of this is paid with taxes.
Activities:
1. Learn and make sentences with the following words: salary, taxes, companies, State.
2. Explain with your own words the roles of the different agents in a country's economy.
Factors of production
Watch this video, read the rest of the article and answer: what are the factors involved in economic activity and on what they consist?
The total value of all these factors (land/natural resources, labour, capital and entrepeneurship/technology) makes up the costs of production:
Activity: If you were the company that produces this corn, how much corn in dollars ($)/acre you should sell if you want to make benefits?
What is capitalism? How it works? How can it be possible that the US, Spain, China and others share the same economic system?
The definition of capitalism is much more complex, but let's start with the basics:
Capitalism is an economic system based on the private ownership of the means of productionand their operation for profit and accumulation. The production of goods and services is based on supply and demand in the general market—known as a market economy—.
Main characteristics of capitalism
Making a profit is the goal for economic activity.
Private ownership of the factors/means of production (land, machinery, technology).
Law of supply and demand determines the price of a product, capital, land and labour. According to this law, if a product is scarce its price will go up, whereas it will go down when there is more supply than demand.
Following the law of supply and demand, it is needed a market or free competition. Market or free competition arises when more than one producer is free to sell the same or similar products to the same buyers. However, monopolies or oligopolies can develop, especially if there is no competition. A monopoly occurs when a firm is granted exclusivity over a market. Hence, the firm can raise prices because it has no fear of competition. An oligopoly is a group of firms that act together in a monopolistic manner to control output and prices.
Activities:
1. Explain the law of supply and demand with examples.
2. What is the difference between a monopoly and an oligopoly? Have you ever heard about monopolistic practices or oligopolies, can you put any examples?
We have defined capitalism as the economic system which is mainly controlled by private ownership, moved in the search of profit and that distribute goods and services according to supply and demand law.
That sounds very abstract, but now we are going to discuss some direct consequences of all these characteristics:
PROS
It searches efficiency. Firms in a capitalist based economy face incentives to be efficient producing goods by cutting costs or avoiding wastes.
It tries to meet consumers needs. If there is a demand for something, then it will appear a market.
It boosts innovation. Connected with efficiency, competition and consumers preferences, if companies stop innovating they can be surpassed by its competitors. In other hand, entrepreneurs are those who create or develop new profitable goods and services.
It depends on the merits. In theory, everybody is entitled to create a new business and, eventually get rich. Wealth is a good incentive for imagination and work.
Competition, innovation and the pressure of hard work can help economic growth. In general terms, the expansion of capital has ended benefiting rich and poor (benefits, job opportunities, more affordable goods...)
CONS
It can generate monopoly power. Competition between companies tend to strength the concentration of capital, that could end in monopolistic practices. Also, companies retain more political influence and are stronger than citizens or workers individually.
It ignores social benefit/common interests. A profit maximising capitalist company is likely to ignore negative consequences from its production, such as pollution or labour exploitation. Similarly, a totally free-market economy will no pay attention to non profitable needs, such as health, public transport and education. Even supporters of capitalism will admit that government provision of certain public goods and public services are essential.
It creates inherited wealth and wealth inequality. Capitalists argue that a capitalist society is fair because you gain the rewards of your hard work, but very often people are rich, simply because they inherit wealth or are born into a privileged class. Therefore, capitalist society not only fails to create equality of outcome but also fails to provide equality of opportunity.
Diminishing "marginal utility of wealth". Capitalism supporters argue that it is good if people can earn more leading to income and wealth inequality. However, this ignores the diminishing marginal utility of wealth: a millionaire who gets an extra million sees little increase in economic welfare, but that €1 million spent on health care would provide a much bigger increase in social welfare.
Boom and bust cycles. Capitalist economies have a tendency to booms and busts with painful recessions and mass unemployment.
https://dilbert.com/strip/1990-04-09
Activity: Put a real example of each pros and cons of capitalism.
Examples:
PROS:
Efficiency - If a machine that makes cars wastes too much energy, the company will invest money in an energy saving machine.
Consumer needs - If it turns out that people wants... peanuts with their faces (?), then it will be peanuts with their faces...
See the Dilbert comic strip below. Is it pro or against capitalistic economic rules? What is him criticizing?
Why are there rich and poor countries? What is the consequence of a global market economy in each country?
SHORT HISTORY OF GLOBAL IMBALANCES:
-16th century: Colonization of America and parts of Asia by European powers. Foundations of global capitalism: metropolitan elites get richer from the colonial raw materials and manpower.
- 1750: Beginning of the Industrial Revolution in Great Britain. Acceleration of production, trade, transportation, financial needs.
- 1815–1914: New industries and social and economic transformations spread across Europe, North America, Japan, and parts of Australasia. The countries in these regions formed the "core" of the modern economic system. Colonies become an important asset for the industrialized countries.
- From the 20th century on: global trade developed with the integration of new countries, including some former colonies, into the "system" of global capitalism.
As a result of colonisation and industrial revolution, industrialized countries spread capitalistic relationships of production all over the World. We can say that global relationships themselves are the origin of global imbalances, since Western countries started to classify the rest of the World on what they lacked, referring on what Western countries do have achieved.
Activity: What are the historical causes of modern inequalities?
DEVELOPED - DEVELOPING
Probably, the most popular classification is between "developed countries", "developing countries" and "underdeveloped countries". However, it is mainly an economic classification, that not always takes on account human welfare, and it is always relative. What is exactly an industrialized country? At what point it gets "industrial"? Are there only two types of countries according to the GDP? Do the two blocks share the same circumstances? Are developed countries "better" than the others? Those questions discuss this classification as a generalization, we should keep in mind that this is only an statistical quantification, not a judgement over the countries.
Nowadays, the criteria used to establish the degree of development are:
Average GDP per capita above and below the median 2010
Industrialisation; countries in which the tertiary and quaternary sectors of industry dominate would thus be described as developed.
Human Development Index (HDI), which combines national income with other measures, such as life expectancy and education. This criterion would define developed countries as those with a very high (HDI) rating. The index, however, does not take into account several factors, such as the net wealth per capita or the relative quality of goods in a country.
Human Development Index (2019 data)
Activities: What are the criteria to establish the degree of development?
Apart from that, maybe you have heard about the "first world" and the "third world" (but what about the "second world"?). Look at the maps above: what countries and regions are part of the first, second and third world?
WALLERTEIN'S WORLD-SYSTEM THEORY
Wallerstein rejected the idea that the "third world" was simply underdeveloped. After analyzing the economic links and the process that they structure, the global economy succeeded in showing that, although the position that a country previously occupied in the world-system was the result of its history and geography, the market dynamics of global capitalism itself accentuated the differences between the periphery and the center, thereby inequality is strengthened. According to Wallerstein's theory, there are three types of countries:
1) Central countries: industrialized, developed and rich, with a dominant position in the modern world-system.
2) Countries of the semi-periphery: they have medium levels of wealth, with some autonomy and economic diversity
3) Peripheral countries: They lack power and are poor. Its agricultural and mining economy is very limited. These nations provide the semi-periphery and the center with raw materials, products and labor at low prices.
Image and text from: http://www.nocierreslosojos.com/sistema-mundo-wallerstein/
The International Division of Labor (IDL) is the term that describes how countries have specialized in producing certain economic goods: they do not work on the same products and, as a result, exchange their production among themselves. This specialization of countries or areas was initially based on the simple comparative advantages of different countries, but it has produced a further division of the production process.
Old IDL
Traditional IDL assigns the production of manufactured goods and services to developed countries; and the supply of primary products in general (agricultural products, raw materials) to poor countries. However, with the development of techniques but also of countries, the international division of labor is changing. Thus some developing countries have started to manufacture common manufactured products (textiles, for example).
New IDL
We sometimes speak of a “new international division of labor” to designate the current specialization of countries: the new industrialized countries, especially Asian ones, today produce manufactured products, including high-tech products. Developed countries mainly manufacture technological products and services whose production requires high skills. The poorest countries remain confined to primary products with low added value.
Until the 1970s: "Old international division of labor". Colonization and exploitation of India, parts of China and Africa by European states. Asymmetric exchange of primary products from colonized countries against manufactured products exported by colonizing countries. Decolonization, between 1947 and 1960, allowed the emergence of new industrialized countries.
After the 1970s: “New international division of labor”. The first wave of these NIDL was dominated by four Southeast Asian countries (the four Asian dragons): Hong Kong, South Korea, Singapore and Taiwan, as well as two Latin American countries: Brazil and Mexico.
Then, from the 1980s onward, a second wave arrived which consisted mainly of Asian countries such as Thailand, Malaysia, Indonesia, Philippines and Vietnam (Asian tigers).
Due to their skilled and cheap labor, these countries were used by multinational firms as bases for subcontracting. They were first engaged in particular industrial sectors, such as optical instruments, watches, toys and machine tools. The direct investments of multinationals in these countries allowed, on the one hand, the transfer of technology, and on the other, the creation of new wealth which in turn financed new projects.
Activities:
Look at the map about manufacturing countries. Then search on the Internet what are the richest countries in the World (according to nominal GDP). Are they (more or less) the same countries?
Loot at the map on coffee: where is it produced? And consumed? Do you think is an expensive product or not?
The same applies to chocolate: it is produced in poor countries but, who is getting the biggest part of the "bar"?
What are the differences between the old and the new IDL?
What countries are part of the Asian Dragons? And Asian Tigers? Search on your home something made in there (except from China). Is it a high added value product or not?
Inequality within countries is very high but it is not rising everywhere. Since 1990, income inequality has increased in most developed countries, whereas it declined in most Latin American countries from 1990 to the early 2010s (although is increasing again in some of them).
2. How is wealth distributed worldwide?
Behold the original "elephant chart". It represents the income growth from the end of the Cold War until (more or less) today. The global elite, in particular the top 1 percent, have enjoyed massive income growth over the past decades (Trunk). The global upper middle class has seen its income stagnate with zero growth over two decades for the 80th (Trough). The global middle class has risen rapidly as select developing countries have begun to converge toward rich countries. Countries like China have lifted large impoverished populations into the middle class (Torso). The global extreme poor have largely been left behind, with several countries stuck in a cycle of poverty and violence (Tail).
However, there are other measurements, like the distribution of household wealth –which comprises ownership of capital, including capital goods (housing, land) and financial capital– which is typically more unequal than the distribution of income. The bottom half (56,6%!!) of the global population owned less than 1 percent of all wealth in 2018, whereas the richest decile (top 10%) owned 85 percent of all wealth and the top 1% alone held almost half of it:
Improvements in labour productivity have not translated into better labour compensation. Wage stagnation is likely to disproportionately harm workers in the middle and at the bottom of the income distribution, while top salaries have risen dramatically.
3. Is inequality inevitable, is somewhat "natural" in a globalized economy?
No, it is not. Global economic, social and environmental forces are certainly affecting the evolution of inequality, but national income dynamics are also shaped by national policies and institutions. Education, health care and labour market policies, for instance, affect the distribution of human capital, skills and wages, and thereby the distribution of market (gross) income.
Those policies are conditioned by taxes and transfers of wealth. The more progressive the
tax system is, the more people living in poverty could benefit from social protection transfers and public services.
Progressive tax systems (top) reduce inequalities by transferring wealth from the upper-income earners to the rest. Direct income and property taxes are usually progressive while indirect taxes, such as VAT, are regressive. The negative effects of indirect taxes on the incomes of people living in poverty can be stronger than the positive effects of public transfers and services.
4. What are the factors of inequality?
The world is far from the goal of equal opportunity for all: circumstances beyond
an individual’s control, such as gender, race, ethnicity, migrant status and, for
children, the socioeconomic status of their parents, continue to affect one’s chances
of succeeding in life. Let's point out a few examples:
In Bolivia, Brazil, Guatemala and Peru, indigenous women and those of African descent are more likely to earn $1 an hour or
less than men from their ethnic group or men and women in the rest of the population.
Students from an immigrant background –both those born abroad, that is, first-generation immigrants, and those born in the country to foreign-born parents, or second generation– score, on average, lower on mathematics, reading and science tests than students without immigrant parents.
Students from socioeconomically disadvantaged backgrounds were nearly three times less likely than socioeconomically advantaged students to attain the minimum level of proficiency in reading. Differences in gender and family background account for up to 35 per cent of differences in scores.
5. But, if education is granted for all, isn't wealth a question of hardwork and merits? 🙋
Infant and early childhood contexts are crucial to understanding the persistence of advantage or disadvantage across the life course and across generations. There are lots of studies that proof that. On average, it would take five generations for the descendants of a low-income family in rich countries to reach their country’s average income level. Children coming from families with more educated parents have more chances to end up with more qualified and better paid jobs compared to their peers with poorly educated parents. Men from a high-income family who have achieved only the lowest level of education have a higher probability of entering the highest income group and a lower probability of entering the lowest income group. And vice versa, there is a strong relationship between low-income family background and lower education achievements.
Therefore, we can establish a strong relationship between the social origins and "success" in academic areas and achieving better paid jobs, that demonstrate that we do not have same opportunities from the starting line.
But, there is another weakness in the "self made-men" theory: Wealth inheritance. No matter how good or bad you are at something, if in the end, your social status relies on how rich were your parents.
6. "Yes, but, who cares? I'm fine! 👿", or What are the prices of inequality?
High inequality is an ethical and moral concern across cultures around the world. Promoting equality is a common ideal, a principle that should be upheld and actively pursued. However, there are instrumental reasons for tackling the issue as well, since high and growing inequality has a range of negative impacts on well-being.
Inequality hurts the economy and society in different ways:
1) Elite groups are more effective at influence policymakers, affecting democracy as whole. They may use their position to lobby in support of their interests. People tend to distrust more each other and institutions in more unequal countries.
2) Inequality among social groups along with other factors has been related with violent conflict and crime.
4) Low incomes reduce the demand, productivity and innovation. For example, higher labour productivity is associated with a lower concentration of labour income at the top.
5) Potential of people at the bottom of the income distribution is lost.
6) Inequality makes a division between people with or without access to health. That implies an economic impact, but overall worst health conditions and less life expectancy in poorer classes.
7. Then, do we have a choice?
Yes, inequality is not "natural" like if it was raining. Policies can differ from one country to another, in developed countries most of the people have access to basic capabilities, but there still exist large inequalities. On the other hand, there are countries with extreme poverty, in contrast with the European countries, for example. Therefore, we could talk about inequality between countries and regions of the World or within a specific country.
Now is your turn to design policies against inequality! How would you redistribute wealth? How would you give equal opportunities to all? Read again question 3, it gives you some clues.
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