CORRECTION RECORD

Unit 4 confirmed corrections

These changes address confirmed errors and inconsistent explanations. Original source documents are preserved. See the evidence correction record for the subsequent review of historical claims.

Specialisation and Comparative Advantage

Before: if the international price of a good rises, it may become worth producing even for a country without a comparative advantage in it, contradicting the model's prediction.

Now: exchange-rate changes can alter exporters’ prices and money profitability, while transport costs and trade barriers can also affect observed specialisation. These do not by themselves change comparative advantage, which depends on relative opportunity costs.

Why: Replaces the incorrect claim that a higher international price automatically contradicts comparative advantage; distinguishes monetary competitiveness from relative opportunity cost.

Restrictions on Free Trade

Before: Stops foreign firms selling below cost or below their home-market price purely to eliminate domestic competition

Now: Counters imports sold below normal value, usually their comparable home-market price; dumping does not require an intention to eliminate domestic competition.

Why: Aligns with the existing normal-value definition; predatory intent is not part of the definition of dumping.

Restrictions on Free Trade

Before: Pros: Lowers domestic firms' costs and prices without directly taxing consumers, helping them compete with cheaper imports; can preserve strategically important sectors (e.g. the primary sector under the EU's Common Agricultural Policy)

Now: Pros: A production subsidy reduces domestic firms’ effective costs and can help them compete with cheaper imports. In the small-country diagram, the consumer price remains at the world price while domestic output increases; the subsidy can support strategically important sectors (e.g. the primary sector under the EU’s Common Agricultural Policy).

Why: Aligns the evaluation with the existing small-country production-subsidy diagram; a fall in consumer price is not implied.

International Competitiveness

Before: Measures to reduce the exchange rate — e.g. cutting interest rates or currency intervention makes exports cheaper, though this is not available to a country (such as the UK) with a purely floating exchange rate, since the government does not directly set the rate.

Now: Measures to reduce the exchange rate — e.g. cutting interest rates may encourage depreciation under a floating exchange rate. The government cannot simply announce a lower fixed parity when the rate floats. Direct currency intervention can also influence the market rate, but this departs from a purely free float and does not guarantee a particular rate.

Why: Separates fixed-rate devaluation from influencing a floating rate; retains the distinction between a pure float and intervention.

Inequality

Before: On this view, inequality falls only when historical shocks or deliberate policy (progressive taxation, wealth taxes) interrupt the r > g dynamic — it does not fall automatically as Kuznets predicted.

Now: On this view, historical shocks and deliberate policy (progressive taxation, wealth taxes) can reduce wealth concentration. Inequality does not necessarily fall automatically with development; the outcome also depends on saving behaviour and the distribution of capital ownership.

Why: Removes the unsupported claim that these are the only mechanisms through which inequality can fall; aligns with the preceding qualifications.

Inequality

Before: often used as the strongest counter-argument to the pro-capitalism case specifically — if returns to capital structurally exceed the growth rate, a purely free-market system with light taxation has no self-correcting mechanism to stop wealth concentrating indefinitely.

Now: often used as a counter-argument to the pro-capitalism case — if returns to capital persistently exceed economic growth, wealth may become more concentrated where ownership is unequal and gains are saved. The outcome depends on saving, taxation and changes in ownership; r > g alone does not establish indefinite concentration.

Why: Removes an unconditional inference from r > g; retains the argument while matching the conditions already stated in the chapter.

Public Sector Borrowing and Public Sector Debt

Before: A deliberate, one-off change in spending or taxation to achieve a specific objective

Now: A deliberate change in spending or taxation to achieve a specific objective; it may be temporary or lasting

Why: Discretionary fiscal policy is not restricted to one-off changes; aligns with the chapter definitions.

Public Sector Borrowing and Public Sector Debt

Before: Interest rates on existing debt

Now: Interest rates and debt refinancing

Why: The effect depends on debt structure and refinancing, not an immediate rise in every existing coupon.

Public Sector Borrowing and Public Sector Debt

Before: higher interest rates raise debt-servicing costs on existing borrowing, widening the deficit further

Now: higher interest rates can raise servicing costs on new borrowing, debt refinanced at higher rates and floating-rate debt, widening the deficit; payments on existing fixed-rate debt do not immediately rise

Why: Distinguishes new and refinanced debt and floating-rate exposure from outstanding fixed-rate obligations.

Causes and Effects of Globalisation

Before: Foreign direct investment (FDI): investment by a firm in productive assets or business operations in another country.

Now: Foreign direct investment (FDI): cross-border investment establishing a lasting interest and significant influence in an enterprise, conventionally indicated by at least 10% of its voting power. Full ownership or majority control is not required.

Why: Distinguish FDI from portfolio investment and full ownership.

Causes and Effects of Globalisation

Before: This expansion is financed largely through foreign direct investment (FDI) — investment by a firm in productive assets (factories, subsidiaries, equity stakes) in another country.

Now: This expansion can be financed through foreign direct investment (FDI): cross-border investment establishing a lasting interest and significant influence in an enterprise, such as a subsidiary or joint venture. It does not require full foreign ownership.

Why: Use a consistent FDI definition.

Balance of Payments

Before: capital provided to, or received from, an enterprise by an investor based in another country (e.g. FDI).

Now: Cross-border investment establishing a lasting interest and significant influence in an enterprise, conventionally at least 10% of voting power. It can involve a wholly owned subsidiary or a joint venture; smaller holdings without significant influence are generally portfolio investment.

Why: Align direct-investment explanations across chapters.

Measures to Promote Growth and Development

Before: Development link: skills and management-expertise transfer to the domestic partner can build longer-term institutional and human capital, unlike pure FDI where control stays fully with the foreign firm.

Now: Development link: a joint venture may support skills and management-expertise transfer to the domestic partner. Compared with a wholly foreign-owned subsidiary, shared ownership can strengthen local participation, but spillovers depend on the agreement and firms’ capabilities. A cross-border joint venture can itself be FDI.

Why: A joint venture is not an alternative category to FDI.

Patterns and Volume of World Trade / Terms of Trade

Before: Cheaper imports (relative to exports) help reduce cost-push inflation

Now: If the improvement comes from lower import prices, imported inputs may become cheaper and ease cost-push pressure. A higher export-price index alone does not establish this.

Why: Separate the cause of a terms-of-trade change from its possible effects.

Patterns and Volume of World Trade / Terms of Trade

Before: Dearer imports (relative to exports) can add to cost-push inflation

Now: If the deterioration comes from higher import prices, imported inputs may become dearer and add cost-push pressure. A lower export-price index alone does not establish this.

Why: Separate the cause of a terms-of-trade change from its possible effects.

Patterns and Volume of World Trade / Terms of Trade

Before: Exports become relatively less price-competitive → export revenues may fall and the balance of trade/balance of payments can worsen (fewer competitive exports, more affordable and attractive imports)

Now: If own export prices rise relative to competing exporters’ prices, price competitiveness may weaken. An improvement caused only by lower import prices does not imply this; trade revenues also depend on quantities and elasticities.

Why: Separate the cause of a terms-of-trade change from its possible effects.

Patterns and Volume of World Trade / Terms of Trade

Before: Exports become relatively more price-competitive → export revenues may rise and the balance of trade can improve

Now: If own export prices fall relative to competing exporters’ prices, price competitiveness may improve. A deterioration caused only by higher import prices does not imply this; trade revenues also depend on quantities and elasticities.

Why: Separate the cause of a terms-of-trade change from its possible effects.

Patterns and Volume of World Trade / Terms of Trade

Before: Cheaper imported capital goods/technology can support productivity

Now: Lower imported-capital prices can support investment and productivity. An improved terms-of-trade ratio alone does not show that these prices fell.

Why: Separate the cause of a terms-of-trade change from its possible effects.

Patterns and Volume of World Trade / Terms of Trade

Before: More expensive imported technology and capital goods can raise costs and hurt productivity growth

Now: Higher imported-capital prices can constrain investment and productivity. A worse terms-of-trade ratio alone does not show that these prices rose.

Why: Separate the cause of a terms-of-trade change from its possible effects.

Inequality

Before: Thomas Piketty argues the mid-20th-century fall in inequality that Kuznets observed was not an automatic feature of development at all, but a one-off consequence of two world wars and the Great Depression destroying large concentrations of capital. His alternative explanation: whenever the rate of return on capital (r) persistently exceeds the rate of economic growth (g) — summarised as r > g — the incomes of capital owners grow faster than the wider economy, which can increase wealth concentration; the outcome also depends on saving, taxation and the distribution of capital ownership.

Now: Thomas Piketty challenges the view that inequality necessarily falls as economies develop, emphasising the historical effects of wars, depression and policy on wealth. When the rate of return on capital (r) exceeds the growth rate of national income (g), existing wealth may accumulate faster than national income if enough of the returns are reinvested. This does not mean capital owners’ incomes automatically grow at rate r: saving, taxation, changing returns and the distribution of ownership affect the outcome.

Why: A return rate is not the growth rate of capital income.

Constraints on Growth and Development

Before: Capital-output ratio: the amount of extra capital needed to produce one extra unit of output; a lower ratio means capital is being used more efficiently.

Now: Incremental capital-output ratio (ICOR): additional capital divided by the additional output it supports (ΔK/ΔY). A lower ratio indicates less additional capital per unit of extra output. The average capital-output ratio is K/Y; the simple fixed-coefficient growth model treats these ratios as equal and constant.

Why: Distinguish incremental from average capital-output ratios.

Constraints on Growth and Development

Before: The capital-output ratio measures how many extra units of capital are needed to produce one extra unit of output — a lower ratio means capital is used more efficiently to generate growth.

Now: The incremental capital-output ratio measures extra capital per extra unit of output (ΔK/ΔY). The average ratio is K/Y. In the simple Harrod–Domar model, a constant ratio links investment to additional capacity; a lower assumed ratio gives more extra output for a given investment.

Why: Use the correct ratio and state the model assumption.

Measures to Promote Growth and Development

Before: Growth link: stable, predictable commodity revenue encourages producers to invest in improving yields and productivity, rather than facing boom-bust cycles that discourage investment.

Now: Growth link: less volatile commodity prices may reduce one source of revenue uncertainty and encourage investment in yields and productivity. Total revenue still depends on output and sales volumes, so price stabilisation does not guarantee stable receipts.

Why: Price stability is not revenue stability.

Measures to Promote Growth and Development

Before: Living standards link: smooths the income of often-poor primary-producing farmers/workers, protecting household living standards from sudden price crashes.

Now: Living standards link: preventing a sharp price fall may protect producers from one source of income loss. The effect on household living standards also depends on harvests, sales volumes, production costs and how the scheme operates.

Why: Make income protection conditional.

Causes and Effects of Globalisation

Before: A key characteristic is that world trade has grown faster than world output for several decades, so trade (exports + imports) has risen as a share of global and national GDP.

Now: Historically, trade has often grown faster than output. A joint IMF, World Bank and WTO report published in 2017 found that global trade in goods and services grew by about 6% a year in real terms between 1960 and 2007, roughly twice the rate of real GDP growth. This is a dated historical pattern, not a rule applying to every later period or every country. Real growth comparisons should also be distinguished from nominal trade-to-GDP ratios.