Globalisation, free trade and protection — practice question

Study the source material thoroughly before you answer Question 1. Source material: Will Honduras become a more successful economy? Honduras is a lower middle-income country that depends very heavily on trade with the US. Over half of Honduran exports are sent to the US, and 40% of its imports come from the US. A large number of Hondurans are employed in the US and transfer money back to their relatives at home. In the past, Honduras focused on bananas and coffee, building expertise and a strong reputation in these industries. Today, Honduras makes a wider variety of products, including clothes, chemicals and paper. This wider range has reduced the uncertainty caused by sudden shifts in demand and supply. For instance, tariffs might be placed on Honduran coffee, or there could be a report claiming that bananas are healthy to eat. Although employment in agriculture is falling, it is rising in Honduras’s clothes industry. Workers in the clothes industry are expected to receive more training and to experience better working conditions. The firms are also making greater use of capital goods. However, it is still uncertain what will happen to the prices of cotton, wool and other materials needed to produce clothes. A thriving clothes industry could help reduce poverty in Honduras. The Honduran government tries to cut poverty by, for example, paying unemployment benefit. One important reason for the government wanting to reduce poverty is to raise life expectancy. Table 1.1 shows poverty levels (the percentage of the population living on less than $1.90 a day) and life expectancy in selected countries. If the Honduran economy becomes more successful, incomes would rise. Because the country uses a progressive income tax system, tax revenue could increase significantly. A stronger economy would also be likely to attract more investment. Unemployment would be expected to decrease which, in turn, could affect consumer spending.