4.3 Measure of economic development Flashcards
Define economic growth
An increase in the productive output of an economy
Leading to an increase in real value of GDP
What are the indications of growth in national capabilities?
Infant mortality (0-5 year olds)
Persecution and intolerance
Starvation and nutrition
Illiteracy
What are the characteristics of an emerging economy
High corruption
Absence of infrastructure like welfare
High pollution
High % of people in rural areas
Low years in education
pool of young workers
What ways does growth lead to economic development?
fall in income and wealth inequality
Closes the informal economy
Lifts people from poverty
increase tax revenue
What is HDI
Human development Index - use to measure economic development
1 being more developed 0 being not developed
What indicators are used to measure HDI
- life expectancy at birth
- expected years of schooling
- Mean years of schooling
(standard of living)
- GNI per capita
- ODA
What countries have the highest and lowest HDI
Switzerland : 0.962
Rwanda : 0.362
Evaluate the limitation of using HDI?
questions the data due to informal economy
Environmental impacts are not recorded
No account of income distribution
Define economic development?
The increase in economic and social opportunities
What factors influence the growth and development of economies?
- lack of infrastructure e.g monetary or welfare systems
- external factors like wars
- weak supply side policies mean inability to use their natural resources
- corrupt political system
- export dependency
- protectionism of world economies
- savings gaps in poorer households
Define savings gap?
It is the difference between actual levels of savings and levels of saving needed for a higher growth state
(17% of GDP in Africa) - which is very low
What is the middle income trap?
Middle income economies unable to become advanced economies due to regulation
Why are savings important in an emerging and developing economy?
- To afford education for children
- lead to investment in healthcare, entrepreneurship and education
- monetary protection over external shocks
What is Harrod Domars model?
The cycle between
1. savings 2. investment 3. capital accumulation and technology 4. output and income
Explain Harrod Domars model:
Savings - loanable funds in financial markets
investment - invest in capital stocks so firms can undertake production
capital accumulation - funds must be used to upgrade technology and production process
output and income - will lead to higher output, more savings and higher incomes allowing more savings
Why Harrods model does not work in emerging economies?
Savings: low income households and low profits from firms
Investment: lack of entrepreneurs and underdeveloped financial markets
Capital accumulation: less dynamic efficiency due to info gaps and funds needed for human capital and improving infrastructure
Output and income: Break downs in chains cause smaller growth
What are the limitations of harrods model
- information gaps in where to invest
- savings are volatile e.g remittances
- corruption can reduce growth
- barriers to economic growth like lack of healthcare
- low saving due to absolute poverty
What is Lewis Model
He presented a dualistic economy
Where there is rural agriculture and a manufacturing sector
He says economic growth comes from the movement of workers from agriculture to urban manufacturing areas
Why may wages be higher in urban manufacturing areas
- excess supply of workers in rural area
- diminishing marginal labour in rural areas as labour is variable and land is fixed, marginal workers contribute less to output
- difference in mrpl of labour
- presence of trade unions
- high concentration of firms lead to excess demand in urban areas
How is rural migration incentivised to urban areas
Pay offer that is 30% or higher
- high profits make firms expand and hire more
What are the limitations to the Lewis model?
Karl Marx states workers will be exploited due to overcrowdedness, unsanitary environment and businesses and shareholders retaining all profit
- assumes no capital in rural areas
- assumes skills are inferior in rural areas
- depends on WED and WES
- Other factors like non-monetary benefits
- can cause regional inequality
- 100% migration is undesirable leaving no farmers and high inflation
What are the benefits of export led growth?
- rise in international competitiveness
- cyclical employment in X industry
- improvement in ToT
- fall in poverty and inequality
- improve C.A
- lead to accelerator effect
- increase investment and government revenue
What is the Dutch Disease?
When a country becomes a commodity producer in one area in a short period of time, this leads to appreciation, which increases price of all exports, in turn lowering international competitiveness in some industry leading to fall in output
AP Netherlands 1880s exporting natural gas
What is Prebisch Singer’s hypothesis
Suggests over time, prices of primary commodities fall, which worsens ToT, can only be sold by diversification.
What countries may suffer from the Dutch disease?
- China - microchips
- Madagascar - Vanila
- ## Netherlands - natural gas
Define remittances
money sent home from migrant workers
What countries have met the ODA (foreign aid) target of 0.7% of GDP
Norways 1.11%
Luxembourg 1%
Sweden 0.94%
Denmark
UK 0.7%
Germany
What countries are the top recipients of remittances (billions)
India
Mexico
China
Philippines
What countries have a high proportion of GDP as remittances?
Tonga
Lebanon
Samoa
What are the benefits of remittances?
- reduces absolute and relative poverty via the affordability of basic needs
- provides startup capital for entrepreneurship
- used as collateral for microloans
- help overcome saving gap
- monetary protection against external shocks like covid
-inflow into the current account
-less malnutrition
What are the drawbacks of remittances?
- moral hazard due to inactivity by those receiving the remittances
- remittance dependancy
- effect of remittances on GDP may be marginal
- can cause dutch disease due to appreciation
- 80% of rural living people do not have access to banking services
- can cause a brain drain on work force
How can remittances enact the harrod domar model
Remittances allow for savings and investment that can lead to growth
If a developing economy can afford basic needs how does this affect GINI and HDI
HDI would increase
GNI would fall
Define micro finance
Small micro loans accessible to low income groups
They’re typically high risks so have high I.R, require no collateral and loans are usually bigger than income
What are the pros of micro finance loans
- target a marginalised group in society
- encourages the Harrod Domar model
- CCT, improves HDI due to mandatory spending on education
- UCT allow for people with different circumstances to benefit
What are the cons of microfinance
- may encourage moral hazard
- micro loans require a bank account yet 80% of low income households in rural areas do not have access to banking services
- information gaps in where to invest and on the benefits of education
- debt is subject to inflation
- there is a time lag to repayment of loans (figure is lower than it seems)
- can cause gender inequality due to men taking the loans given to women in a household
Why is inflation more problematic in developing/emerging zone?
- weak monetary infrastructure
- increase in absolute poverty due to increase in basic economic goods prices
- harms the exporting industry, fall in IC
- fall in FDI due to an increase in uncertainty
- the savings gap would grow
