55 terms

IB Economics Development

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Terms in this set (...)

Economics development
the sustainable increase in living standards for a country, typically characterized by increase in life span, education level, and income
Economic growth
an increase in real GDP over the previous years
Production Possibilities Frontier (PPF)
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

Growth of actual production: shift of AD (GDP)
Growth of potential production: shift of the LRAS
Source of economic growth (5)
1. The natural resource base
2. physical capital
3. appropriate technologies
4. Human capital
5. Institutional factors

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Natural resource base
- what to do about each natural resource

Physical capital
- buildings, equipments
- Capital widening: extension of capital good to larger segment of workers (more farmers using simple tools)
- Capital deepening: increase in the quality of the capital and ratio of capital per worker (all farmers using better farm tools)

Appropriate technology

Human capital
- increase healthcare
- encourage immigration to increase labor force
- education

Institutional factors
- Political stability
- stable banking system
- orderly legal system
Components of Growth without Development (3)
What to produce?
When comparative advantage of a country does not benefit themselves
- Resource extraction by multinational corporations (MNCs)
- Agricultural commodities reliance

How to produce?
Deterioration of environment and society as produced (negative externalities)
- deforestation
- land degradation
- water pollution
- over-fising
- air pollution
- climate change

For whom do you produce?
When there are some that do not benefit
- income equality
Development with/without growth?
Development with growth
- high correlation
- high income with high development

Development without growth
- low GDP per capita
- low income but high education
- wise investment in prenatal care and education
Common characteristics of economically less developed countries (LDCs) (5)
[IB GAP]

1. High birth rates/large dependency ratios
2. Low capita GDP
3. High agricultural dependence (50-80%)
4. Large urban informal sector
5. Poverty cycle
Crude Birth Rate (CBR)
- Global average 20 births per 1000 women of childbearing age per year
- LDCs, 40-55 births per 1000 women of childbearing age per year (2-3 times more)
Dependency ratio
the percentage of old age adults and below-working aged children relative to number of working-age adults
- LDCs high dependency ratio
Measurement of poverty
Extreme poverty: less than $1.25 in purchasing power parity (ppp) adjusted

Moderate poverty: earning $2.00 per day, ppp-adjusted
Informal sector
sector that is unorganized, unregistered, and unsupported by state and its institution
- black market
Poverty cycle
low income --> low saving --> low capital investment --> low productivity
Diversity among LDCs (5)
[PS RCH]

1. Resource endowments
2. Climate
3. History
4. Political system
5. Degree of political stability
Single indicators (def. and 3)
indicators of economic development through a specific area

1. Income indicators
2. Health indicators
3. Education indicators
Income indicators (3)
- single indicator

1. Per capita GDP v. per capita GNI
- GNI: Gross national income (all production from factors of production owed by a country) (GNI = GDP - net income flows)
- GDP: Gross national production (all production from factors of production in the boundaries of a specific region/country)

=> LDCs: per capita GDP> capita GNI
- more economic activity than amount labor is paid
=> MDCs (more developed country): per capita GDP < Capita GNI
- less economic activity than amount labor is paid

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2. Purchasing power parity (PPP)
- law of one price: an identical good in one country should cost the same in another country

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3. Gini Coefficient
- distribution of income across a nation
- 0= completely equal in income distribution
- 100= completely unequal income distribution
Health indicators
1. fertility rate
- LDCs: high

2. mortality rate
- LDCs: high

3. Life span
- Low
Education indicators
Student per teacher ratio
adult literary rate
Composite indicator
a group of indicators and put them together in an attempt to get a broad picture of a country's level of development usually expressed an an index
Human Development Index (HDI)
- created by United Nations

- Evaluates
1. Health: Life expectancy
2. Education: Adult literary and enrollments ratio
3. Income: GDP per Capita (PPP-adjusted)

0 to 1
- 0 is low
- 1 is high
Domestic obstacles to economic (5)
1. poverty trap
2. natural resource trap
3. Geography trap
4. Education/poor governance trap
5. Conflict trap
Natural resource trap
2 reasons
1. no natural resources
2. cannot export resources to earn foreign exchange

Curse of natural resource
- breed domestic conflict over control of one resource

resource poor country --> no exportable commodities --> limited foreign income --> inability to import capital good --> low productivity and low income --> poverty
Geography trap
- land-locked and surrounded by poor countries
- Key access to sea ports

Country is landlocked with hostile neighbors --> no access to global market --> no foreign income from export --> low domestic employment --> low income --> poverty
Education/poor governance trap
- corrupt government does not help education

poor education makes a country
-less attractive to FDI
- limit amount of capital available to workers
- low skill workforce
- lower income
- less tax revenue

Poor education system --> low quality human capital --> low productivity --> low income --> low revenue/corrupt gov --> minimal spending on public goods
Conflict trap
- worse poverty trap

civil unrest and violence --> political and economic uncertainty --> reduced investment from abroad --> intense resource scarcity
Institutional and political obstacle to economic development (6)
1. ineffective taxation structure
2. lack of property rights
3. political instability
4. inequality in distribution of income
5. lack of infrastructure
6. lack of access to credit (banking and loans)
Social and cultural obstacles to economic development (2)
1. religion
2. tradition
Domestic factors that contribute to economic development (4)
1. education
2. Health
3. banking, credit, micro-credit
4. empowerment of women
International obstacles to economic development
1. Narrow range of exports
2. Over dependence on primary products
Narrow range of exports
LDCs have currency that is non-convertible on foreign exchange markets

need to gain "hard currency" through exports and use those capital to acquire needed physical capital to increase productivity
Over-dependence on primary products
consequence
- influence greatly by global commodity market fluctuation
- little pricing power

A highly inelastic supply means
- small change in quantity demanded, big change in price
International factors that contribute to economic development (5)
1. import substitution policies
2. export promotion policies
3. trade liberalization
4. acquire help from organization (WTO)
5. Diversification of national output
Import substitution policies
protectionist policies aiming to reduce domestic consumers' dependence on imported goods
- promote domestic industries with high import tariffs

BAD:
- could lead to tariff wars
- inefficient production at home (more expensive)
Export promotion policies
Protectionist measures aimed to increase competitiveness of domestic producers in foreign market
- subsidies for domestic producers of exportable goods
- intentional devaluation of national currency

BAD:
- export-led growth may be too dependent on foreign consumers
- government reduce revenue
- domestic producers' lack of incentive to increase quality or productivity due to government aid
- devaluation makes import less attractive to domestic country
Foreign direct investment
a long-term investment by foreign firms into domestic markets of other countries
- Add into the low capital/productivity area in poverty cycle

Greenfield investment: MNC construct new facilities from scratch

Brownfield investment: MNC purchase or lease existing facilities
Multinational corporation (MNCs)
large company with trading, manufacturing or service operations across several countries
Why MNCs are attracted to developing countries (6)
1. low-cost labor
2. natural resources
3. political stability
4. large domestic market
5. relaxed regulatory environment
6. liberalized free market conditions
Advantages of FDI (3)
1. Capital improvements
2. income, employment, training
3. Market efficiency and choice
Disadvantages of FDI (3)
1. muted effects on employment
2. limited income benefits
3. limited capital injections
MNC Power (5)
1. influence over regulatory environment
2. reduced tax burden
3. minimal environmental regulation
4. local worker right limited
5. overwhelming competition with local industry (enjoy economies of scale)
Aid
long or short term loans, grants, and/or technical assistance
Official development assistance (ODA) or bilateral aid
Aid given by a foreign government; when a country's government gives directly to another country
Non-governmental Organizations (NGO)
aid by non-governmental organisation
Type of aids (5)
1. debt relief grants
2. technical assistance
3. development assistance
4. humanitarian aid
5. Commodity assistance
Donor motivation for giving aid (3)
1. political and strategic
2. Economic
3. Humanitarian
Arguments for foreign aid (2)
1. It is only the delivery of aid that is problem, not the aid itself
2. aid addresses areas where growth alone will not cover
Arguments against foreign aid (5)
1. Aid is inefficient
2. Corruption squanders aid
3. Aid rarely gets to those who are in need
4. Aid displaces local investments and market
5. Aid fosters dependency
6. cost lead to international debt
Arguments for Trade to cope with development (4)
1. Rich countries eliminate subsidies and expand market for LDC
2. allow diversification
3. more efficiency
4. reduce dependency on foreign aid
Arguments against trade to cope with development (2)
1. cut in subsidies would cause rise in food prices (LDS import a lot from aboard)
2. Aid will go where trade don't go (poor villages)
International debt
comprises short and long term loan obligation owed to foreign government, NGOs, and private sources
Origins of international debt
1. inelastic demand of certain product (oil)
2. LDCs engaging in a rush lending and borrowing from banks
3. high interest rates that cannot be paid back
4. funds poorly used
Consequence of indebtedness
Debt trap

1. big non-concessional (market interest rate) loans
2. Large debt service payments
3. poor credit rating
4. fewer loans, high interest rate
5. public and private investment crowded out
6a. reduced business growth/lower employment/lower income
6b. decreased government spending on health, education, infrastructure
7a. slow reduced economic growth, less income for debt repayment
7b. lack of development
Market oriented growth and development policies
any policy that requires little or no role for government in promoting economic development through the unregulated activities of free market
Positives of market oriented policies (4)
1. privatizations and deregulation
2. improved efficiency in the provision of public good (problem with subsidizing natural monopoly)
3. price mechanism work (price controls (ceilings/floors) don't work)
4. improved efficiency in the international flow of goods, services and capital (bad export/import promotion, bad trade barriers)
Weaknesses of market oriented policies
- assume once merit goods are privatized efficiency will be achieved (neglect externalities)
Where Complementary approach (government intervention) is needed the most (3)
1. education (under allocated)
2. social safety nets
3. Infrastructures (under allocated)