Chapter 35: Economic development Flashcards
Economic development
Improvement in economic welfare including improved living standards, reduceing poverty, expanding the range of economic and social choices, and increasing freedom and self esteem
Causes of differences in economic development
- Different in incomes per head
- Differences in saving due to differences in income
- Differences in investment
- Differences in population growth
- Differences in education and healthcare
- Differnces in the size of primary, secondary, tertiary sectors
- Differences in the concentration of a narrow range of exports
- Differences in productivity
The cycle
Countries with low income have a low saving rate. Most resources are used to produce consumer goods instead of capital goods which keep productivity low, keeping income low.
Governments seek to achieve economic development
Higher real GDP
If it consists of both capital and consumer goods the country can enjoy more goods and resources
Governments seek to achieve economic development
Higher living standards
- Important for the distribution of income not to become unequal
- Reduced poverty
- People who enjoy better standards of living are likely to be more productive and lower the country’s average costs making it more internationally competitive
Governments seek to achieve economic development
Expansion of the range of social and economic choices
- Increasing freedom and self esteem
- Increasing access to education, healthcare, and participation in the political process
- Improves quality of living and enhances future economic performance
- Creates virtuous cycle
Problems facing economies with relatively low economic development
- High growth of population
- High levels of international debt
- Reliance on the export of primary products (primary products fall in price)
- Lack of investment in human capital and capital goods (holds back productivity, new technology, and international competitiveness)
- Emigration of key workers
- Trade restrictions on their products
- Unbalanced economies
Measures to promote economic development
Import substitution
- Protection of new domestic industries against foreign competition
- ALlows the induestires to grow
- Imports can be replaced domestically
- Can increase domestic output, raise employment, and improve the country’s trade balance
Risk:
- Short term: May raise prices and reduce choice and hence lower economic welfare
- Countries may retaliate and the domestic industries may become reliant on protection without seeking to increase their efficiency and competitiveness
Measures to promote economic development
Promoting exports by exposing domestic firms to market forces
- Firms will be forced to become efficient without govenrment support
- Success depends on firms being able to compete with foriegn firms
Measures to promote economic development
Improving infrastructure, capital stock, education, training, and healthcare
- Countries may lack tax revenue to do this so may seek to attract MNCs, loand from abroad or foreign aid
Measures to promote economic development
MNCs
- Promote development
- Increase employment, wages, train and educate workers, bring in new technology, and improve infrastructure
- May pay workers less than in their home countrys and have poorer working conditions
- As long as the wages are higher and the conditions are better than those generally operating in the host country the MNC is positive contribution
- MNC may deplete non renewable resources, cause pollution, and put pressure on the government to pursure policies which have detrimental effect on development
Measures to promote economic development
Borrowing from abroad
- Can work if funds are used in a way which raises productivity and generates enough income to repay the loans
- Interest can be high which makes some projects unviable
- Risk taht projects may not be successful as expected
Measures to promote economic development
Foreign aid
- Potential to increase development but can create economic and political dependency
- Can postpone necessary reforms and bring in inappropriate technology
- Risk that aid may be used for non profitable projects and there may be corruption in its use
- Foreign aid may be given out of a desire to help wpeople, win political support, and gain commercial advantage