Analyzing Economical Geography

Parts taken from the 2012 AP Princeton Review Human Geography

Sectors of Production

• The economy can be divided into several different categories known as sectors– Can be grouped by its stage in the production

process, from primary production onwards• Three to five categories

– Can be grouped by the types of products or services they create

Sector Categories by Stage of Production

• Primary production– Agriculture, mining, energy, forestry, and fisheries– Extraction of natural resources from the earth

• Secondary production– The processing of raw materials drawn from the primary sector– Secondary productions reflect all forms of manufacturing

• Tertiary production– Transportation, wholesaling, and retailing of finished goods to consumers– Can include other types of services that could be categorized as quaternary or

quinary– Quaternary and quinary are categorized as services in the tertiary sector

• Quaternary production– Wholesaling, finance, banking, insurance, real estate, advertising, and marketing– “business services”

• Quinary production– Retailing, tourism, entertainment, communications, government, or semi-public services such as

health, education, and utilities– “Consumer services”

Agriculture

• Economically, the combined cash value of what is produced is measured– Not the volume or weight of the goods

• In less developed portions of the world, subsistence agriculture is very common, with agriculture supporting the family and local people

• In more developed countries, farming is most commonly done on a commercial basis

Commodity Chain

• Exist from the small-scale, family-based producers selling directly from the farm or through farmers’ markets to transnational supply networks selling to an international base

Natural Resources

• Mining and energy extraction can be valuable depending on the global commodity prices

• Oil based economies can rise and crash with radical price changes– Price volatility is difficult for both producers and consumers

• Fisheries and timber markets are not as volatile, but have increased in price and value over the years to reduced supply – Due to increasingly protected natural resources, companies

must use more technology and larger processing facilities to remain profitable and meet growing consumer demand

Renewability

• Resources can be classified by their renewability• Minerals and fossil fuels are nonrenewable

– The earth cannot reproduce them– Some mineral products can be recycled

• In some cases, it is cheaper to buy scrap metal to recycle than to mine new metal

• With the exception of hydroelectricity, alternative energy sources as often much more expensive to harness than fossil fuels– This makes them less common

• Alternative energy is used to shift energy usage away from nonrenewable resources

Sustainability

• Fisheries and forestry involve renewable resources– We rely on the sustainable use of the resource– Fish cannot be overfished, and forests cannot be

cut without replanting– Using large nets for fishing and clear cutting of

forests are not sustainable practices

Manufacturing• Factory-made products far out-value agricultural based products

– Manufactured goods are farm products and natural resources that have been taken through value-added processing• The more complex and technology-driven the manufacturing is, the more expensive the final product is

– The utility and demand of the product can influence value

• Manufacturing can be divided into several groups– Durable- goods that are intended for use of more than a year

• Greater value and represent a more lucrative form of production

– Nondurable- goods that are intended for use of less than a year• Can also be divided by product type

– Resource processing- oil refineries, metals, plastics, chemicals, lumber, paper, food and beverage, concrete and cement, glass

– Textiles- clothing, shoes and leather products, artificial fibers and thread– Furniture- home, office, bedding– Appliances- home appliances, commercial equipment, power tools, lighting– Transport- automotive, rail, aerospace, shipbuilding, recreational vehicles,– Health- pharmaceuticals, medical devices, personal care products– Technology- computers and laptops, servers, industrial control devices, phones, television and

audio entertainment

Services• Intangible products• Most valuable form of economic production

– Not all services are valued equally• Low-benefit services are sectors where the labor force tends to be

hourly employees who receive few if any additional work benefits– EX: hotel and food services, retail, customer services, contract agricultural

labor, and construction• High-benefit services are sectors in which pay tends to be salaried and

include additional work benefits including health, dental, vision, vacation, sick days, etc…– Benefits are provided by other high-benefit service industries such as

insurance companies– EX: business services, health care, government, and education

• Service sectors organized by type of firm– Retailing, labor and workforce services, hospitality, government, education,

transportation and delivery services, environmental, construction, engineering, utilities, media, advertising and marketing, medical and health care, finance and banking, insurance, real estate, accounting, legal services, computer, and research and development

Deindustrialization• The shifting away from manufacturing as the main source of economic

production• In the 1970s and ’80s, when deindustrialization was occurring across

North America and West Europe, millions of factory workers lost jobs and many old industrial cities suffered from the economic downturn– Workforce had to adjust to new service sector employment that paid less

and had fewer benefits compared to factory jobs– Manufacturing had to focus on highly priced goods to keep profits and

investments up amid foreign competition and to keep the remaining First World manufacturing labor force paid and employed

• Services became important as investors in new businesses are looking to maximize their returns on investment– Services are the most valuable investments

Levels of Development

• Countries can be categorized based on their level of economic development

• First World– Industrialized or service based– Free market, high level of productivity value per

person and a high quality of life– EX: U.S., Canada, Norway, Switzerland, Iceland,

Israel, Australia, New Zealand, Japan, South Korea, Singapore, Taiwan, Saudi Arabia, Kuwait, United Arab Emirates, Oman, and Bahrain

Levels of Development

• Second World– Describes Communist countries• Cuba and North Korea

– Still have centrally planned economies

– Former Communist states that are restructuring their economy to free-market systems

– Newly industrialized countries that are still controlled by Communist parties, but have adapted free-market reforms• China and Vietnam

Levels of Development

• Third World– Mainly agricultural and resource-based economies

that have low levels of productivity and a low quality of life

– Some Third World countries• Made an economic shift towards industrialization and

urbanization• Remain firmly in a rural, agricultural economy

– The poorest Third World countries• Haiti, Niger, Malawi, Tanzania, Madagascar, Nepal,

Kyrgyzstan, and Tajikistan

Levels of Development

• Fourth World– Experienced an economic crisis that has

immobilized the national economy• Crash in banking system, devaluation of currency, failed

taxation system, or events that have disrupted the economy such as warfare or natural disasters

– Sierra Leone and Liberia• Civil wars

– Myanmar• Cyclone

Levels of Development

• Fifth World– Lack both a functioning economy and have no

formal national government• Somalia and the West Sahara

More Developed Countries(MDCs) and Less Developed Countries(LDCs)

• First and Second World are considered MDCs• Third, Fourth, and Fifth World are considered

LDCs– Even if they are NICs

• Dividing Line– $10,000 GNP per capita• Above- MDCs• Below- LDCs

Newly Industrialized Countries

• Third World states that have economics that have made a distinct shift away from agriculture and towards manufacturing– Industrialization is a long-term process that can last longer in

larger countries• Constant process of building infrastructure that facilitate

the construction and operation of factories• Rapid population growth and are located on the border

of stage two and three on the Demographic Transition Model

• Industrialization and Urbanization

A list of NICsNIC Important Sector(s)

Mexico Manufacturing, oil, tourism

Brazil Manufacturing, services

Dominican Republic Manufacturing, tourism

Nigeria Oil, chemicals

Gabon Oil

Indonesia Manufacturing, oil, tourism

Vietnam Manufacturing

China Manufacturing, technology, industry, finance, transport

India Manufacturing, pharmaceuticals, technology, computing services

Thailand Manufacturing, medical services

Malaysia Manufacturing, technology

Philippines Manufacturing

NIC Development Funding

• Funding to develop infrastructure and factories can come from– Internal sources– Foreign aid

• Provided by donor states in First World Economies; do not expect money to be returned

• Donations rarely go to building for-profit businesses– Instead, it provides the means to create schools, nutrition, health programs,

etc…

• Can also be a technology transfer– Technical knowledge, training, and equipment is provided to NIC

governments to increase business efficiency

– Foreign direct investment(FDI)

Foreign Direct Investment(FDI)

• Money from private investors or investment firms that are looking to earn a profit– Use money to start a new business or build a new

factory in a NIC– Over time, investors are paid back plus a portion

of the profits• If unprofitable, investor may gain less money back, or

nothing at all

– In cases of high demand, investors can have returns of 10 to 15 percent within a few years

Development Loans

• To attract FDI, some NICs seek international development loans from organizations such as the World Bank– Loans are most often given to advance infrastructure

• These new services can charge fees(trains, toll roads, etc…) that will be used to pay back the loan

• Criticism– The loans don’t make the positive impact on the

economy as intended– Costly and significant environmental problems

India, a Growing NIC• Until the 1990s, India’s exports have been focused on manufactured

goods such as textiles and steel– During the 1990s, high-tech markets in software development and

computing services began to open in India because of India’s comparative advances• A country has the ability or resources to produce a good or service at less cost and

more efficiently than other states

– India’s colonial history with Britain gives India several advantages against other competitors• Access to the American technology markets

– High amount of English speakers in India

• Large number of educated workers

– Dell and Microsoft have opened factories and customer service centers in India recently• These are examples of off-shoring of computer services from the United States to

NICs

China’s Demand for Energy

• Industrial development and the newly earned wealth of Chinese citizens have combined to create a large demand for energy in industry and transportation– Coal is the primary source for electric production– High oil demand; fuels cars and trucks

• China does not have much oil and has invested in oil exploration and production in Third World countries

• Problems– Pollution

• Acid rain, smog

– Greenhouse gas emissions

North versus South analogy

• Used to describe the developed world(North) and the less developed countries(South)– Inaccurate because Australia and New Zealand are

First World countries that are in the Southern Hemisphere

– Most of the world’s LDCs are on or north of the equator

The Old Asian Tigers• The term “Asian Tiger” is used to describe the industrial economies of

Asia that have been aggressive in terms of economic growth rates and their ability to compete with consumers

• The Old Asian Tigers were seen as free-market bastions against the spread of Communism– The U.S. and Britain had no choice but to give foreign aid money to support

democracy in the region• By the 1970s, the Asian countries had become competitive with the

United States and Britain for global markets in manufacturing goods• By the 1980s, efficient factories and a focus on product quality in Japan

and Korea created significant market share in the American auto and electronics markets– Foreign competition and the oil shocks of the 1970s have caused the

deindustrialization in the United States, Canada, and Western Europe

The Old Asian TigersOld Asian Tigers Source of Development

FundingManufacturing

Redevelopment PeriodJapan

Foreign aid programs such as the Macarthur Plan 1950s-1970s

South Korea

Taiwan

Hong Kong

Singapore

The New Asian Tigers

• Manufacturing development was mainly funded through FDI that came from the United States and Britain as well as from the Old Asian Tigers– Profitable investments

• The New Asian Tigers offered– Cheap labor– Low-cost land and resources– Little labor and environmental regulations

• In low-end product lines, such as clothing or shoes, the New Asian Tigers proved to be the only profitable manufacturing locations– China had the lowest costs and a large labor force

The New Asian Tigers

New Asian Tigers Source of Development Funding Manufacturing Development Period

China

Foreign direct investment(FDI) 1980s-1997

India

Indonesia

Malaysia

Thailand

Vietnam

The Asian Economic Crisis(1997)

• A banking crash in South Korea resulted in a credit crisis– Because of banks and investors holding back on industrial

loans and investment– Money to develop new factories and infrastructure

disappeared• Prompted the deindustrialization of the Old Asian Tigers

– Payrolls were cut and workers were laid off by the hundreds of thousands

• Like First World economies, the Old Asian Tigers now focus on services rather than manufacturing– Manufacturing still exists, but only for high profit

manufactured goods such as cars and medical devices

Measures of Development

• Help us to understand the levels of development and measure uneven development in various countries

Gross Domestic Product(GDP)

• The dollar value of all goods and services produced in a country in one year– Measures the total volume of a country’s

economy• Formula– Goods + Services

Gross National Income(GNI)

• The dollar value of all goods and services produced in a country plus the dollar value of exports minus imports in the same year– Adjusts for national wealth lost when imported goods

are purchased from abroad• In countries where export value exceeds import value, there

is a trade surplus• In countries where import value exceeds export value, there

is a trade deficit

• Formula– Goods + Services + (Exports – Imports)

Per Capita

• Means “for every head” in Latin; for every person• Calculated by dividing the volume of the economy by

the population– GDP per capita- (Goods + Services) / Population– GNI per capita- [(Goods + Services) + (Exports – Imports)] /

Population• Answer calculated is not an indicator of the average

salary of each worker– Answer calculated is a measure of the country’s collective

wealth or productivity and indicates a relative standard of living

Gross National Income Purchasing Power Parity(GNI PPP)

• An estimate that takes into account the differences in prices for countries– Gross National Income per capita can make First

World countries seem more prosperous and can make Third World countries seem less prosperous• Doesn’t factor the cost of living in each country

Human Development Index(HDI)

• Designed by the United Nations to measure the level of development of states based on social indicators and economic productivity

• Indexed score ranges from 0.00 to 1.00 by combining GDP per capita, the average literacy rate, average level of education, and total life expectancy

Economic Indicator Data for Selected Countries

State GNI per capita

GNI PPP HDI Categories

United States 46,040 45,580 .950 First World, MDC

Canada 39,420 35,310 .967 First World, MDC

United Kingdom 42,740 33,800 .942 First World, MDC

Russia 7,560 16,085 .806 Second World, MDC

China 2,360 5,370 .762 Second World, NIC

India 950 2,740 .609 Third World, NIC

Kenya 680 1,540 .532 Third World, LDC

Haiti 560 1,150 .521 Third World, LDC

Nepal 340 1,040 .530 Third World, LDC

•Recommended to know more than three of the above countries’ statistics• At minimum, one MDC, one NIC, and one LDC

The Gini Coefficient

• Measures the level of income disparity between the country’s richest and poorest population groups on a scale from 0 to 100– High numbers indicate a wide gap between the

rich and the poor and suggest problems with wealth distribution

– Low numbers indicate a large middle class population where wealth is more equally divided

The Gender-Related Development Index(GDI)

• Uses same indicators that calculate HDI, except it replaces GDP per capita with income– The male and female data is compared by dividing

the female score by the male score• The closer the result is to 1.00, the role of women in

society is greater• The closer the result is to 0.00, the role of women in

society is minimal

• Can be an effective indicator of social development

Women in Development

• Women work more hours/day than men in every country in the world except in Anglo America and Australia

• Women in the paid workforce are also growing in numbers across the world in both developed and developing countries and regions– Role in society is improving as opportunities for education, childcare,

and maternity benefits increase• In Third World countries, access to microcredit give women the

chance to start their own business and provide for their families• The UN developed a mandate called the Millennium

Development Goals(MDGs) designed to erase poverty by 2015– These eight development goals promote gender equality and an

empowering of women in the work force

Rostow’s Stages of Growth

• Developed by Walter Rostow in the 1950s– Proposed that countries went through five stages

of growth between agricultural and service-based economies

– Assumed that each country had some form of a comparative advantage that could be utilized in international trade and fund the economy

• There are five stages

Rostow’s Stages of Growth1. Traditional society

– Economy is focused on primary production– Limited wealth is spent internally on items that do not promote economic development– Low technical knowledge

2. Preconditions for takeoff– The country’s leadership begins to invest the country’s wealth in infrastructure that promotes economic

development and international trade relations– More technical knowledge; helps to stimulate the economy

3. Takeoff– Economy begins to shift focus onto a limited number of industrial exports– Labor force begins to switch from agriculture to manufacturing– Technical knowledge is gained through industrial production and business management

4. Drive to maturity– Technical advancements diffuse throughout the country– Advancements in industrial production– Workers become increasingly skilled and educated, and fewer people are engaged in primary production

5. Age of mass consumption– Industrial trade economy develops where highly specialized production has a major role in the economy– Technical knowledge and education is high– Agriculture is mechanized, thus employing a smaller work force

Criticism of Rostow’s Stages of Growth

• Based on the historical development of many First World, industrialized countries– Not all countries have had the ability to utilize

comparative advantages • Colonial legacy, government corruption, and other

factors are not included in Rostow’s theory– He assumed that all countries could progress through

the stages• However, the world economy leaves many countries behind

as foreign aid mostly goes to only the most developed of the NICs

Dependency Theory• States that most LDCs(including all NICs) are dependent on trade owned

factories, foreign direct investment, and technology from MDCs to provide employment and infrastructure– A continuous cycle of dependency would continue, giving no real gains to the

LDCs• Concerns were first raised by economist Raul Prebisch in 1950

– Stated that money made by LDCs from the sale of manufactured goods and natural resources is used to pay off loans and to buy manufactured products• In the end, LDCs are left with little money, MDCs, richer

– Thus continuing the cycle of dependency

• Dependency creates additional economic risks, as Third World economies are also subject to the levels of demand for LDC-made products and the global economy staggers– If demand and investment decline, LDCs suffer job layoffs, and loan payments

are not able to be made• Risk is magnified if the LDC is a one-commodity nation

– Can be catastrophic for economy and harm the quality of life

Breaking the Cycle of Dependency• Various methods, the purpose of these methods is to gain national

wealth that is recycled in the country’s economy to help local businesses and improve the quality of life through funding for public services and utility infrastructure

• Internalization of economic capital– Requires companies to deposit profits from factories in LDC banks and

invest locally• Used to prevent capital flight

– When earnings are sent to banks in First World countries where they cannot be used to advance local development

• Wealthier citizens may be required to keep their money in national banks instead of off-shore banks

• Import Substitution– Instead of buying products from First World countries, LDCs would produce

these products where profits would then be put into local economy

Breaking the Cycle of Dependency

• Nationalization of natural resource-based industries– International mining companies take away minerals and oil that could

be sold by local companies• With the expelling of such companies, profit made from the local companies

can be used for local economic development

• Profit-sharing agreements– In China and Vietnam(and a few other countries), foreign companies

are given permission to build new factories on land leased to them by the government• In exchange, foreign companies share a portion of the profit

• Technology development programs– Using funds to invest in technological equipment and employee

training for local manufacturers• These companies can then compete globally for contracts to produce goods

as sub-contractors to First World corporations– Factory profits stay with the local companies

Tourism

• Countries can gain large inputs of wealth from foreign countries without having to export manufactured goods– Tourism countries must have hospitality and be viewed as

safe from crime and warfare– To attract tourists, the country must have some degree of

historical value, natural beauty, sport recreation centers, or combinations of these

• In the past 20 years, ecotourism has become popular– Rainforests, marine reef, savannah grassland, and polar

habitats have became prime tourist locations

Free-Trade Agreements

• Free-trade zones have made regional economies of multiple states stronger and have lead to the development of their less developed neighbors– Helped former Communist states develop their free-market

economies faster• NAFTA Treaty

– Signed in 1991; full effect in 2001– Full removal of tariffs between Mexico, United States, and Canada– Benefitted Mexico

• Allowed several hundred firms to build factories and contract with local firms in Mexico to produce goods

• Maquiladoras, northern factory cities, have grown rapidly in terms of population and manufacturing– Tijuana, Mexicali, Ciudad Juarez, etc…

• Helped to improve quality of life

Free-Market Reforms

• In the 1980s, Communist states began to reform the command economy

• Reforms– Allowed farmers to sell surplus agricultural goods in

local and regional markets for profit– Allowed people to open privately owned businesses– Free movement of labor– The ability to purchase private real estate– Allowing foreign companies the option of opening

factories and retail services in these countries

China and Vietnam• China established the first special economic zones(SEZs) in 1980

– Foreign companies were allowed to build factories in coastal port cities– SEZs are a type of export processing zone, port locations where foreign firms are

given tax privileges to provide incentives for trade• By the late 1990s, all the coastal provinces in China and Vietnam had

been opened to foreign manufacturing firms– Labor, land, and utilities were in large demand by transnational corporations

wanting to maximize profits, which would be shared with the Chinese and Vietnamese government

• China has been able to integrate itself into the global economy through their corporations that have purchased Western product lines, such as Whirlpool

• Chinese banking and financial firms increase trade integration with export markets– Especially in the US; US sells some of its treasury bonds to China

Location Theory• Devised by Alfred Weber

– Theory of Industrial Location, 1909• Stated that the location of factories is related to the minimization of land,

labor, resource, and transportation cost– Manufactured goods have a variable-cost framework that affects the location of

factories• Stated that in terms of location, manufactured goods can be classified

into two categories based on the relation of inputs to product output– Weight-losing(bulk-reducing)

• A large amount of inputs are reduced to a product that weighs less or has less volume than the inputs

• Factories are generally located nearest to the input that loses the most bulk in the manufacturing process

– Weight-gaining(bulk-gaining)• Inputs are combined to make a product with more weight or volume• Factories are located closer to consumers to aid with transportation costs

Supply Chains• Parts are assembled into components that are then assembled

together to create larger products– EX: Automobiles, computers, etc…

• As price and corporate profit benefits have increased over time, supply chains have expanded

• Fordist production(Fordism) relied on a single company owning all aspects of production– In 1903, when Henry Ford opened his River Rouge plant in Detroit, every

part(except tires) was made in the factory and assembled in an assembly line• In the Post-Fordist era, car companies changed and became

dependent on large networks of regional supply chains that stretch throughout the United States with some specialized parts coming from overseas

• To minimize inventory costs and keep factories efficient, car companies utilize just-in-time production methods, where items are sent to the factories on an as-needed basis

Retail Location Theory• States that market area of a city varies depending on two factors

– Threshold• The minimum number of people required to support a business

– Range• The maximum distance people are willing to travel to buy a product

• The location of retail services is spatially dependent on the relationship between variable cost and revenue surfaces based on local geography– Business owners try to find the location that will maximize profit

• The spatial margin of profitability is the area where local demand for a service creates revenues higher that the cost of business

Service Location Theory• A footloose industry is a business whose location is not tied to resources,

transportation, or consumer locations– EX: Customer-Service Call Centers, Research and Development Centers, Software

Development Centers, etc…• There are a number of factors that influence placement of service-industry

offices• Richard Florida has proposed that there is a creative class of high-benefit

service industry firms and workers– Economic development has become focused on attracting

• Creative firms• Creative class employees

– Factors include• Language of the workforce• Education level of the workforce• Climate and natural environment• Entertainment venues• Tolerant community

Agglomeration and Deglomeration

• Agglomeration– The concentration of human activities around a central

location– Agglomeration economies

• Firms with related products located together in a region• Advantages

– Shared skilled labor pool– Specialized suppliers– Service providers

• Deglomeration– A location is overloaded with similar firms and services

• Some firms may seek a change in location to expand, or move entirely– EX: Auto production in Detroit

Economics of Scale

• Producers expand their operations but incur lower per unit costs in the process– When a company increases production of a

product, it can save money by buying in bulk, managing more workers under a single management staff, financing larger sums of credit at lower interest rates, and negotiate discounts for transportation costs

– More goods are sold without increasing advertising, accounting, research, etc…

Economics of Scope

• Companies benefit from the increase of products under a single brand name– Products can be produced by the same work force

in the same factories, etc…• Larger economics of scope are useful when

one product is at the end of its product cycle and is replaced by a new/alternative device