Collective Action in Finance Module 1

Module 1: Collective Action in Finance

• Microfinance: financial services for poor, low-income clients, providing credit to those who otherwise would not have access to credit services.
• Micro-credit: very small amounts of credit (loans) extended to small-scale entrepreneurs.
• History of Microfinance:
  • Birth of modern microfinance occurred in 1976 in rural Bangladesh.
  • Dr. Muhammad Yunus, professor of economics, started microfinance to help poor people, including 42 women who made bamboo stools.
• Entrepreneur: someone who starts, organizes, and manages their own business.
• Capital: wealth (e.g., money or goods) that can be used to produce more wealth.
• Sources of Credit:
  • Family and friends
  • Informal financial institutions (moneylenders, landlords)
  • Formal financial institutions (banks, cooperatives)
• Collective Action in Microfinance:
  • Instead of collateral, loans are secured using the honor of a peer group.
  • If one person fails to make payments, the others in the lending circle will be denied future credit.

Module 2: Collective Action in Production, Processing, Marketing, and Consumption

• Economies of Scale:
  • Unit cost advantage from expanding quantity produced.
  • Improvement in long-run productive efficiency.
  • Leads to lower prices and higher profits.
• Types of Economies of Scale:
  1. Technical Economies of Scale
  2. Specialization Economies of Scale
  3. Marketing Economies of Scale
  4. Purchasing Economies of Scale
  5. Managerial Economies of Scale
  6. Financial Economies of Scale
  7. Network Economies of Scale
  8. Risk-Bearing Economies of Scale
• Examples of Economies of Scale:
  • Division of labor in mass production of motor vehicles and electronic products
  • Learning by doing: average costs of production decline in real terms as a result of production experience
  • Monopsony Power: a large group can purchase factor inputs in bulk at discounted prices

Module 3: Collective Action among Firms

• Market Integration:
  • Relationship of a firm in a market.
  • Expansion process of a firm to consolidate additional functions and activities under one single management.
• Types of Market Integration:
  1. Vertical Integration
  2. Horizontal Integration
  3. Conglomeration or Diversification
• Vertical Integration:
  • Purchase of companies at any level of the value chain.
  • A company has complete control over one or more stages in the production or distribution of a product.
• Horizontal Integration:
  • Acquisition of a similar or competitive business.
  • Types of consolidation: acquisition, merger, take-over.
• Examples of Horizontal Integration:
  • Facebook's acquisition of Instagram
  • Walt Disney's integration of Pixar Animation Studios

Module 4: Collective Action among Countries

• Trading Bloc:

  • A group of countries that agrees to reduce/eliminate trade barriers among members.
  • Form of political and/or economic integration.

• Customs Union (CUs):

  • Involves the removal of trade barriers between members.
  • Plus the acceptance of a common (unified) policy of trade barriers on non-members.

• Common Market (CMs):

  • Eliminate internal barriers.
  • Adopt common external barriers.
  • Allow free movement of resources.

• Examples of Common Market:

  • Mercosur, COMESA, ECOWAS### Comparative Advantage

• The ability to produce goods at a lower opportunity cost, not necessarily at a greater volume or quality.

Advantages of Membership in Trading Blocs

• Free trade within the bloc, encouraging members to specialize.
• Market access and trade creation, leading to lower prices and increased demand/consumption.
• Economies of Scale.
• Job creation.
• Protection from cheaper imports from outside the bloc.

Disadvantages of Membership in Trading Blocs

• Loss of benefits from free trade with non-members.
• Distortion of trade, reducing the benefits of specialization and comparative advantage.
• Trade inefficiencies, making goods and services from non-members more expensive.
• Trade diversion, favoring inefficient producers within the bloc over efficient ones outside.
• Retaliation from different groups.

Types of Trading Blocs

• Preferential Trade Area (PTAs): countries agree to reduce trade barriers on selected goods imported from other members.
• Free Trade Area (FTAs): countries agree to eliminate barriers to trade on all goods coming from other members.
• Customs Union (CUs): eliminates internal barriers and adopts common external barriers.
• Common Market (CMs): allows free movement of resources among members and adopts a uniform set of economic policies.
• Economic Union (EUs): eliminates internal barriers, adopts common external barriers, and adopts a uniform set of economic policies.
• Full Integration (FIs): entities behave as one unit, eliminating internal barriers, adopting common external barriers, and adopting a uniform set of economic policies.