IB economics HL - Developement economics
I think the title says it all...but maybe that's just me
Terms in this set (48)
Distinguish between economic growth and economic developement
Economic growth is an increase in a country's real national output, and is measured by an increase in GDP
Economic development refers to a process that leads to improved standards of living for a population as hole, is measured with the human development index
explain the multidimensional nature of economic development
Economic development is the nature of reducing widespread poverty, raising living standards, reducing income inequalities and increasing employment opportunities
Explain the most important sources of growth in economically less developed countries are..
1. Natural factors: Anything that will increase that will increase the quantity and/or the quality of a factor of production should lead to an increase in potential growth. Countries normally try to improve the quality by fertilization etc.
2. Human capital: increased by encouraging potential growth (quantity) or improving education and healthcare (quality)
3. Physical capital & technical factors (includes things such as factory buildings, machinery, shops, offices and motor vehicles): focus on improving them through education, research& development - but they must be appropriate the the conditions of the country
4. Institutional factors: need to be good and need to exist, e.g. a banking system, a structured legal system, a good educational system, reasonable infrastructure, international relationships
Explain the relationship between economic growth and economic development
Economic growth can occur without economic development, and some economic development can occur in the absence of economic growth, if appropriate policies are followed to provide access to basic social services to the poor. However, economic growth does not guarantee that economic development will occur. GDP may increase, and as it increases income should be higher, but only if it is evenly distributed. IF income is evenly distributed, it can lead to a higher average in terms of economic indicators of welfare (health care etc). Also, taxes on this money will lead to an increase in government revenue, which can then be invested in CELL. But, economic growth can also only mean that the rich are getting richer, and only leading to more inequality. However, no increases in GDP will lead to zero revenue for anybody, and can therefore only lead to very little economic development.
Explain, using examples, that economically less developed countries share certain common characteristics
1. Low standards of living, characterized by low incomes, inequality, poor health and inadequate education.
2. Low levels of productivity (output per person - low GDP)
3. High rates of population growth and dependency burdens: i.e high birth rates that leads to those of working age (15-65) having to support a much larger proportion of the population (e.g. children) than developed countries
4. High and rising levels of unemployment & underemployment
5. A relatively large agricultural sector with substantial dependence on agricultural production and primary product export (they produce commodities rather than secondary products)
6. They lack many of the necessary factors that enable markets to work efficiently, such as a functioning banking system, a developed legal system, adequate infrastructure and information systems
7. Dominance, dependence and vulnerability in international relations: developing countries are controlled by the decision made and actions of developed countries
All of the factors above can also represent hindrances to economic growth and thus, economic development
Explain, using examples, that economically less developed countries differ enormously from each other in terms of a variety of different factors
1. Resource endowment: there is a tendency to assume that developing countries must be poorly endowed with resources, both physical and human. This is not necessarily the case, it varies hugely between countries.
2. Historical background: The history of different countries varies and has affected different countries differently
3. Geographic and demographic factors: when it comes to the size of the country, the climate and the size of the population, it varies hugely among developing countries
4. Political structure: this varies too, there are democracies, monarchies, military rule etc
Explain the poverty trap/cycle
A poverty trap arises when low incomes result in low (or zero) savings, permitting only low (or no) investment in physical , human or natural capital, and therefore low productivity of land and labour. This gives rise to low, if any, growth in income (sometimes growth may be negative), and hence low incomes once again. A poverty cycle may occur in a family, a community or an economy and is transmitted from generation to generation.
Outline the current millennium gaols
There are goals that are aimed to be achieved by world leaders.
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 diseases
7. Ensure environmental sustainability
8. Global partnership for development
Distinguish between GDP and GNI per capita figures
-GNP per capita figures: the total all economic activity in a country, regardless of who owns the productive assets, divided by the number in population
-GNI per capita figures: The total income income that is earned by a country's factors of production, regardless where assets are located, divided by the number in population
These are both single financial measures used to assess growth and/or developement
Compare and contrast the GDP and GNI per capita figures for MEDC's and LEDC's
For LEDCs: GDP is significantly higher than GNI figures
For MEDCs: GDN is significantly higher than GNP figures
Distinguish between GDP per capita figures and GDP per capita at purchasing power parity (PPP)
Another set of single financial measures that are often used are GDP per capita figures and GDP per capita at purchasing power parity (PPP) . When making financial comparisons between countries a problem arises because goods and services simply don't cost the same amount in different countries. To avoid this problem economists use what is called PPP as an exchange rate. This rate attempts to equate the purchasing power of currencies in different countries. (e.g. the big mac index)
Compare and contrast the GDP per capita at purchasing power parity (PPP) for MEDC's and LEDC's
For LEDCs: PPP will be higher as things will generally cost less
For MEDCs: PPP will be lower as things will generally cost more
Compare and contrast two health indicators for MEDC's and LEDC's
1. Life expectancy at birth: a measure of the average number of years that a parson may expect to live from the time they are born. This indicator is affected by if there is good healthcare, water supply and adequate sanitation, food supply, nationwide education, low levels of poverty and lack of conflict.
For LEDCs: lower life expectancy due to lack of good factors
For MEDCs: Higher life expectancy due to availability of good factors
2. Infant mortality rate: This is the measure of the number of deaths of babies under teh age of 1 per 1000 births in a given year. Factors that affect this indicator is the availability of sanitation, availability of food and the level of poverty:
For LEDCs: Higher infant mortality rate
For MEDCs: Lower infant mortality rate
Compare and contrast two education indicators for MEDC's and LEDC's
1. Adult literacy rate: this is a measure of the proportion of the adult population, aged 15 or over, which is literate. They are considered literate if they can write a short statement about their everyday life. It is affected by the educational opportunities in the country, which in turn is influenced by wealth, distribution of income and poverty levels
2. Net enrollment ratio in primary education: this is the number of children enrolled in primary school, to the number of children who are of primary school age in the country. This is affected by the same factors as the adult.
Composite indicators are indicators that include more than one single indicator and are therefore considered to be better indicators of economic development.
Explain the measures that make up the human development index (HDI)
The HDI is a composite index that brings together the 3 basic goals that can be measured:
1. A long and healthy life (measured by life expectancy at birth with the assumption that people who live longer have benifited from good health)
2. The second is education (measured by adult literacy rate combined with a measure of primary, secondary and school enrollment.
3. The standard of living, or the ability to meet basic needs (measured in GDP per capita, converted at PPP)
Explain why a country's GDP/GNI per capita global ranking may be lower, or higher, than its HDI global ranking
In a country you can have a higher/lower GDP than HDI. This is because GNI/GDP is a poor measure of the different dimensions of development. Many countries, even with their given levels of GNI per capita, are capable of making improvements in the well-being of their populations by making different choices regarding the resources allocated to health,education and other services or merit goods. Economic and human development issues apply not only to developing countries, but also to developed countries.
With reference to specific developing economies, examine how the following factors contribute to economic development - education and health
Education provides an effective workforce, and increased levels of education mean that people are better able to read and communicate. This, in turn, will lead to social change. Education also improves equality, health care and decreases child mortality
With reference to specific developing economies, examine how the following factors contribute to economic development - appropriate technology
Appropriate technology is technology that is appropriate for use with existing factor endowments - technology appropriate to the people who use them. Also, using capital that will not replace humans but rather help them progress together, which will lead to a higher output in society. A higher output will mean a higher income, which will then contribute to development.
With reference to specific developing economies, examine how the following factors contribute to economic development - access to credit and micro-credit
Financial services are necessary if low-income people are to be able to manage their assets and to allow them to increase in value., thus enabling them to invest in thins that will lead to their economic development, e.g. healthcare, shelter and education. The difficulties associated with saving and borrowing money are a significant barrier to economic growth and development. It makes it exceedingly difficult for people to raise themselves out of poverty
With reference to specific developing economies, examine how the following factors contribute to economic development - empowerment of women
Giving women more empowerment, especially through education, is a huge factor in the achievement of economic empowerment. This is because women will improve the well being of her family if she is more informed about things such as health and hygiene. Also, it is found that women is more likely to pass on her education as well as spend her money on her family, making health levels increase. Also, if they have more power, they have more control over contraception; will marry later and have smaller families - which will decrease population growth.
With reference to specific developing economies, examine how the following factors contribute to economic development - income distribution
The gap between the rich and the poor has been found to be greater in developing countries. This has been found to be barriers to growth because:
- the poor save less of their income, and low savings means low investment and therefore low growth
- the rich tend to dominate politics and the economy, meaning that polices are followed that are more in their favor and so we don't have pro-poor growth = inequality
-High income inequality can be due to the rich people moving money out of the economy, in the form of capital flight
With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries - over specialization on a narrow range of products
Developing countries are generally dependent on primary commodities for a significant share of their revenues. So, if prices rise it may benefit their countries. It will increase the rate of economic growth and if the revenues are used on things such as education, health and infrastructure then it can improve the country's economic development. But if prices fall, they may experience deterioration in the terms of trade, and the country may find it to be difficult to finance current expenditure and necessary imports.
So, if a country is dependent on a narrow range of exports, then they may experience great vulnerability and uncertainty
With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries - price volatility on primary products
The price elasticity of demand and supply for commodities, on the world market, tend to be relatively inelastic. With such inelastic demand and supply, any change in the demand or the supply condition for resources will lead to price fluctuations. It could be e.g. due to weather conditions. This price and revenue volatility makes it difficult for producers and governments in developing countries to plan ahead, and will in turn affect investment in companies, and thus growth and government planning for education, health care and infrastructure, and thus development.
With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries - inability to access international markets
Protectionism is an economic policy that is aimed at supporting domestic producers at the expense of foreign producers. Protectionist measures by developed countries against the exports of developing countries from utilizing their comparative advantages and exporting to developed countries, then developing countries, then developing countries will be limited in their ability to earn foreign exchange. This is especially damaging for countries producing primary products.
Dumping from developed countries into developing is also a problem.
With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries - long term changes in the terms of trade
Long-term changes in the terms of trade, i.e. changes in the relative prices of exports and imports, can have a marked effect upon the ability of developing countries to trade internationally. If the commodity prices are falling over time, and many developing countries are primary exporters of commodities, then their export revues - as well as their ability to buy imports - will decrease
With reference to specific examples, evaluate each of the following as a means to of achieving economic growth and economic development - import substitution
It is a strategy that says that developing countries should, wherever possible, produce goods domestically, rather than import them. This mean that the domestic industries should grow and then be competitive in the world market in the future. For this to be possible the government would need to adopt a policy of organizing the goods produced domestically, subsidies would have to be made available and there would be a need for other protectionist measures.
+ protects jobs in the short-run
+protects local culture and habits
+ protects the economy from multinational corporations
- In the long-run growth will be lower to due less competition
- might not be evocatively efficient
- could lead to high rates of inflation due to persistent increase in AD
- Lead to protectionist relationship
With reference to specific examples, evaluate each of the following as a means to of achieving economic growth and economic development - export promotion
Export promotion refers to a growth and trade strategy and where a county attempts to achieve economic growth by expanding its exports. This should increase GDP and this in turn should lead to higher incomes, and eventually to growth in the domestic and exporting markets. They concentrate on producing and exporting products that have comparative advantage.
+ increased trade, income and wealth. Increased efficiency and benefits from comparative advantage.
+ A possibility to climb up the value chain
- loss of cultural heritage
- increased unemployment in the short run due to increased imports
- Depends on helps from the government
With reference to specific examples, evaluate each of the following as a means to of achieving economic growth and economic development - trade liberalization
Trade liberalization is the removal, or at least reduction of trade barriers that block out free trade goods and services between countries. It involves the elimination of such things as tariff barriers, quotas, export subsidies and administrative legislation.
+ Increased competition
+ Do not need much help from the government and the goverment will then have decreased power.
- Increased unemployment, both short and long-run
With reference to specific examples, evaluate each of the following as a means to of achieving economic growth and economic development - the role of the WTO
We now already know the role of the WTO.
+keep the peace
+ it is a system based on rules rather than power.
+ Stimulates economic growth
+ Protectionism raises prices, so no protectionism means cuts in the costs of living
- domestic production may decrease
- domestic jobs will decrease
- Extortion of LEDCs may occur
With reference to specific examples, evaluate each of the following as a means to of achieving economic growth and economic development - Bilateral and regional preferential trade agreements
Basically creating trading blocs, find more on disadvantages and advantage of trading blocs.
With reference to specific examples, evaluate each of the following as a means to of achieving economic growth and economic development - diversification
Involves a relocation of resources into new activities that broaden the range of goods or services produced.
+ increased research and development
+ use of domestic capacity
- less foreign trade
Describe the nature of foriegn direct investment (FDI) and multinational corporations (MNC:s)
FDI: Is the long-term investment made by private multinational corporations in countries overseas. It usually occurs in one of two ways:
- MNC's build new plants or expand their existing facilities in foreign countries - Greenfield investment
-MNC's merge with or buy existing firms in foreign countries.
This is a corporation that has its facilities and other assets in at least one country other than its home country.
Explain the reasons why MNC's expand into economically less developed countries/Describe the characteristics of economically less developed countries that attract the FDI
1.The countries may be rich in natural resources (e.g. oil and minerals) and the MNCs have the technology and expertise to extract such resources.
2.Some developing countries represent huge growing markets (e.g. India), and if MNCs are located directly in the markets then they have much better access to the large number of potential customers. They will be there to satisfy demand.
3.The cost of labor is lower than in the developed countries - which mean firms can sell products at lower prices and make higher profits.
4.In many developing countries government regulations are less severe than in developed countries, thus it can easier to set up and also greatly reduce cost of production. Also the government may offer tax concessions.
Evaluate the impact of foreign investment (FDI) for economically less developed countries - Advantages
Possible advantages of the FDI:
- FDI helps fill the savings gap and thus may lead to economic growth
-Provides employment, and often education and training - this may also improve the skill levels of the workforce & the managerial capabilities.
- MNC's allow developing countries greater access to research, development, technology and marketing expertise - can enhance industrialization
- Can stimulate growth
-The government in the developing country might tax revenues from the MNCs profits, which can then be used to improve infrastructure, health care and education.
-In some cases, MNCs may improve the infrastructure of the economy - both physical and financial, or they may act as a spur for governments to do so, in order to attract them
-The existence of MNC's may provide greater choice and lower prices, and make goods available that are not normally available domestically
-It can lead to a more efficient allocation of world resources
Evaluate the impact of foreign investment (FDI) for economically less developed countries - Disadvantages part 1
-MNCs may provide employment, but often they bring their own teams and only use the people living there for the low skilled jobs, without giving them any further education. This also limits the ability of providing the country with new technologies
-The MNCs sometimes have too much power, because of their size, and so they gain large tax advantages. Perhaps their incomes and size will also allow them to exert too much influence pm policy decisions taken in institutions such as the WTO
-MNC:s may practice transfer pricing - they sell goods and services from one division of the company to another division of the company in a separate country, in order to take advantage of different tax rates on corporate profits. The governments do have laws against doing this, but they can be difficult to enforce in developing countries
Evaluate the impact of foreign investment (FDI) for economically less developed countries - Disadvantages part 2
-MNC:s locate themselves where legislations on pollution is not effective, and thus they are able to reduce their private cost while creating external cost. This will be bad for the environment.
-They may also set up in countries where labor laws are weak, allowing the exploitation of local workers in terms of both low wage levels and poor working conditions.
-MNC:s may extract resources and leave
-MNC.s may use capital-intensive production methods that leads to reduced employment opportunities (not appropriate technology)
-MNC:s may repatriate their profits = they transfer their profits out of the country back to the MNC's country of origin
-It is likely that the money made by the MNCs will never be used in the developing country's economy
Aid is defined as any assistance that is given to a country that would not have been provided through normal market forces
-Official aid: organised by the government
-Unofiicial aid organised: by an non-government organisation NGO
Explain humanitarian aid
Humanitarian aid is given to alleviate short term suffering which may have been caused by droughts, wars, or natural disasters - does not have to be repaid. The main three forms are:
1. Food aid: the provision of food from donor countries/ money to pay for the food
2. Medical aid: provision of medical services and provisions from donor countries/ money to facilitate the medical services
3. Emergency aid: the provision of emergency supplies, e.g. tents, clothing and lighting
Explain development aid
Development aid is given in order to alleviate poverty in the long run and improve the welfare of individuals.
Development aid is often referred to specifically as ODA - Official Development Assistance (is provided by governments)
Types of development aid
- Long term loans (soft loans repayable in local currency)
- Tied aid (the condition is to buy products from the donor country)
Project aid (money given for a specific project- often infrastructure)
-Technical assistance aid (providing technology)
-Commodity aid (to increase productivity)
- Bilateral aid (directly from one country to another)
-Multilateral aid (given from rich countries to international aid agencies; IBRD, UN, Red cross
Explain the priority of NGOs
-NGO = non-government organizations
-They are incredibly diverse in size, orientation outlook, nationality, income and success.
-The priority of the NGOs is to promote economic development, humanitarian ideals and sustainable development. Their work might be to provide emergency relief in cases of disasters or to provide long-term development assistance.
-They plan and implement specifically targeted projects in developing countries and act as lobbyists to try to influence public policy in areas such as poverty reduction, workers' rights, human rights and the environment.
Explain that aid might also come in the form of tied aid
Tied aid is grants or loans that are given to a developing country, but only on the condition that the funds are used to buy goods and services from the donor country.
Explain the motivations of economically more developed countries giving aid
Donor countries generally give aid because it is in their own interest to do so. Undoubtedly some aid is given with humanitarian motives in mind; however, most foreign aid is given for variety of political, strategic and economic reasons that benefit the donor countries in the longer term.
1. Political reasons
Official Development Assistance (ODA) is often designed to achieve political objectives other than increasing prosperity in recipient countries. In the United States, national security considerations often influence foreign-aid decisions.
2. Economic reasons
Providing aid to Less Developed Countries (LDCs) ensures that the savings gap and the foreign exchange gap are filled. For domestic investment to take place domestic savings must also occur. If these are absent then a flow of development assistance can help finance investment projects.
Less and less development assistance is given in the form of outright grants and increasingly interest is being charged albeit at concessionary rates.
Evaluate the effectiveness of foreign aid in contributing to economic development
• Aid is inefficient (at times used for large-scale projects that are unnecessary to embellish reputations of project administrators/donors)
• Corruption squanders aid
• Aid rarely gets to those who need it
• Aid displaces local investment and markets (discourages tax collection)
• Aid fosters dependency
• Delivery of aid is the problem - otherwise its good
• Aid addresses areas where growth alone will not (income inequality for example)
• Successes are not celebrated because the need is still great
Compare and contrast the roles of aid and trade in economic development
Advantages of trade:
- Larger export markets could create economies of scale
- More efficient and mature agricultural sectors earn more foreign exchange for the country
- In turns allows diversification; reducing dependency
- Reduces dependence on foreign aid and stimulate more savings and investment
Limitations of trade:
- Prices might go up
Examine the current roles of the World Bank in promoting economic development
• World Bank emphasizes sustainable development methods as opposed to economic growth. Supports poverty alleviation & debt relief as well.
• World bank loans have conditions that reduce a country's economic sovereignty
• World Bank voting procedures have heavy weight for MEDCs, who arguably don't fully understand the needs of poor countries
• While World bank focuses on development through water-sanitation initiatives and anti-corruption campaigns, in the past the conditions of loans have caused cuts in social spending that have lowered countries' performance on the HDI and worsened the quality of life
Examine the current roles of the IMF in promoting economic development
• IMF aims to foster global monetary cooperation, secure financial stability, promoting high employment & sustainable economic growth and facilitating international trade
• IMF can enforce measures such as budget austerity, supply-side policies, inflation control, currency floating & trade liberalization
• IMF is dominated by rich countries and the lending from the IMF frees countries from fiscal responsibility and at times can impose unpopular policies that reduce social welfare and HDI
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