ECN 500 SEU Trade Policies for the Developing Nations Essay

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In a critical essay, select a developing country of your choice (other than Saudi Arabia) and discuss its main trade characteristics and trade problems. What trade reforms should the government implement? What would be the role of the IMF and the World Bank in these reforms? What policies should the government pursue to achieve strong economic growth? 

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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 7
Trade Policies
for Developing
Nations
© 2019 Cengage. All rights reserved.
2
Chapter Outline
Developing Nation Trade Characteristics
Tensions between Developing Nations & Advanced Nations
Trade Problems of Developing Nations
Stabilizing Primary-Product Prices
The OPEC Oil Cartel
Aiding Developing Nations
Economic Growth Strategies: Import Substitution vs. ExportLed Growth
East Asian Economies
China’s Great Leap Forward
India: Breaking Out of the Third World
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3
Trade Policies for
Developing Nations (1 of 3)
Commonly accepted practice to array all
nations according to real income and draw
line between advanced and developing
nations
• Advanced nations: countries of North
America, Western Europe, Australia, New
Zealand, and Japan
• Developing nations: most countries in Africa,
Asia, Latin America, and Middle East
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4
Trade Policies for
Developing Nations (2 of 3)
• Advanced nations
• High levels of GDP per capita
• Longer life expectancies
• Higher levels of adult literacy
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5
Trade Policies for
Developing Nations (3 of 3) Table 7.1
Basic Economic and Social Indicators for Selected Nations, 2015
ADULT LITERACY (PERCENT)
Gross Domestic Product
per Capita*
Life Expectancy
(years)
Male
Female
$62,558
83
99
99
United States
56,116
79
99
99
Japan
40,763
84
99
99
Chile
23,367
82
97
97
Mexico
16,988
77
96
94
Algeria
14,688
75
86
73
Indonesia
11,058
69
97
94
1,209
59
38
23
727
57
88
83
Switzerland
Guinea
Burundi
*Converted into international dollars using purchasing power parity rates. An international dollar has the same
purchasing power as a U.S. dollar has in the United States.
Source: From the World Bank at http://www.worldbank.org/data.
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6
Developing Nation
Trade Characteristics (1 of 2)
Highly dependent on advanced nations
• Imports mostly originate in advanced nations
• Historically, export primarily in:
• Primary products
• Agricultural goods, raw materials, fuels
• Simple manufactured goods
• Textiles, labor intensive, low-tech
• In last 30 years, many developing nations
have increased exports of manufactured
goods and services
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7
Developing-Nation
Trade Characteristics (2 of 2)
• Developing nations – moving into exports
of manufactured products
• Investment in human capital and technology
• Higher educational levels
• Higher capital stock per worker
• Improvements in transport & communications
• Trade reforms
• Liberalization of trade barriers after mid-1980s
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8
Tensions between Developing
Nations & Advanced Nations
Poor nations
• Need to take advantage of international trade
• Problem: advanced world – increased barriers
to imports from developing nations
• Other problems:
• Structural weaknesses
• Nonexistent or inadequate institutions and policies
• Law and order, sustainable macroeconomic
management, and public services
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9
Trade Problems
of Developing Nations (1 of 7)
Unstable Export Markets
• Exports ? concentrated in only one or a few
primary commodities
• Instability of prices and producer revenues
• Low price elasticities of demand and supply
• Changes in demand induce wide fluctuations
in price when supply is inelastic
• Changes in supply induce wide fluctuations in
price when demand is inelastic
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10
Trade Problems
of Developing Nations (2 of 7)
• Falling Commodity Prices Threaten
Growth of Exporting Nations
• In early 2000s: increasing commodity prices
benefited developing nations
• 2007–8 : Great Recession, shrinking
economies, lower demand, falling prices
• Economies of developing nations tied to
primary products, exported to advanced
nations. Advanced nation economic
downturns passed on to developing nations
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11
Trade Problems
of Developing Nations (3 of 7)
• Worsening Terms of Trade
• Prices of exports relative to those of imports
have fallen over last century
• Productivity gains translate into higher earnings,
and as incomes rise in third world, people spend
more on manufactured goods, imported largely
from developed countries in monopolistic markets
• Export ? primary goods traded in competitive
markets; productivity gains result in lower prices
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12
Trade Problems
of Developing Nations (4 of 7)
• Limited Market Access
• Global protectionism hindrance to developing
nations’ market access in agriculture, laborintensive low-skilled manufactured goods
• Higher tariffs imposed on developing
countries
• Major trading blocks: EU, NAFTA
• Tariff escalation
• By developed and developing nations
• Quotas on imports
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13
Trade Problems
of Developing Nations (5 of 7) Table 7.2
Tariffs of Selected Developing Nations and Advanced Nations, All Products, 2015
Country
Average Applied Tariff Rate*
Maldives
Bahamas
Bhutan
South Korea
Brazil
India
Russian Federation
European Union
Japan
United States
Hong Kong
36.8%
33.9
22.3
13.9
13.5
13.4
7.8
5.1
4.0
3.5
0.0
*Average applied tariff rates are duties that are actually charged on imports. These can be below the bound rates, which are
commitments to increase a rate of duty beyond an agreed level. Once a rate of duty is bound, it may not be raised without
compensating the affected parties.
Source: From the World Trade Organization, World Tariff Profiles, 2016.
© 2019 Cengage. All rights reserved.
14
Trade Problems
of Developing Nations (6 of 7)
• Agricultural Export Subsidies of Advanced
Nations
• Discourage agricultural imports
• Displace developing-nation shipments to
advanced-nation markets
• Results in unwanted surpluses that
• are often dumped onto world markets
• lead to decreasing prices for many agricultural
commodities sold by developing nations
• reduce export revenues of developing nations
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15
Trade Problems
of Developing Nations (7 of 7)
• Bangladesh’s Sweatshop Reputation
• Sweatshop: factory with poor & unsafe working
conditions, unreasonable hours, unfair wages, child
labor, and a lack of benefits for workers
• Bangladesh provides world’s clothing industry with
millions of workers who quickly churn out huge
amounts of well-made clothing for the lowest wages
in the world
• Bangladesh expected to suffer most from expiration of the
MFA in 2005, but orders kept coming because of low wages
• Producers rushed to expand capacity, often unsafely; several
deadly clothing factory fires, collapse of 8-story building in
2013
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16
Stabilizing
Primary-Product Prices (1 of 6)
International Commodity Agreements
(ICAs)
• Attempt to stabilize revenues of primary
producers
• Agreements between leading producing and
consuming nations of commodities; such
agreements seek to
• stabilize prices
• assure adequate supplies to consumers
• promote economic development of producers
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17
Stabilizing
Primary-Product Prices (2 of 6)
• Production and Export Controls
• Stabilize export revenues
• Affect price; influence world supply; based on
target price
• Obstacles:
• Difficulties allocating limits among producing nations
• Entrance of new producers
• Incentives of producers to cheat on output
restrictions
• Difficulties in enforcement
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18
Stabilizing
Primary-Product Prices (3 of 6)
• Buffer Stocks
• Establishment of a producers’ association
(international agency)
• Prepared to buy and sell a commodity in large
amounts
• Supplies of a commodity financed and held by
producers’ association
• Buffer stock manager
• Buys from market when prices are falling
• Sells from buffer stock when prices are high
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19
Stabilizing
Primary-Product Prices (4 of 6)
• Buffer Stocks (cont.)
• Advantages
• Can promote economic efficiency
• Can moderate price inflation of industrialized
nations
• Problems
• Agreeing on target price
• High costs of holding stocks
• Poor decisions
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20
Stabilizing
Primary-Product Prices (5 of 6)
• Multilateral Contracts
• To hold the price within target range
• Minimum price at which importers will purchase
guaranteed quantities
• Maximum price at which producing nations will sell
guaranteed amounts to importers
• Advantage
• Less distortion of market mechanism and
allocation of resources
• Tend to furnish only limited market stability
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21
Stabilizing
Primary-Product Prices (6 of 6)
• Does the Fair Trade Movement Help Poor
Coffee Farmers?
• Object of fair trade coffee movement to
increase income to farmers by setting up
system for them to bypass middlemen & sell
directly to roasters & retailers
• Difference in price from $0.40/lb. to $1.26/lb.
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22
The OPEC Oil Cartel (1 of 5)
• Cartels form among exporting nations to
increase price and realize “monopoly” profits
• Organization of Petroleum Exporting
Countries (OPEC) formed to increase oil
revenues of oil-producing countries
• Prior to OPEC, oil-producing nations behaved
like individual competitive sellers
• OPEC restricted output and competition,
resulting in higher prices
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23
The OPEC Oil Cartel (2 of 5)
• Cartels support prices higher than they would
be under more competitive conditions and
increase profits of the members
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24
The OPEC Oil Cartel (3 of 5)
Figure 7.3
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25
The OPEC Oil Cartel (4 of 5)
• OPEC as a “cartel”
• OPEC currently controls less than 40% of
world supply; insufficient to establish effective
cartel
• Exception is Saudi Arabia, with large reserves,
ready to influence prices
• To offset market power of OPEC
• Higher fuel economy standards mandated by the
federal government
• Resistance from auto producers
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26
The OPEC Oil Cartel (5 of 5)
• To offset market power (cont.)
• Increasing federal excise tax on gasoline
• Harms low-income consumers
• Allow oil companies to drill on federal land
designated as wilderness in Alaska
• What if the wilderness is destroyed?
• Diversify oil imports
• Work more closely with unsavory regimes
• Develop alternate sources of energy such as
biofuels and wind power
• Requires governmental subsidies financed by taxpayers
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27
Aiding Developing Nations
(1 of 5)
World Bank
• Provides loans & grants to developing nations for
poverty reduction & economic development
• Funds specific development projects such as hospitals,
schools, highways, dams, AIDS awareness, rebuilding
• Corrupt government officials sometimes divert
development dollars to own use
• World Bank’s role diminishing; new competitors
fund developing nations
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28
Aiding Developing Nations
(2 of 5) Table 7.3
World Bank Lending by Sector, 2016 (Millions of Dollars)
Developing Nation Sector
Percentage of Total
Agriculture, Fishing, and Forestry
Education
Energy and Mining
Finance
Health and Social Services
Industry and Trade
Information and Communication
Public Administration, Law, and Justice
Transportation
Water, Sanitation, and Flood Protection
2
6
15
9
8
11
1
18
15
15
100
Source: From the World Bank, “World Bank Lending by Theme and Sector,” Annual Report 2016, Table 19, available at
http://www.worldbank.org/.
© 2019 Cengage. All rights reserved.
29
Aiding Developing Nations
(3 of 5)
• International Monetary Fund
• Bank for central banks of member nations
• Surplus nations channel funds to nations with
temporary deficits
• Two major sources of IMF funds
• Quotas
• Subscriptions, pooled funds of member nations; generate
most IMF funds; larger quota for wealthier nations
• Loans
• Loans from member nations
• IMF has lines of credit with advanced nations, ex. Saudi
Arabia
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30
Aiding Developing Nations
(4 of 5)
• Generalized System of Preferences
• Major advanced nations temporarily reduce tariffs
on designated manufactured imports from
developing nations below levels applied to
imports from other advanced nations
• Attempt to promote economic development
through trade rather than foreign aid
• Trade preferences granted by nation voluntary;
granting nation sets eligibility, terms
• Nation may “graduate” out of program if
successful
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31
Aiding Developing Nations
(5 of 5)
• Does Aid Promote Growth of Developing
Nations?
• Critics contend aid enables bad governments to
survive; favors wealthy in poor nations; is often
squandered
• Proponents counter that although sometimes
ineffective, has reduced poverty, spurred growth
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32
Economic Growth Strategies: Import
Substitution vs. Export-Led Growth (1 of 7)
Import substitution
• Extensive use of trade barriers
• To produce goods formerly imported by protecting
domestic industries from import competition
• Inward-oriented
• Trade and industrial incentives favor production for
domestic market over export market
• Extension of infant-industry argument
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33
Economic Growth Strategies: Import
Substitution vs. Export-Led Growth (2 of 7)
• Advantages of import substitution
• Low risk of establishing home industry that
will replace imports, since home market
already exists
• Easier to protect from foreign competitors
compared with having advanced nations
reduce their trade restrictions
• Foreign firms have incentive to locate
manufacturing plants in developing nations
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34
Economic Growth Strategies: Import
Substitution vs. Export-Led Growth (3 of 7)
• Disadvantages of import substitution
• Domestic industries
• No incentive to increase efficiency
• Producers cannot achieve economies of scale
• Discriminates against all other producers
• Including potential exporting ones
• Very difficult to remove restrictions once in
place
• Breeds corruption
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35
Economic Growth Strategies: Import
Substitution vs. Export-Led Growth (4 of 7)
• Import Substitution Laws Backfire on Brazil
• From 1970s until 1991, in effort to develop own
electronics industry, Brazil
• prohibited importation of many electronics goods
• banned investment by foreign firms in Brazilian
manufacturing plants
• limited foreign participation in joint ventures to 30%
ownership of local businesses
• Brazilian electronics industry became uncompetitive;
Brazilian economy became technologically outdated
• In 1991, government scrapped most, though not all,
protectionist measures
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36
Economic Growth Strategies: Import
Substitution vs. Export-Led Growth (5 of 7)
• Export-led growth
• Export-oriented policy
• Outward-oriented ? links domestic economy
to world economy
• Promotes growth through export of
manufactured goods
• Trade controls ? nonexistent or very low
• Industrialization
• is natural outcome of development
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37
Economic Growth Strategies: Import
Substitution vs. Export-Led Growth (6 of 7)
• Is Economic Growth Good for the Poor?
• Developing nations with continuing growth
• Significant progress in decreasing poverty
• Liberal economic policies
• Open markets and foster monetary and fiscal
stability
• Raise incomes of poor and everyone else in
society proportionately
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38
Economic Growth Strategies: Import
Substitution vs. Export-Led Growth (7 of 7)
• Can All Developing Nations Achieve
Export-Led Growth?
• Exports can promote growth, but if all
developing nations tried to export
simultaneously, prices of exports would drop
• But production of developing nations is only
5% of world output
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39
East Asian Economies (1 of 4)
Economic success
• Highly diverse in natural resources,
populations, cultures, and economic policies
• High rates of investment
• High and increasing endowments of human
capital due to universal primary and
secondary education
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40
East Asian Economies (2 of 4)
• Foster competitiveness
• Invest in people
• Provide favorable competitive climate for
private enterprise
• Economies open to international trade
• Actively seek foreign technology
• Free and competitive labor markets
• discourage organization of trade unions
• Follow no minimum wage legislation
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41
East Asian Economies (3 of 4)
Table 7.4
East Asian Economies’ Growth Rates of Gross Domestic
Product, 2012–2015
ANNUAL GROWTH RATE
Nation
China
Cambodia
Philippines
Indonesia
Thailand
Vietnam
Malaysia
2012
7.7%
7.3
6.8
6.3
6.5
5.2
5.6
2013
7.7%
7.4
7.2
5.8
2.9
5.4
4.7
2015
6.9%
7.0
5.9
4.8
2.8
6.7
5.0
Source: The World Bank, World Data Bank, World Development Indicators, available at
www.databank.worldbank.org. See also Central Intelligence Agency, World Fact Book, available at www.cia.gov.
© 2019 Cengage. All rights reserved.
42
East Asian Economies (4 of 4)
• Flying Geese Pattern of Growth
• Nations gradually move up in technological
development by following pattern of nations
ahead of them in development process
• Partially result of market forces
• Also dependent on export platforms, developed by
government policy, that created incentives for
labor-intensive exports
• e.g., bonded warehouses, free-trade zones, joint
ventures, and strategic alliances with multinational
enterprises
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43
China’s Great Leap Forward
(1 of 4)
1970s
• Value of exports and imports less than $15
billion
• 30th largest exporting nation
• Negligible participant in world financial markets
2005
• World’s second-largest economy
• National output over half that of U.S.
• 60% larger than Japan’s
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44
China’s Great Leap Forward
(2 of 4)
• Since 1970s, China has “marketized” its
economy
• Greater competition
• Open to foreign investment and joint ventures
• Economic zones where firms can keep
foreign-exchange earnings and hire and fire
workers
• Open to international trade
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45
China’s Great Leap Forward
(3 of 4)
• Challenges and Concerns for China’s Economy
•
•
•
•
•
•
•
•
•
•
•
Privatization of industry
Rising labor costs
Development of infrastructure
Reliance on investment spending
Environmental future
Status in global finance
Convertibility of Yuan
China’s current policy (i.e., value of Yuan)
Industrial policy and innovation
Intellectual property rights concerns
China’s holdings of U.S. securities
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46
China’s Great Leap Forward
(4 of 4)
• China’s Export Boom Comes at a Cost: How
to Make Factories Play Fair
?
U.S. demand for cheap goods creates issues
• Product safety
• Unsafe toys made in China; recalled because of
lead paint, dangerous magnets, kerosene
• Labor protections
• Pressure to cut costs leads to failure to pay
Chinese minimum wage, excessive hours
• Quality of environment
© 2019 Cengage. All rights reserved.
47
India: Breaking Out
of the Third World (1 of 3)
• Rapidly improved economic performance
• Freer trade policies
• Economy of India
• Agriculture, handicrafts, manufacturing,
services
• Two-thirds of Indian workforce in agriculture
• Services and technical support – young,
English-fluent Indians are increasingly
involved
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48
India: Breaking Out
of the Third World (2 of 3)
• Issues to sustain robust economic growth
• Improvement in infrastructure
• Roads, electric power generation, rail freight, and
ports
• High rate of population growth
• Major advantage ? almost limitless labor supply
and consumer demand
• Necessity of investing in education and health care
• Creating adequate opportunities for employment
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49
India: Breaking Out
of the Third World (3 of 3)
• Further efforts needed
• Systematically deregulate sectors
• Retailing, news media, and banking
• Eliminate preferences for small-scale,
inefficient producers
• Reform agriculture to generate jobs in rural
areas
© 2019 Cengage. All rights reserved.
50
ECN500
Critical Thinking Writing Rubric – Module 5
Exceeds
Expectation
Content, Research, and Analysis
21-25 Points
Requirements
Exceeds
Expectation Includes all of the
required
components, as
specified in the
assignment.
21-25 Points
Content
Exceeds
Expectation Demonstrates
substantial and
extensive
knowledge of the
materials, with no
errors or major
omissions.
25-30 Points
Analysis
Exceeds
Expectation Provides strong
thought, insight,
and analysis of
concepts and
applications
regarding trade
barriers.
13-15 Points
Sources
Exceeds
Expectation Sources go above
and beyond
required criteria,
and are well
chosen to provide
effective
substance and
perspectives on
the issue under
examination.
Meets Expectation
Below Expectation
Limited Evidence
16-20 Points
Meets Expectation
– Includes most of
the required
components, as
specified in the
assignment.
11-15 Points
Below Expectation
– Includes some of
the required
components, as
specified in the
assignment.
6-10 Points
Limited Evidence Includes few of the
required
components, as
specified in the
assignment.
16-20 Points
Meets Expectation
– Demonstrates
adequate
knowledge of the
materials; may
include some
minor errors or
omissions.
11-15 Points
Below Expectation
– Demonstrates fair
knowledge of the
materials and/or
includes some
major errors or
omissions.
6-10 Points
Limited Evidence Fails to
demonstrate
knowledge of the
materials and/or
includes many
major errors or
omissions.
19-24 Points
Meets Expectation
– Provides
adequate thought,
insight, and
analysis of
concepts and
applications
regarding trade
barriers.
10-12 Points
Meets Expectation
– Sources meet
required criteria
and are adequately
chosen to provide
substance and
perspectives on the
issue under
examination.
13-18 Points
Below Expectation
– Provides poor
thought, insight,
and analysis of
concepts and
applications
regarding trade
barriers.
7-12 Points
Limited Evidence Provides little or no
thought, insight,
and analysis of
concepts and
applications
regarding trade
barriers.
7-9 Points
Below Expectation
– Sources meet
required criteria,
but are poorly
chosen to provide
substance and
perspectives on the
issue under
examination.
4-6 Points
Limited Evidence Source selection
and integration of
knowledge from
the course is
clearly deficient.
ECN500
Critical Thinking Writing Rubric – Module 5
Mechanics and Writing
Demonstrates
college-level
proficiency in
organization,
grammar and
style.
5 Points
Exceeds
Expectation Project is clearly
organized, well
written, and in
proper format as
outlined in the
assignment. Strong
sentence and
paragraph
structure; contains
no errors in
grammar, spelling,
APA style, or APA
citations and
references.
Total points possible = 100
4 Points
Meets Expectation
– Project is fairly
well organized and
written, and is in
proper format as
outlined in the
assignment.
Reasonably good
sentence and
paragraph
structure; may
include a few
minor errors in
grammar, spelling,
APA style, or APA
citations and
references.
3 Points
Below Expectation
– Project is poorly
organized and
written, and may
not follow proper
format as outlined
in the assignment.
Inconsistent to
inadequate
sentence and
paragraph
development,
and/or includes
numerous or major
errors in grammar,
spelling, APA style,
or APA citations
and references.
1-2 Points
Limited Evidence Project is not
organized or well
written, and is not
in proper format as
outlined in the
assignment. Poor
quality work;
unacceptable in
terms of grammar,
spelling, APA style,
and APA citations
and references.

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