IB Economics Economic development
Terms in this set (54)
Define economic growth.
Increase in real output of an economy over time.
Sources of economic growth.
Increase in quantity or quality of
•HUMAN CAPITAL FACTORS:
→encouraging population growth or by increasing immigration levels
→improve health care, education, training, retraining and access to fresh water and sanitation
•PHYSICAL CAPITAL AND TECHNOLOGICAL FACTORS:
→Two concepts: capital widening (extra capital is used with increased amount of labour but ratio of capital per worker does not change, production rise)
→Capital deepening (increase in the amount of capital for each worker, improvements in labour productivity as well as total production)
→adequate banking system
→structured legal system
→good education system
→good international relationships
Define economic development.
•Improvement in welfare measured from a number of viewpoints
•Multidimensional nature of economic development:
→reducing widespread poverty
→raising living standards
→reducing income inequalities
→increasing employment opportunities.
Relationship between economic growth and economic development.
•improves standards of living
•depends on how income is distributed
2. IMPROVED ECONOMIC INDICATORS OF WELFARE:
•Economic growth lead to higher averages in terms of welfare
•not necessarily case for all sections of the population
3. HIGHER GOVERNMENT REVENUES:
•Government better able to provide essential services such as education, health care and infrastructure.
4. CREATIONS OF INEQUALITY:
•Gap between rich and poor said to grow.
5. NEGATIVE EXTERNALITIES AND LACK OF SUSTAINABILITY:
•Economic growth tends to lead to pollution.
•As incomes rise behavior creates negative externalities of consumption,
•problems can be linked to deforestation, soil degradation, and reduction in bio-diversity to economic growth.
IN LONG TERM, ECONOMIC GROWTH IS USUALLY NECESSARY FOR ECONOMIC DEVELOPMENT
Common characteristics of developing countries.
1. LOW LEVELS OF GDP PER CAPITA:
(low productivity, high unemployment, income inequality)
(low standards of living characterised by low incomes, inequality, poor health, and inadequate education)
3. LARGE AGRICULTURAL SECTORS:
(easier to export due to tariff escalation. also dependent on primary product exports)
3. LARGE URBAN INFORMAL SECTORS
(lack necessary factos to enable markets to work efficiently e.g. banking systems, infrastructure,
4. HIGH BIRTH RATES:
(high dependency ratios. Those of working age usually have to support a much larger proportion of children than the work force)
5. PREVALENCE OF IMPERFECT MARKETS AND LIMITED INFORMATION
6. DOMINANCE, DEPENDENCE AND VULNERABILITY IN INTERNATIONAL RELATIONS
•Some communities caught in poverty trap where poor communities unable to invest in physical, human and natural capital due to low or no savings
•poverty is therefore transmitted from generation to generation.
Explain and give examples of the diversity that exists between developing countries.
1. RESOURCE ENDOWMENT:
Common for human resources to be undernourished and poorly educated and thus low skilled.
2. HISTORICAL BACKGROUND
3. GEOGRAPHICAL AND DEMOGRAPHIC FACTORS
4. ETHNIC AND RELIGIOUS BREAKDOWN
5. POLITICAL STRUCTURE AND POLITICAL STABILITY
Describe the poverty cycle.
•A linked combination of barriers to growth and development forms a circle, thus it is endless unless the circle can be broken.
•Poor communities are unable to invest in physical, human and natural capital due to low or no savings; poverty is therefore transmitted from generation to generation
•there is a need for intervention to break out of the cycle.
Define relative poverty.
Comparative level of poverty, they do not reach some specified level of income.
Define absolute poverty.
•Measured in terms of the basic necessities for survival
•the amount that a person needs to have in order to live.
•Enables to make comparisons across the world.
Milennium Development Goals.
Eight MDG's (need to know word for word):
1. Eradicate extreme poverty and hunger
2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria, and other diseases
7. Ensure environmental stability
8. Global partnership for development
Distinguish, compare and contrast GDP per capita figures and GNI per capita figures for different countries.
•GDP per capita=(Total economic activity in country regardless of who owns productive assets)/(Number in poppulation)
•GNI per capita=(Total income earned by a country' s factors of production regardless of asset location)/(Number in population)
•GNI figures tend to be used to measure the status of developing countries.
•increase in the annual flow of foreign direct investment (FDI) to developing countries increasing GDP above GNI figures.
•Developed countries GNI figures are greater than GDP.
Define PPP(purchasing power parity).
•exchange rate attempts to equate purchasing power of currencies in different countries
•done by comparing prices of identical goods and services in different countries
Distinguish, compare and contrast GDP per capita figures and GDP per capita figures a purchasing power parity exchange rates for different countries.
•GDP normally measured US dollars but exchange rates can be very volatile and are more relevant to trading products.
•GDP based on market exchange rates tend to over-estimate the cost of living in poorer developing countries
•The difference between GDP converted to US dollars at official rates is higher than the GDP converted at PPP rates for lower income countries.
Describe health measures.
LIFE EXPECTANCY AT BIRTH:
•average number of years that a person may expect to live from the time they are born.
INFANT MORTALITY RATE:
•measure of the number of deaths of babies under the age of one year per thousand live births in a given year.
Describe education measures.
ADULT LITERACY RATE:
•measure of the proportion of adult population aged 15 or over which is literate.
NET ENROLEMENT IN PRIMARY EDUCATION:
•measure of the ratio of the number of children of primary school age who are enrolled in primary school, to the total number of children who are of primary school age in the country.
Describe composite indicators of economic development.
•Composite indicators include more than one measure and so are considered to be better indicators of economic development
Describe the human development index.
1.LONG AND HEALTHY LIFE (life expectancy)
2.IMPROVED EDUCATION (literacy and school enrolment)
3.DECENT STANDARD OF LIVING (GDP per capita)
•Three indicators combined to get a value between 0 and 1, with higher values representing a higher level of development.
Explain why a countries GDP/GNI per capita global ranking may be lower, or higher than its HDI global ranking.
•HDI still only shows an average figure that can mask inequalities within the country,
•Inequalities that are likely to occur between:
→rural and urban citizens
Identify and examine how domestic factors contribute to economic development.
1. EDUCATION AND HEALTH CARE:
•More efficient and better quality work force, increasing production potential
•Improve role of women in society
•better living standards
2. USE OF APPROPRIATE TECHNOLOGY:
•technology that makes use of the labour surplus
3. ACCESS TO CREDIT AND MICRO-CREDIT:
•Micro credit is an enabling, empowering, and bottoms-up tool to poverty alleviation
•Credit creates opportunities for self-employment liberating poor and women from poverty, gaining income
•create institutions for financial services to the poor so they can manage their assets and allow them to increase in value, and thus enabling them to invest
4. EMPOWERMENT OF WOMEN:
•lending to women tends to speed up development as they usually reinvest high portion in their families and communities
•Improved welfare of women through greater education and improved social standing
•women pass on their information to their children, better informed about health care, hygiene, and diet
•slow rate of population growth
5. INCOME DISTRIBUTION:
•High income inequality is a barrier to growth and development:
→Tends to be lower saving because poor save very small proportion of their growth
→Rich tend to dominate both politics and economy, policies favor rich
→Rich move large amounts of funds out of economy
What are the International barriers to economic development.
1. Over-specialization on a narrow range of products
2. Price volatility of primary products
3. Inability to access international markets
Describe over specialisation on a narrow range of products.
•dependent on primary commodities
•Rises in these prices of these commodities will be beneficial, increasing rate of economic growth
•revenues could be used to finance education, health and infrastructure offsetting positive cycle in terms of development and future growth
•Fall in prices of these commodities cause economy to experience deteriorating terms of trade.
FACED WITH GREATER VULNERABILITY AND UNCERTAINTY
Describe Price volatility of primary products.
•Price elasticity of demand for commodities and the price elasticity of supply of commodities on the world market tend to be relatively inelastic.
•Any change in the demand or supply conditions for resources will lead to large price fluctuations.
•Makes very difficult for producers and governments in developing countries to plan ahead for education healthcare and infrastructure
•impact on investment in companies
Describe inability to access international markets.
•Protectionism measures by developed countries preventing developing countries from utilizing their comparative advantages and exporting to developed countries, limiting their ability to earn foreign exchange
•More developed countries give greater subsidies to farmers lowering world prices making it harder for developing countries to compete (lead to dumping)
•Tariff escalation (rate of tariffs on goods rises the more the goods are processed)
→discourages developing countries to move away from producing raw materials as if they do process them, they will be uncompetitive.
→Traps them as suppliers of raw materials
•Many developing countries have non convertible currencies (can only be used domestically, not accepted for exchange on foreign exchange markets).
→making trade less likely to occur as traders taking more of a risk
What are the strategies for achieving economic growth and economic development.
•Bilateral and regional preferential trade agreements
•Fair trade organisations.
Evaluate import substitution.
→Produce goods domestically rather than import them.
→allows domestic industries to grow and become competitive
•Protects jobs in domestic market
•reduce foreign exchange demand
•make the country self-reliant in critical areas such as food, defense, and advanced technology
•loss of consumer welfare (more expensive, less choice, higher taxes)
•Lead to high rates of inflation
•cause other countries to increase protectionism
Evaluate export promotion.
•increased international trade
•lead to increase GDP and higher incomes and growth.
•Concentrate on producing and exporting products they have comparative advantage of.
•source foreign exchange
•Lead to increase in protectionism in developed countries against manufactured products from developing countries.
•Attract MNC's, which could become too powerful
•Export led growth may increase income inequality (focus on manufactured goods)
Evaluate trade liberalisation.
•Removal or reduction of trade barriers that block free trade.
•Involves elimination of tariff barriers, quotas, export subsidies and administrative legislation
•Believed increase world trade enabling developing countries to focus on production of goods and services in which they have comparative advantages
•Benefits of free trade (learned previously)
•Allows MNC's to have access to cheap labour markets where they can produce products and sell them for large profits
•Developing countries have little gain
•can lead to economic crises, increasing debt, income inequality and exploitation of working conditions
Evaluate the role of WTO and bilateral and regional preferential trade agreements.
•main objective to promote free trade among its members
•Preferential access to products from other member countries. Reduces but doesn't necessarily abolish tariffs
•The more agreements made, greater ability developing country has to trade and to gain development
•More trade mean increase in AD, can increase employment, increasing growth etc.
•dependent on exporting primary commodities
•Move from production and export of primary goods to production and export of processed and manufactured goods
•Countries encouraged to improve state of technology and their force of highly skilled workers
•Protect themselves from volatile prices in primary products
•Need for a more highly qualified workforce
Evaluate fair trade organisations.
•Small scale farmers often suffer due to low primary product prices, tariff escalation and poor working conditions
•Ensure that small scale producers in developing countries receive a fair share of revenue from their produce
•Raises awareness to consumers of harsh and unfair conditions facing farmers
•Product will be purchased so price covers production costs and provides a living income
•Long term contract so producer has security
•Ensure proper working condition, fund local community development
Describe Foreign direct investment (FDI).
•purchase of productive assets by a multinational corporation in another country.
•The long-term investment by private multinational corporations in countries overseas
•Occurs in two ways:
→MNC's build new plants or expand their existing facilities in foreign countries
→MNCs merge with or buy existing firms in foreign countries
•Employ people->increasing economic activity->causing growth
Define multinational corporations (MNC's).
Firms that produce goods and services in more than one country
Reasons why MNCs expand into economically less developed countries.
1.NATURAL RESOURCES (oil and minerals): MNCs have technology to extract the resources
2. GROWING MARKETS:
•take advantage of access to large numbers of consumers with growing incomes
3. LOW COST LABOUR:
•keep costs of production lower so they can sell final products at lower prices, making higher profit
4. LACK OF REGULATION:
•having fewer rules means setting up costs of MNCs and running costs lower
5. TAX CONCESSIONS:
•used to attract FDI
Advantages of FDI on developing countries.
1. FILLS SAVING GAP:
•saving is necessary for economic growth
2. EMPLOYMENT, EDUCATION AND TRAINING:
•Improving skill levels of work force and the managerial capabilities
•increase earnings stimulate growth
3. BETTER RESEARCH AND DEVELOPMENT, TECHNOLOGY AND MARKETING EXPERTISE:
4. INCREASE GOV TAX REVENUE:
•can be used to gain growth by investing in infrastructure, improve public services, promote economic development
5. IMPROVE INFRASTRUCTURE BOTH PHYSICALLY AND FINANCIALLY
6. GREATER CHOICE AND LOWER PRICE:
•may be able to provide essential goods that are not provided domestically
7. MORE EFFICIENT ALLOCATION OF RESOURCES
Disadvantages of FDI on developing countries.
•only provide employment for inexpensive low skilled workers for basic production, using their own management teams.
•No education or training provided, limiting ability to acquire new technologies
•too much power, gaining large tax advantages or subsidies. Can influence policy decisions
• transfer pricing, where sell goods and services from one division of company to another division of company in a separate country, in order to take advantage of different tax rates on corporate profits.
•Developing countries with low tax rates encourage MNCs to invest reap little tax reward, developed countries loose out on tax revenue.
•able to reduce private costs while creating external costs. Damage environment
•exploitation of workers, low wage rates and poor working conditions
•extract resources, stripping resources and leaving. Host country does not get profits
•often buy domestic firms in shares which means actual money not used to benefit economy
Success of FDI in supporting sustainable economic development depends on.
•Type of investment
•Ability of host government to regulate behavior of MNCs and use benefits of investment to achieve development objectives
•Assistance that is given to a country that would not have been provided through normal market forces.
•Extended to economically less developed countries by governments of donor countries (official development assistance ODA) or by non-government organizations (NGOs).
Reasons for providing aid.
1. Relief after natural disasters or wars
2. Help developing countries achieve economic development
3. Create or strengthen political or strategic alliances
4. Fill savings gap to encourage investment
5. Improve quality of human resources in a developing country
6. Improve technology
7. Fund specific development projects.
Describe humanitarian aid.
•Given to relieve short term suffering
•Generally considered grant aid (short term aid provided as a gift)
•Consists of food aid, medical aid and emergency relief aid.
Describe development aid.
•Given in order to alleviate poverty in the long run and improve welfare of individuals
•Official Development Aid
•Provided by governments on concessional terms or as donations
•Consists of: grants, concessional long-term loans, project aid (includes support for schools and hospitals), and programme aid (includes support for education sector and financial sector)
Priority of NGOs.
•Aim to promote economic development, humanitarian ideals and sustainable development
→Plan and implement specifically targeted projects in developing countries
→Act as lobbyists to try to influence public policy
→Actively raise funds
→Raise awareness which could lead to public pressure on governments affecting amount of aid given
→Influence buying patterns of consumers
•Work directly with field, work directly with poor people to enhance their human capital
•Literacy programmes, health education, AIDS prevention projects, agricultural extension, micro credit schemes, immunization and vocational training
Effectiveness of Foreign aid in contributing to economic development.
•No significant correlation between level of aid given and growth of GDP
•Often governments do not distribute aid evenly or to areas in need, corruption
•Aid sometimes given for political reasons, where they have political or economic interest. This means that the poorest receive the least amount of aid
•Tied aid is less effective than untied aid. Developing country will not be able to buy least expensive goods as they have to buy from donor country. Creates no employment or extra output for developing country, and imports may replace domestic products
•Long term provision of large quantities of food may force down domestic prices
•Continued dependency on aid gives little incentive to be innovative
•Aid often focused on modern sector, widening gap in incomes and living standards
•Loan repayments on financial aid could lead to indebtedness
Role of International Monetary Fund (IMF).
•Organization of 184 countries working to foster:
→global monetary cooperation
→secure financial stability
→facilitate international trade
→promote high employment and sustainable economic growth
•Practices of IMF:
→ Financial assistance
Role of World Bank.
•organisation whose main aims are to provide aid and advice to developing countries, (as well as reducing poverty levels and encouraging and safeguarding international investment).
•MORE DETAILED NOTES ABOUT ITS AIMS:
→promote the economic development of the world's poorer countries
→assists developing countries through long-term financing of development projects and programs
→provides to the poorest developing countries with special financial assistance (through the International Development Association (IDA))
→encourages private enterprises in developing countries through its connections, (the International Finance Corporation (IFC))
•Level of debt repayments that countries need to make on money that was borrowed.
Describe the actions of IMF.
Lends funds to developing countries that need them but would only do so if they adopt Structural Adjustment policies:
→Encouraging trade liberalisation
→Encourage exports of primary agricultural commodities
→privatisation of nationalized industries
→Charging for basic services such as education and health
→Removing subsidies and price controls
Describe the actions of SAP.
•SAP helped control inflation, improve workings of international markets, lowering government budget deficits, reducing public ownership and reforming exchange rate policies
•SAP heavily affected poor:
→Reduction in government provided services such as education and health care
→Fall in real wage levels
→Increased prices of essential products
•Although SAPs lead to long term growth, argued that short term costs to very poor are too great
•Need to service debt means that governments are unable to spend on other areas which:
→Slows down economic growth
→Slows down development
Describe debt relief.
•To address the development needs of low income countries and make sure that debt sustainability is maintained over time
•For debt reduction to have impact on poverty, additional money needs to be spend on programs that benefit poor
•Issue of odious debt where debt is incurred by a regime and is not used for purposes that serve the interests of the people
•Debt relief allows developing countries to experience better rates of economic growth. Rising incomes create more demand and this would benefit exporters in more developed countries
Explain positive outcomes of market-orientated policies.
E.g. liberalized trade and capital flows, privitization and dereculation.
•More efficient allocation of resources
Explain negative outcomes of market-orientated policies.
•Development of dual economy
Explain strengths of interventionist policies.
•Provision of infrastructure
•Investment in human capital
•Provision of a stable macroeconomic economy
•Provision of a social safety net
Explain weaknesses of interventionist policies.
Explain the importance of good governance in the development process.
•Creates confidence in developed countries increasing trade
•Money will be spent in infrastructure and other areas to promote growth and development
Discuss the view that economic development may be best achieved through a complementary approach involving a balance of market orientated policies and government intervention.
•Government intervention protects against worst elements of capitalism while others are unnecessary invasion of their freedoms.
•Government should take a limited role in the economy while allowing private enterprises because such involvement would eliminate the negative aspects of capitalism while adopting the positiveness of Socialism.
•Government regulations allow businesses to remain in the private hands while removing some of the worst abuses of pure capitalism.
•Government intervention protects the consumers, producers, and the community as a whole.
•Limited government involvement prevents crises such as inflation, unemployment and depression.
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