Reasons for trade:
○ To generate wealth needed for economic development
■ Countries cannot meet all their own needs
● Lack of resources
● Unsuitable climate
● Country’s strengths allow it to trade with other countries
○ Gathers income needed for economic development
● LICs only trade primary products (raw materials) → do not receive a good price
○ They have insufficient money to import important manufactured goods from HICs
○ Development goals are harder to achieve without these goods
■ eg/ computers for schools, special equipment for hospitals
Reasons as to why primary products receive low prices:
● Overproduction = too many countries grow the same crop → pushes price down globally
○ In years where crops are good , problem is made even worse
■ More overproduction of the same crop
○ Prices can fall very low → affects producer communities
● Import taxes = taxes put in place for countries to import goods from other countries
○ eg/ countries in the EU have import taxes to protect its own farmers
■ Countries inside the EU will not want to pay the import tax to non-EU countries (expensive)
■ Countries in the EU do not need to pay other countries within the EU → easy trade
○ Countries outside EU do not receive good prices for crops due to the import tax as EU countries are
unwilling to pay the high import tax
Investment by TNCs: Multiplier effect
● TNC (transnational corporations) = companies that have operations in more than 1 country (eg/ Nike)
○ They rely less on exporting and instead produce goods/services inside the borders of many
countries
■ They have many branches/factories around the world → no need to export
○ They buy material/food from LICs at low prices that jeopardises economic development
■ LICs do not make enough money to support their country/ help it develop
● Multiplier effect = positive spin-off effects that follow on from an initial investment in a region
○ Multiplies the sources of income a country can have
■ Other firms gain business by supplying goods to build factories/infrastructure
■ Wages of factory workers help local shops to grow their businesses
Process:
1. TNC invests in an LIC by FDI
○ Foreign direct investment = sum of money a TNC spends on building/buying up operations
in a foreign country
2. TNC builds a factory in the LIC
○ Creates jobs for locals
○ Cheaper employment in LICs
○ People willing to work for lower wages
○ Higher profits
○ If country is near large economies , there is cheap trade between them
3. TNC employs people to build and work in the factory
○ People migrate to area for job
○ Locals have more money to spend
○ They spend money in shops/services → make more money
○ Government collects more tax
4. LIC government builds hospitals, schools and shops as they collect more taxes
○ Money is used to improve development of the country
○ More people employed
○ Employees have more income
○ Spend money on goods/services to improve their QOL
5. TNC uses the increased demand for goods in LICs to build more services
○ eg/ opens a shopping mall
○ Multiplier effect starts again
