4.3.1 - 4.3.3 Development Economics Flashcards
What is the Human Development Index made up of
-life expectancy
-number of years in education
-GNI per capita
Advantages of using HDI to measure development
-easily collectable and reliable
Limitations of using HDI to measure development
-does not show distribution of income
-ignores indicators such as political freedom, access to clean water, quality of education
-inaccurate data (outdated, manipulated by gov)
Characteristics of developed economies
-high GDP per capita
-high levels of education and healthcare
-democratic government
-low birth/death rates
-many are in deindustrialisation
Characteristics of developing countries
-low GDP per capita
-primary product dependent
-poor financial infrastructure
-high birth/death rates
Limits to growth and development in LEDC’s (7)
Primary product dependency
-volatile prices and low value goods
-leads to unstable incomes
Declining terms of trade
-terms of trade worsen for many countries that are primary product dependent
Weak financial infrastructure
-low incomes means low savings
-low savings means low investment
-low investment means low capital accumulation
-low capital means no loans means low incomes
Poor infrastructure
-cannot attract FDI
Lack of education
-low skilled human capital
Corrupt and weak governments
-aid is often misdirected instead of used to develop education and infrastructure
Debt
-pay back international debt instead of investing
Civil wars
-instead of spending on infrastructure, money is spent on military funding
What are some potential benefits from rapid population growth
-increase in working population —> increases LRAS
-increase size of domestic markets —> more people to provide for, encourages EoS and capital investment by firms
-increased tax revenue for gov
What are some negatives of rapid population growth
-could lead to rising unemployment if there are limited jobs available for the population
-limits the growth of GDP per capita so could lead to rising absolute poverty
-puts pressures on healthcare and education so could lead to an uneducated population with a lower life expectancy
What are the potential benefits from an aging population
-increased demand for housing and specialist healthcare
-increased consumer spending on leisure and travel
-improved life expectancy which means people can work productively to an older age
What are some negatives of an aging population
-rise in the age-dependency ratio - increased burden of paying for state welfare on working population
-increased fiscal costs - more spending on pensions and healthcare
-could cause shortages of labour - rising costs so loss of international competitiveness
-could slow down labour productivity - limits growth
What is the savings gap cycle
- Low incomes (likely from low value primary product dependency)
- Low levels of savings (high MPC)
- Low levels of investment
- Low productivity
- Low or no economic growth
Cycle begins
What does the Harrod-Domar model suggest
That the rate of growth of GDP is determined by the national savings ratio and the ratio of capital to output in the economy
What is the Harrod-Domer equation
Rate of growth of GDP = savings ratio ÷ capital/output ratio
What is the Harrod-Domer model example
Savings ratio = 5%
Capital/output ratio = 2.5
Rate of GDP growth = 5/2.5 =2 2% per annum
How can LEDC’s get out of the poverty trap
Increase investment
How can LEDC’s get investment to get out of the savings gap
- Borrow from the World Bank or IMF
- Foreign aid
- FDI (via cheap labour)
- Microfinance
- Debt relief
What is a example of a developing country that is attempting to reduce its savings gap
Angola - public offerings (selling gov bonds to public)
Ethiopia - launched a stock exchange
What are some criticisms of the Harrod-Domer model
-capital flight - many savings from wealthy citizens are deposited abroad so financial institutions in the LEDC’s have limited funds to finance investment
-low interest rates - tries to encourage investment but also makes saving unattractive
-absolute poverty - people cannot save
What is the Prebisch-Singer hypothesis
Real and relative prices of many primary commodities have been in long term decline compared to manufactured goods.
What are some reasons for the falling real and relative prices for primary commodities
-productivity improvements in agriculture and mining (increased supply)
-demand for most primary commodities is income inelastic (only small increases in demand compared to more income elastic goods i.e. luxuries)
-discovery of synthetic replacements for natural products like synthetic rubber (reduced demand)
-protectionist agricultural policies by developed countries e.g EU cap and common external tariffs (reduced demand for agriculture exports from outside the EU)
This means that export prices fall relative to import prices and therefore worsens the terms of trade
Consequences of deteriorating terms of trade from falling primary commodity prices
-depleted resources as they have to increase supply to sell more exports to fund imports
-further fall in prices due to increased supply to sell more exports to fund imports
-increased debt via falling export revenue
-increased foreign currency gap due to a fall in export revenue so less dollars earned to pay for their imports
What do the Buffer stock scheme diagrams look like
Maximum and minimum price:
-demand and supply diagram
-max and min prices marked
-outwards shift of supply showing an equilibrium price below max price and excess supply
-inwards shift of supply showing an equilibrium price above min price and excess demand
-areas marked of stock that must be released from (inwards shift) and bought up by (outwards shift) buffer stock scheme
Target price diagram:
-demand curve and 3 vertical supply curves
-target price, high price and low price marked
-arrows showing stock released from (inwards shift) and bought up by (outwards shift) buffer stock scheme
What are some benefits of Buffer stock schemes
-stabilises prices for producers - guarantees stable income - allows investment
-can be self financing if gov buy stock when prices are low and sells when prices are high
What are some problems of Buffer Stock Schemes
-can be expensive: initial funds, storage costs, wastage costs, opportunity costs
-difficult to set the right target price: price too high = continual surpluses that the government must buy
What is a buffer stock scheme
An organisation set up and financed by the government which buys up agricultural supplies when harvest are plentiful and sells them when harvests are poor
What is Fairtrade
A minimum price designed to cover the cost of sustainable production for many commodities
Benefits of Fairtrade
-guarantees producers a minimum price for their products = stabilised income = increased living standards = increased flow of income
-guarantees producers minimum price = guaranteed income = may encourage capital investment from farmers to increase productivity
Problems with Fairtrade schemes
-not all producers reach requirements leaving many small scale farmers vulnerable to monopsony buying power
-distorts the price mechanism
-middle men typically get more additional profits from Fairtrade than the farmers themselves
Benefits of tourism for developing countries (6)
Injection into the circular flow
-its an invisible export so:
-increases AD and BoP
Attracts FDI e.g from hotel chains creating jobs
Multiplier effect
-increased incomes
-reduced savings gap
-e.g restaurants, hotels, taxi firms
Infrastructure investment
-e.g roads, rail, airports
Diversifies economy
Tax revenue
-tourist tax e.g Greece
Problems with using tourism to develop LEDC’s
-negative externalities from building airports, pollution, loss of habitats
-income inelastic so in a global recession tourism falls too
-often seasonal work leading to seasonal unemployment
-could increase property prices
-leakages via increased exports to cater for tourist tastes
Benefits of debt relief for developing countries
-improved government finances means:
-investment in education more productive workforce
-investment in healthcare more productive workforce
-investment in infrastructure to stimulate growth
Problems with debt relief for developing countries
-moral hazard
-benefits may go to corrupt governments
What is the difference between official and unofficial aid
Official - from governments
Unofficial - non-government organisations
Benefits of aid for LEDCs
can fill the savings gap to allow investment in infrastructure and capital
Problems with aid for LEDCS
-corrupt governments may not use it to benefit its people
-can make countries dependent on it leading to citizens neglecting their own skills
What is microfinance
Provision of small loans to individuals and small businesses
Benefits of microfinance
-can fill the savings gap, giving credit to those who need it
-reduces poverty by raising per capita incomes
Problems with microfinance
-high interest rates can push borrowers into debt
-loans may not be used for enterprise but for consumption so does not help long run capacity of economy
What are the two sectors of the Lewis Dual-Sector model
Rural agriculture
Urban industrial sector
What is the Lewis Dual-Sector model
- The population is mainly employed in the rural agricultural sector which has low productivity due to diminishing marginal returns
- Agricultural workers are attracted to the industrial sector because of higher wages which are higher because of higher productivity of workers
- Output of the economy increases until all the ‘surplus labour’ from the agricultural sector has migrated
- Structural change has occurred
Explain how a diagram can demonstrate the Lewis Dual-Sector model
PPF diagram
Moving FoP from agriculture to manufacturing / industrial will lead to an outwards shift in the productive potential of the economy as productivity increases so the PPF shifts out
What are some criticisms of the Lewis Dual-Sector model
-assumes that all profits of the industrial sector are reinvested
-assume entrepreneurs will keep requiring more labour as they expand
-research suggests that surplus labour actually exists in the agricultural sector due to rapid industrialisation
What are the interventionist strategies to influence growth and development in LEDC
-develop human capital (education investment)
-protectionism
-infrastructure development (gov spending)
-buffer stock schemes
What are the market-based strategies to influence growth and development in LEDC
-trade liberalisation
-promotion of FDI
-removal of gov subsidies
-floating exchange rates
-microfinance schemes
-privatisation
What are the other strategies to influence growth and development in LEDC (doesn’t come under market-based or interventionist)
-industrialisation
-development of tourism
-fair trade schemes
-aid
-debt relief
What is the curse of raw materials
When a rapid increase in the production of raw materials (like oil and gas) causes a decline in other sectors of the economy so that when the raw materials run out, the economy is in a worse position than before.
What is effect of the curse of raw materials
Raw materials (e.g oil or gas) is exported
The currency strengthens
People can buy more luxury imports so living standards can improve
Exports from other industries are less competitive globally so industries begin to decline
The country becomes more dependent on the raw material (e.g oil)
Unemployment rises
Raw material runs out
Remaining industries are left weak
