4.3 Flashcards
What is economic growth and economic development
Economic growth is purely measured by real GDP and productive potential of a country
Economic development is improvements in standards of living
HDI and components
HDI- measures of economic development based on income, health and education
Health= life expectancy at birth
Income = real GNI per capita at PPP
Education= mean years of schooling
^ Given an equal weighting and a mean is taken to give a figure between 0-1 = high development
ADV and DIS of HDI
ADV of HDI
- Relatively easy to calculate because govs collect data on this already
- Broader than GDP= more accurate comparison
- 3 key factors which are important for development
DIS of HDI
- No consideration of human rights, gender equality and political freedom
- Doesnt consider distribution of income
- Doesnt consider othe factors like econvironment or corruption
Other indicators of development
- IHDI- inequality adjusted humans development index- takes into account inequality of health, income and education = more broader than HDI, doesnt take into account environment
- MPI- Multidimensional poverty index - measures the percentage of population that is multidimensionally poor. Takes into account school attendance, availability of electricity, safe drinking water - highlights differences between areas
>EVAl- data not always available and hard to collect - Genuine progress indicator- 26 indicators grouped into 3 main categories: economic, environmental and social= looks at economic sustainability for future generations.It looks at personal consumption,cost of pollution, cost of crime
Factors influencing growth and development
PVFCDTAIEAS Poor villages face constant difficulties, trying and improving every aspect steadily
- Primary product dependancy - country relies on primary products eg mining and agriculture
> Natural disasters wipe out primary products = decreases harvest = decreased incomes
> Non renewable resources run out= decline of industry= structural employment
> Have low YED = increased incomes = decreased primary goods bought and increased demand for manufactured goods. However not all have low YED eg diamonds
> Dutch disease = country becomes key commodity producer in short time = increased demand for currency = increased value of currency= decreased competitiveness = decreased output - Volatility of commodity prices, primary goods= inelastic S+D curve = small changes is supply and demand = huge fluctuations in prices = producer incomes and country earnings see rapid change = hard to plan and carry out investments= decreased investment = decreased growth and development
- Foreign currency gap , value of current account deficit is larger than the value of capital inflows = slows down economic growth
- Capital flight- large amounts of money is taken out of country rather than being let there for people to borrow or invest= not enough capital to grow economy due to withdraw from circular flow
> Due to hide from gov authority, profit repatriation, lack of confidence - Demographic factors, developing countries= have large population= limits development as if population increases by 5%, economy has to grow up by 5% to maintain living standards
> Increased population growth= increased number of dependants within country = strains education system and leads to youth unemployment - Too much debt- during 70s and 80s developed countries gave loans to developing = now suffer from high IR = moves money flow from developing to developed= gov has less money to spend on services for their people = increased taxes = limits growth
- Access to credit and banking= developing countries = limited access to credit and banking compared to developed = unable to fund investments and struggle to save for future = limits growth as firms may find it hard to grow = limits potential output
- Infrastructure, low= hard for firms to trade and set up = makes their services and production less reliable= decreased competitiveness = decreased output and development
- Education and skill = unable to read/ write = decreased productivity = increased prices of goods or goods aint of quality = decreases competitiveness = limits growth and development
- Absence of property rights - weak/absent rights= cant protect ideas = no incentive to innovate
- Savings gap- gap between a banks saving and money firms want to borrow .
> 2 main reasons , low incomes and low access to banks
= decreased investments = keeps economic growth low as AD shifts left = low incomes as less job creation = increases gap even further. Also low investment = decreased profits = low tax revenue = limits growth + devel
^ Harrod domar model
Non-economic factors influencing growth and development
- Corruption- make decisions which maximise brides rather than development and growth= reduces growth and development and increases personal satisfaction
- High levels of beuraracy= increased cost of production and time consuming= decreased new entrants = decreased comp and decreased output
- Diseases eg HIV/AIDS = decrease productivity as more days off work or inability to work= decreased output and growth
- Poor climate and geographical terrain eg suffer from natural disasters = hard to set up firms
- Civil wars eg Iraq = increased poverty and decreased infrastructure= hard to rebuild after war
Market orientated strategies influencing growth and development
(P-MTRF)
-Promoting FDI eg through lower taxes or decreased wage costs,
> decreased costs= able to lower prices= increased profitability = attracts FDI eg India 31 billion in 2015 = able to spend on or expand on areas like infrastructure = easier for firms to set up= increased productivity = decreased costs and increased profits and therefore increased taxation
>EVAL– decreased wage costs = decreased incomes = decreased consumption= decreased AD = limits growth and decreased standards of living
- Microfinance- small loans to firms to encourage investment = able to invest and buy equipment to pursue business = decreased costs as productivity increases= able to lower price and stay profitable= increased competitiveness= increased demand = increased incomes= decreased savings gap as banks able to lend more= increased AD AND LRAS= economic growth
> EVAL- microfinance organisation charge high IR= decreased income if not profit = no money to save= increases savings gap= decreased investment - Trade liberisation- increased competition in domestic markets = force domestic producers to become as efficient and productive as other producers= resources allocated to best use where comparative advantage is present = decreased prices of goods as costs fall = increased LRAS and AD = export led growth
> EVAL- producers can leave market = increased unemployment = decreased incomes and SOL - Removing gov subsidies= increase gov surplus or improve deficit as subsidies represent a large spending = gov has more money to spend on development through direct investments eg public goods= increases SOL
> EVAL- politically unpopular and increases inequality - Floating exchange rate system= decreased spending on gold and foreign currency reserves= increase gov revenue as opp cost is reduced = more money to spend ondevelopment
> EVAL- decreased growth as competitiveness may fall
Interventionist strategies to increase growth and development
- Increased education eg develop new schools or train = increases SOL= increased human capital= more knowledge and skill to increase productivity = LRAS shifts right = increased real GDP = increased growth. Also increaseassed productivity = increased incomes = increased income tax= increased gov revenue= more money to spend on development eg prevent from disease eg HIV
- Infrastructure= increased= increased productivity as workers can move faster= decreased COP = can decrease prices = increased competitiveness= increased demand for goods= increased profits= increased coroporaiton tax= increased development and growth
> EVAL- corruption,magnitude of invesment,quality - Buffer stock scheme- gov buys up commodity eg good harvest = less in market= increase prices back to equilibrium = reduces fluctuations = decreases price instability= increased confidence and investment as its easier to predict prices= increased AD = increased growth
> EVAL- expensive to store, opp cost, not market experts
