IB Economics Economic development
Terms in this set (60)
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.
•Process of expanding the real freedoms that people enjoy.
•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
IMPROVED ECONOMIC INDICATORS OF WELFARE:
•Economic growth lead to higher averages in terms of welfare
•not necessarily case for all sections of the population
HIGHER GOVERNMENT REVENUES:
•Government better able to provide essential services such as education, health care and infrastructure.
CREATIONS OF INEQUALITY:
•Rich get richer and the poor get poorer.
•Gap between rich and poor said to grow.
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 STANDARDS OF LIVING, characterized by low incomes, inequality, poor health, and inadequate education.
2. LOW LEVELS OF PRODUCTIVITY (output per person)
3. HIGH RATES OF POPULATION GROWTH AND DEPENDENCY BURDENS: developing countries tend to have high birth rates, and hence high dependency ratios. Those of working age usually have to support a much larger proportion of children than the work force
4. HIGH AND RISING LEVELS OF UNEMPLOYMENT AND UNDEREMPLOYMENT
5. SUSTAINED DEPENDENCE ON AGRICULTURAL PRODUCTION AND PRIMARY PRODUCT EXPORTS
6. PREVALENCE OF IMPERFECT MARKETS AND LIMITED INFORMATION
7. 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:
Assumption that developing countries must be poorly endowed with resources however not necessarily the case. Common for human resources to be undernourished and poorly educated and thus low skilled.
2. HISTORICAL BACKGROUND:
large proportion of developing countries were once colonies of developed countries yet extent of this affect varies.
3. GEOGRAPHICAL AND DEMOGRAPHIC FACTORS:
Some developing countries very large, some are very small (in terms of land mass).
4. ETHNIC AND RELIGIOUS BREAKDOWN:
wide range of ethnic and religious diversity. High levels of ethnic and religious diversity within country increase changes of political unrest and international conflict.
5. STRUCTURE OF INDUSTRY:
Assume that developing countries depend upon the production and exportation of primary products.
6. PER CAPITA INCOME LEVELS
7. POLITICAL STRUCTURE
Outline current status of the Milennium Development Goals.
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
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.
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 PPP(purchasing power parity).
•Technique used to determine the relative value of currencies
•estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency's purchasing power.
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)
•In recent times there has been an increase in the annual flow of foreign direct investment (FDI) to developing countries.
•If a developing country has a large FDI then its GDP figures will be significantly higher than its GNI figures.
•GNI figures tend to be used to measure the status of developing countries.
•Developed countries GNI figures are greater than GDP.
Compare and contrast GDP per capita figures and GDP per capita figures a purchasing power parity exchange rates for different countries.
The difference between GDP converted to US dollars at official rates is lower than the GDP converted at PPP rates for lower income countries.
Describe health measures.
LIFE EXPECTANCY AT BIRTH:
•expressed on a country by country basis
•average number of years that a person may expect to live from the time they are born.
•Factors that lead to high life expectancy include good level of health care and services, provision of clean water supplies and adequate sanitation, the provision of nationwide education, reasonable supplies of food, healty diets and lifestyles, low levels of poverty, lack of conflict.
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.
•Long and healthy life
•decent standard of living.
•Three indicators combined to get a value between 0 and 1, with higher values representing a higher level of development.
Describe other indicators of development.
•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
GENDER-RELATED DEVELOPMENT INDEX:
•attempts to break down HDI values for different groups.
GENDER EMPOWERMENT MEASURE:
•measure whether country is helping to create freedoms and opportunities for women.
•Measures extent to which women are able to actively participate in economic political life.
HUMAN POVERTY INDEX:
•measure level of deprivation and poverty experienced in a country, proportional of people who are deprived of the opportunity to reah a basic level in each area.
What are domestic factors of economic development.
•Financial system, credit and micro-finance•Use of appropriate technology
•Empowerment of women
Describe education as a domestic factor of economic development.
•Education provides external benefits: More efficient work force, Better able to read and to communicate which could lead to more discussions and debate and consequence social change
•Improve role of women in society: High correlations between women's education and child survival rates and fertility rates
•Improved levels of health: More aware of health hazards and opportunities that exist
Describe health care as a domestic factor of economic development.
•Strong correlation between health care and life expectancy
•There has been progress made by developing countries in terms of training doctors and nurses, the building of hospitals and clinics, and provision of public health services such as improved access to safe water and sanitation and the widespread availability of immunisations
Describe financial system, credit and micro finance as a domestic factor of economic development.
•Developed and independent financial institutions are essential
•Most developing countries have dual financial markets
•Saving is necessary to make funds available for investment and invest ment is necessary for economic growth
•Financial services are necessary if low income people are able to manage their assets and allow them to increase in value, and thus enabling them to invest in things that will lead to economic development
•Provision of small loans(microcredit) to enable poor people to start up very small scale businesses (women tend to be the main recipients as they are better credit risk)
Describe the use of appropriate technology as a domestic factor of economic development.
•Since in developing countries there is a surplus of labour, appropriate technology would be technology that makes use of this labour
•Example would be giving workers capital equipment to use that is cheap to make and requires labour for its use
•E.g. solar cooker which is very cheap and only requires sunshine, does not require wood which eliminates time taken searching for firewood
Describe the empowerment of women as a domestic factor of economic development.
•Improved welfare of women through greater education and improved social standing
•Well being of their families is improved, women better informed about health care, hygiene, and diet
•Education of children in family improved as women pass on their education
•Quality of workforce in country will improve
•Women earn more money
•With better education and social standing, women have more control over contraception, marriage, smaller families, slowing rate of population growth
Describe income distribution as a domestic factor of economic development.
•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.
•Number of developing countries are dependent on primary commodities
•Rises in these prices of these commodities will be beneficial, increasing their 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, impacting investment in companies and thus government planning for education, healthcare and infrastructure and thus development
Describe inability to access international markets.
•Protectionism measures by developed countries against the exports of developing counties very harmful
•Prevents developing countries from utilizing their comparative advantages and exporting to developed countries, limiting their ability to earn foreign exchange
•More developed countries will give greater subsidies to farmers, lowering world prices, making it harder for developing countries to compete. These subsidized products are dumped in foreign markets
•Tariff escalation(rate of tariffs on goods rises the more the goods are processed) creates a significant problem for developing countries as it discourages them 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). Non convertibility means that trade is less likely to occur as traders talking 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.
Developing countries would wherever possible produce goods domestically rather than import them. This should mean that the industries producing the goods domestically will be able to grow and will be competitive.
•Protects jobs in domestic market
•Protects local culture and social habits by isolating the economy from foreign influence
•Protects economy from power and possibly bad influence of multinational corporations
•Only protect jobs in short run, in long run economic growth may be lower and lack of growth may lead to lack of job creation
•Country does not enjoy benefits to be gained from comparative advantage and specialization, so producing inefficiently
•Lead to high rates of inflation
Evaluate export promotion.
Based on openness and increased international trade. Increasing exports should lead to increasing GDP and in turn lead to higher incomes and growth. Concentrate on producing and exporting products they have comparative advantage of.
Export products with comparative advantage, usually based upon low cost labour, can mean more will be produced for less.
•Lead to increase in protectionism in developed countries against manufactured products from developing countries.
•Tariff escalation will be used, reducing the ability of the developing countries to export processed goods forcing many to export primary products and low skilled manufactured goods
•Attract MNC's, which could become too powerful
•Export led growth may increase income inequality
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
•Some cases lead to economic crises, increasing debt, income inequality and exploitation of working conditions
Evaluate bilateral and regional preferential trade agreements.
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.
•Many developing countries over 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).
•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).
Enterprise operating in several countries but managed from one country.
Reasons why MNCs expand into economically less developed countries.
•Natural resources (oil and minerals): MNCs have technology to extract the resources
•Growing Markets: If MNCs located directly in markets they can take advantage of access to large numbers of consumers with growing incomes
•Low cost labour: allows MNCs to keep costs of production lower so they can sell final products at lower prices, making higher profit
•Lack of regulation: having fewer rules to follow means setting up costs of MNCs and running costs lower
•Tax concessions: used to attract FDI
Advantages of FDI on developing countries.
•FDI fills the saving gap (saving is necessary for economic growth)
•MNCs provide employment, and in some cases education and training. Improving skill levels of work force and the managerial capabilities
•MNCs allow greater access to research and development, technology and marketing expertise-> enhancing industrialization
•Increased employment and earnings may stimulate growth
•Host government gain tax revenue which can be used to gain growth by investing in infrastructure, improve public services, promote economic development
•If MNCs buy existing companies, increase foreign capital, increasing aggregate demand
•MNCs may improve infrastructure both physically and financially
•MNCs provide greater choice and lower prices for consumers, and may be able to provide essential goods that are not provided domestically
•MNCs and more liberalization of trade lead to more efficient allocation of resources
Disadvantages of FDI on developing countries.
•Argued 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
•MNCs often have too much power, gaining large tax advantages or subsidies. Can influence policy decisions
•MNC practice 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.
•MNCs situate themselves in countries where legislation against pollution not effective, able to reduce private costs while creating external costs. Damage environment
•MNCs set up in countries where labour laws are weak, allowing exploitation of workers, low wage rates and poor working conditions
•MNCs enter country to extract resources, stripping resources and leaving. Host country does not get profits
•MNCs use capital intensive production methods to make use of abundant natural resources when should instead make use of cheap labour
•MNCs 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.
•Relief after natural disasters or wars
•Help developing countries achieve economic development
•Create or strengthen political or strategic alliances
•Fill savings gap to encourage investment
•Improve quality of human resources in a developing country
•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 and reduce poverty
•Responsibilities of IMF:
→Promoting international monetary cooperation
→Facilitate expansion and balanced growth of international trade
→Promoting exchange stability
→Assisting in establishment of a multilateral system of payments
→Making its resources available to members experiencing balance of payments difficulties
Role of World Bank.
•Collection of five individual organizations
•Aims to provide aid and advice to developing countries as well as reducing poverty levels and encouraging and safeguarding international investment
→The international bank for reconstruction and development (grants loans)
→The international financial corporation (promote private sector investment)
→The international development association (gives interest free loans with repayment periods of up to 30 years)
→The multilateral investment guarantee agency (promotes foreign direct investment)
→The international centre for settlement of investment disputes (facilitates settlement of investment disputes)
•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.