4.3

Question 1

Advanced or developed economies

Answer 1

-Industrialised
-High-tech
-Not focused on agriculture
-Low population growth
-High GNI

Question 2

developing economies

Answer 2

-relying on agriculture
-Low Tech
-High population growth
-Reliant on aid
-Corrupt government

Question 3

Emerging economies

Answer 3

-rapid economic growth
-Increased investment
-Manufacturing
-High Income, growth and inequality

Question 4

What does Economic Development mean?
(Michael Todaro)

Answer 4

-Life sustaining goods and services: To increase the availability and widen the distribution of basic goods such as food, shelter, health and protection.
-Higher incomes: To raise living standards, including the provision of more jobs, better education, and greater attention to cultural and human values
-Freedom to make economic and social choices

Question 5

The Human Development Index (HDI)

Answer 5

-Was developed by the UN to identify the stage of development for an economy

HDI focuses on basic education, longevity, and income
-Knowledge: an educational component made up of two statistics – mean years of schooling and expected years of schooling
-Long and healthy life: a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years
-A decent standard of living: gross national income (GNI) per capita adjusted to purchasing power parity standard (PPP)

-scale from 0-100
0 is no development
100 completely developed

Question 6

Advantages of the Human Development Index (HDI)

Answer 6

-HDI does allow for comparisons between countries to be made, based upon which countries are generally more developed than other countries.
-It provides a much broader comparison between countries than GDP does.
-Education and health are important development factors to consider, and it can provide information about the country’s infrastructure and opportunities.

Question 7

Limitations of the Human Development Index (HDI)

Answer 7

-HDI does not consider how free people are politically, their human rights, gender equality or people’s cultural identity.
-HDI does not take the environment into account. It could be argued that this should be included to focus on human development more.
-HDI does not consider the distribution of income. A country could have a high HDI but be very unequal. This can mean many people might still be in poverty.

Question 8

Factors Influencing Development and HDI

Answer 8

Capital- human and physical
Organisation
Incentives
Institutions- banking and government
Property Rights and Contract Law
Political Stability
Competitive and Open markets
Geography, history and culture

Question 9

Economic Factors Influencing Development and HDI

Answer 9

Primary Product Dependency-Economy depends on limited range of primary products such as cocoa and bananas
Commodity price volatility-Prices on world markets may change dramatically due to supply shocks such as abundant harvest
Savings Gap-Household income is low so there is little savings available for investment
Lack of foreign currency-Weak currency means that the country can not afford to import technology
Capital Flight-Potential investment funds are diverted to other countries

Question 10

Other Factors Influencing Development and HDI

Answer 10

Geography
Demographic factors
Debt
Access to credit
Infrastructure
Education/Skills
Lack of property rights
Political Instability
Corruption

Question 11

Increasing Long Run Economic Growth

Answer 11

Changes in a nation’s potential GDP are brought about by:
-Changes in labour supply available for production (i.e. more people joining the labour force)
-Changes in the stock of capital inputs – affected by the level of gross capital investment
-Changes in the efficiency of allocation of factor inputs e.g. shifting resources from rural to urban areas
-Improvements in the quality of factor inputs / productivity of inputs
-Advances in the state of technology
-Improvements in institutions such as the banking system

Question 12

Strategies to Promote Development

Answer 12

-Market orientated strategies to improve the operation of markets by promotion enterprise and trade
-Government interventionist led strategies to improve aggregate supply and infrastructure
-Other strategies that rely on assistance from other countries and organisations

Question 13

Market-orientated strategies:

Answer 13

o Trade liberalisation-country lowering import tariffs and relaxing import quotas and other forms of protectionism. (more open to trade and investment)
o Promotion of FDI
o Removal of government subsidies
o Floating exchange rate systems (relative to demand and supply)
o Microfinance schemes-Micro credit, micro savings, micro insurance, remittance management
o Privatisation-Privatisation is the transfer of a business, industry or service from public to private ownership.

Question 14

Interventionist strategies:

Answer 14

o Development of human capital
o Protectionism- high barriers to trade
o Managed exchange rates-central bank may choose to intervene in the foreign exchange markets
o Infrastructure development-Closing the infrastructure gap
o Promoting joint ventures with global companies-A joint venture (JV) is a separate business entity created by two or more parties. Joint ventures provide an opportunity for developing countries to acquire specific expertise thereby gaining comparative ad
o Buffer stock schemes-One way to smooth out fluctuations in prices is to operate price support schemes e.g. through the use of buffer stocks. Buffer stock schemes seek to stabilize the market price of agricultural products b:
* Buying up supplies when harvests are plentiful
* Selling stocks onto the market when supplies are low

Question 15

Other strategies:

Answer 15

o Industrialisation: the Lewis model-suggest that if countries moved to industrialisation that were reliant on agriculture would see more growth and productivity increase.
o Development of tourism
o Fairtrade schemes
o Overseas aid
o Debt relief-External debt is owed to external (overseas) creditors.

Question 16

Difference between Growth and Development

Answer 16

Economic Growth
-A sustained rise in a country’s productive capacity
-An increase in real value of GDP / GNI per capita
-Increases in the productivity of factors of production

Economic Development
-Progress in expanding economic freedoms
-Sustained improvement in economic and social opportunities
Growth in personal and national capabilities

Question 17

The difference between gender equality and gender equity

Answer 17

-Gender equality denotes women having the same opportunities in life as men, including the ability to participate in the public sphere.
-Gender equity denotes the equivalence in life outcomes for women and men, recognizing their different needs and interests

Question 18

Primary Product Dependency

Answer 18

-countries at an earlier stage of development tend to export a narrower range of products.
-developing countries continue to have high dependence on extracting & exporting primary commodities.
-significant risks from over-specialisation

Question 19

The Prebisch-Singer Hypothesis

Answer 19

The Prebisch-Singer Hypothesis (PSH) suggests that, over the long run, prices of primary goods such as coffee and cocoa decline in proportion to prices of manufactured goods such as cars and washing machines.The core idea behind the Prebisch-Singer hypothesis is as follows:

-There is likely to be a long-term decline in real commodity prices
-In part this is because the income elasticity of demand for commodities is lower than for manufactured goods
-This then worsens the terms of trade for primary exporters over time
-In this situation, countries might be better off focusing on import substitution policies which encourage rapid industrialisation and improved export diversification designed to make a country more resilient to price shocks

Question 20

What is Dutch Disease?

Answer 20

-Dutch Disease refers to the adverse impact of a sudden discovery of natural resources on the national economy via the appreciation of the real exchange rate and the decline in export competitiveness.
-risk is that there is a corresponding loss of investment into other industries

Question 21

Strategies for reducing Primary Product Dependency and Price Volatility

Answer 21

1. Better government – including more transparency & accountability to taxpayers so that it is clear how natural resource revenues are being spent
2. Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and infrastructure or to inject money into an economy when aggregate demand dips
3. Higher taxes of natural resource profits (i.e. extracting resource rents and then reinvesting in the domestic economy to increase a country’s supply-side capacity)
4. Buffer stock schemes – these are designed in principle to reduce some of the effects of price volatility although most less developed countries have limited ability to influence the world prices of their key exports
5. Diversification – including shifting resources into processing, light manufacturing & tourism – giving higher value added and making the economy less susceptible to external shocks

Question 22

What is the savings gap?

Answer 22

-The savings gap is the gap between the amount of investment in a country and the level needed to achieve growth.
-Savings are needed to help finance capital investment
-Many rich countries have excess savings, whereas in smaller low-income countries, extreme poverty make it
almost impossible to generate sufficient savings to fund capital investment projects
-Furthermore, the financial / banking sector may be extremely underdeveloped in developing economies, and there may no guarantees provided by governments for depositors to get their money back in case of bank
failure
-This increases reliance on foreign aid or borrowing from overseas (leading to higher external debt)
-This problem is known as the savings gap
-In Sub Saharan Africa for example, savings rates of around 17 per cent of GDP compare to 31 per cent on average for middle-income countries
-Low savings rates and poorly developed or malfunctioning financial markets then make it more expensive for African public and private sectors to get the funds needed for capital investment

Question 23

Harrod Domar Model of Growth

Answer 23

The Harrod-Domar model stresses the importance of savings and investment. The rate of growth depends on:
-Level of national saving (S)
-The productivity of capital investment (capital-output ratio)

Question 24

The rate of growth of GDP

Answer 24

The rate of growth of GDP = Savings ratio / capital output ratio.

Question 25

Role of higher savings:

Answer 25

An increase in national savings leads to an Increase in investment – which leads to a larger capital stock – which leads to an increase in real GNI – which leads to increased factor incomes – which in turn allows more households to save.

Question 26

What is a foreign currency gap?

Answer 26

A foreign exchange gap happens when currency outflows exceed currency inflows This can occur when:
-A country is running a persistent current account deficit
-There is an outflow of capital from investors in money & capital markets (this is known as capital flight)
-There is a fall in the value of inflows of remittances from nationals living and working overseas

Question 27

Capital Flight

Answer 27

Capital flight is the uncertain and rapid movement of large sums of money out of a country. The UK Overseas Development Institute (ODI) defines capital flight as “the outflow of resident capital which is motivated by economic and political uncertainty.” There could be several reasons linked to a lack of investor confidence:
1. Political turmoil / unrest / risk of civil conflict
2. Fears that a government plans to take assets under state control
3. Exchange rate uncertainty e.g. ahead of a possible devaluation
4. Fears over the stability of a country’s financial system

Question 28

demographic factors

Answer 28

-Demography is concerned with the size and composition of a population.

Question 29

Possible microeconomic effects of demographic factors

Answer 29

1. Changing patterns of consumer demand in markets / affecting profits of businesses in particular sectors
2. Impact on government welfare spending and tax revenues e.g. health care for the elderly, treatment of chronic illness
3. Impact on housing market e.g. if people can live in their own homes for longer

Question 30

Possible macroeconomic effects of demographic factors

Answer 30

1. Impact on the rate of growth of productivity and long-term GDP growth - for example if there is an increase in the age-dependency ratio
2. Impact on business competitiveness if the median age continues to rise rapidly
3. Increased demand for state-funded health care including social care and a possible reduction in tax revenues if the active labour force contracts

Question 31

Opportunities from rapid population growth

Answer 31

1. A young median age and fast natural population growth contributes to an expanding population of working age which can increase long-run aggregate supply (LRAS) causing an outward shift of the PPF.
2. Providing per capita incomes are rising, then population growth increases the size of domestic markets - encouraging economies of scale and increased capital investment spending by businesses
3. More people in work leads to a widening of the tax base to help government finances
4. Population growth and urbanization tend to go together - population growth increases density and, alongside rural-urban migration can lead to benefits from agglomeration economies. Urbanisation has been linked to stronger innovation and it also stimulates demand for new infrastructure which in turn creates jobs and creates positive multiplier effects
5. The challenge of feeding a growing population can be a catalyst for research and development and innovation in farming designed to increase crop yields

Question 32

Risks and drawbacks from rapid population growth

Answer 32

1. A large number of young people entering the labour market creates challenges - not least in providing sufficient jobs in the formal economy to prevent a large increase in youth unemployment.
2. Fast-growing population holds back the annual growth of per capita incomes. Income is spread more thinly across large households which makes it harder to satisfy everyone’s basic needs and wants and can lead to rising malnutrition
3. Rapid population growth puts increasing pressure on the natural environment including demand for water and energy and can also threaten bio-diversity
4. High rates of rural-urban migration can lead to problems associated with urban density such as crime, the spread of disease and increased inequalities of income and wealth.

Question 33

Brain Drain Effects

Answer 33

Some countries experience a brain drain effect which describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. Brain drains can lead to de-population.

Question 34

Disadvantages from a brain drain

Answer 34

1. Loss of human capital – this damages long-run supply-side potential and is a barrier to development
2. Loss of enterprising younger workers who might have started up businesses at home
3. Skills shortages affect HDI outcomes e.g. the emigration of skilled doctors, teachers & engineers
4. Risk of a fall in aggregate demand because of a smaller population
5. Depopulation make the country less attractive to inflows of foreign investment

Question 35

Possible advantages from a brain drain

Answer 35

1. Remittances from emigrants flow back to increase a nation’s gross national income (GNI)
2. People living overseas (the diaspora) may be able to help finance private sector capital projects in the future
3. Acquisition of human capital by working & studying in other countries e.g. learning languages, earning degrees – possibly leading to brain gains if they return to their country of origin
4. May help to offset the risks from rapid natural growth of population such as higher inflation and pressure of the built environment and natural resources

Question 36

External Debt

Answer 36

Many developing countries accumulate a growing amount of external debt. External debt is owed to external (overseas) creditors and examples of debt includes government bonds sold to foreign investors and private sector credit borrowed from foreign banks. The scale of external debt is usually measured as a % of a country’s GNI.

External debt tends to rise when:
1. A government is running a budget deficit and finances this by selling government bonds to overseas creditors
2. A country is running a sizeable current account deficit which is partly funded by borrowing from overseas institutions such as the IMF
3. Households and businesses borrow money in a foreign currency including mortgages and corporate bonds

Question 37

But there are risks with a developing country increasing the scale of external debt:

Answer 37

• Returns on investment might fall short of expectations especially if investment goes on projects not subject to a proper cost-benefit analysis
• If a country experiences a depreciation/devaluation of their exchange rate, the real value of the debt will increase making it harder to repay
• A recession can make it harder to meet the interest payments on debt since government tax revenues shrink
• If international investors become nervous about the ability of a government to repay external debt, then a country may suffer a credit-rating downgrade which will increase the interest rate needed to finance new loans

Question 38

Infrastructure

Answer 38

-Infrastructure consists of a spectrum of public, semi-public, and private goods. Public goods include access to safe drinking water and sanitation. Semi-public goods include networks providing electricity, roads, ports, and airports
-effects of rapid urbanisation and climate change.

Question 39

How infrastructure gaps can limit economic growth and development:

Answer 39

• Increase supply costs for businesses – this causes higher prices – therefore hitting real incomes for consumers
• Reduces geographical mobility of labour causing higher structural unemployment (a labour market failure)
• Damages export competitiveness and limits intra-regional trade (trade within a cluster of countries)
• Can make a country less attractive to foreign direct investment (FDI) which might then slow economic growth
• Makes an economy vulnerable to climate change / natural disasters such as flooding and earthquakes
• Contributes to gender inequality
• Have a direct impact on basic human development – e.g. having access to basic water and sanitation services

Question 40

Why are property rights important for development?

Answer 40

1. Rights to own land and to establish businesses are seen as crucial for wealth creation e.g. private plots to farm
2. Protection of property rights is a major barrier to corruption
3. Property rights are important to tackle gender inequalities
4. Community ownership / husbandry of natural resources can help overcome threats to eco-systems
5. Laws on patents are important to secure investment in research industries
6. Common rules encourage trade & investment between countries by reducing trade friction costs

Question 41

Corruption as a barrier to growth and development

Answer 41

Corruption is due to a failure of governing institutions who lack transparency in where tax revenues are coming from and how resources are spent. Corruption is defined broadly as the misuse of public power for private benefit. High levels of corruption damages long term growth & development in a number of ways:
* Deters foreign direct investment by increasing the cost of doing business
* Leads to allocative inefficiency / i.e. diverting public resources for private gain, there are numerous extreme examples of extravagant wealth in economically less developed countries
* Government decisions are often unduly influenced by lobbying
* Contributes to income & wealth inequality and reduced progress in cutting the incidence of extreme poverty
* Causes a loss of trust - i.e. a breakdown of social capital
* Leads to poorer development outcomes because governments are not collecting sufficient tax revenues

Question 42

Non-economic factors that can affect development

Answer 42

• Poor governance
• Degree of corruption
• Civil war and political unrest
• The geography of a country e.g. landlocked, mountainous etc

Question 43

The world bank

Answer 43

The World Bank comprises two institutions managed by member countries: The International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD aims to reduce poverty in middle-income and credit-worthy poorer countries. The IDA focuses exclusively on the world’s poorest countries.
The World Bank:
* Provides grants and low interest loans
* Offers policy advice and technical assistance to developing countries
* Co-ordinates projects with governments

Question 44

International Monetary Fund (IMF)

Answer 44

The International Monetary Fund (IMF) has played a prominent role in world financial affairs in the post-Second World War period. In the 1950s and 1960s, its main purpose was to support the system of fixed exchange rates. Since then its activities have evolved to embrace developing economies and both banking and sovereign debt crises.

Question 45

Key Roles for the IMF

Answer 45

1. Promote international monetary co-operation
2. Facilitate the expansion of international trade
3. Provide exchange stability
4. Make resources available to members experiencing balance of payments difficulties

Question 46

NGOs

Answer 46

An NGO is any not-for-profit voluntary group – it can operate on a local, regional, or international scale. NGOs often operate on a small scale in developing countries. They frequently work in the areas of environmental improvement, community development, and human rights – there have been notable interventions from NGOs in the areas of
removal of landmines in previously war-torn countries (e.g. Cambodia), gender equality and women’s rights, and raising awareness of ‘blood diamonds’.

Question 47

the IBRD

Answer 47

the imternational bank for reconstruction and development, commonly known as the world bank