Chapter 5 - Economic development Flashcards
What is economic development?
Economic development is the sustainable increase in living standards for a country, typically characterised by increases in life span, education levels, and income
What are two measures of living standards?
Real GDP per head and the human development index.
What is real GDP per capita?
Real GDP is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation
Real GDP per capita = rGDP / the population
It shows the mean wealth of each citizen in a country. This makes it easier to compare standards of living between countries.
What are the disadvantages of rGDP per capita?
It is a single indicator so provides very limited information
It is an average so there may be significant poverty in many parts of a country that has a high rGDP/capita
What is the human development index (HDI)?
It is a combination of three factors: health, education and income. Health, as measured by the life expectancy at birth, Education, as measured by a combination of the mean years of schooling that 25 year olds have received, together with the expected years of schooling for a pre-school child and Income, as measured by the real GDP.
What is the weighting of the human development index?
Each indicator is given equal weighting in the index. The index ranks countries on a score between 0 and 1. The closer to 1, the higher the level of economic development and the better the standard of living
A value of < 0.550 is considered low development. E.g. Chad 0.394
A value of 0.550-0.699 is considered medium development. E.g. El Salvador 0.673
A value of 0.700-0.799 is considered high development. E.g. Thailand 0.777
A value ≥ 0.800 is considered very high development. E.g. Norway 0.957
What are some advantages of the human development index?
It is a composite indicator and includes several important indicators of living standards.
It includes rGDP/capita which is an average - so the HDI still does not take into account inequality in the distribution of income.
It does not measure environmental damage or resource depletion.
It does not take into account cultural differences or measure qualitative factors such as happiness or equal rights.
What are the ten reasons for differences in living standards and income distribution?
Economic system, the government, corruption, tax system, productivity levels, size of the population, education levels, inflation, regional differences and personal freedoms.
How does different governments cause differences in living standards the income distribution within and between countries?
The Government: the values of a government influence their economic agenda, tax system and government spending. Governments are more easily held accountable by the citizens in countries with a low level of corruption
How does different economic systems cause differences in living standards the income distribution within and between countries?
Economic system: a mixed economy provides the highest quality of living standards. There is much debate on how much government planning there should be. However, countries in Scandinavia with a more mixed economic system score very highly on HDI and living standards. With completely free markets (unchecked capitalism), wealth inequalities increase exponentially. With planned economies, shortages abound
How does different productivity levels cause differences in living standards the income distribution within and between countries?
Productivity levels: differences in skills result in difference in productivity and higher levels of productivity are rewarded with higher wages, which leads to a better standard of living
How does different tax systems cause differences in living standards the income distribution within and between countries?
Tax system: most countries have a progressive tax system for corporate and personal income tax. However, there can be many indirect taxes which completely change the quality of life for the poorest households
How does corruption cause differences in living standards the income distribution within and between countries?
Corruption: significantly undermines quality of life and the standards of living
How does different population sizes cause differences in living standards the income distribution within and between countries?
Size of the population: more densely populated countries or cities face more challenges. A larger population can mean higher tax revenues but at the same time, government expenditure on services is spread across more people often resulting in less government spending/capita
How does different education levels cause differences in living standards the income distribution within and between countries?
Education levels: These directly influence productivity and wages
How does regional differences cause differences in living standards the income distribution within and between countries?
Regional differences: Many countries have historically poor areas, as well as wealthier ones. Poverty in certain regions can be much higher
How does inflation cause differences in living standards the income distribution within and between countries?
Inflation: Tends to impact poorer households more as any increase in general price levels represents a larger absolute value of their wages when compared to wealthier households
How does different personal freedoms cause differences in living standards the income distribution within and between countries?
Personal freedoms: religious, economic, personal, political and civil freedoms improve the quality of life within a nation
What is poverty?
Poverty is a situation where a person lacks the financial resources to sustain a basic standard of living.
what is absolute poverty?
Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence.
What is relative poverty?
Relative poverty is a situation where household income is a certain percentage less than the median household income in the economy. Relative poverty is the main form of poverty that occurs in developed countries.
What are some causes of poverty?
Low wages, education and healthcare, low productivity and population
How do low wages cause poverty?
Low wages represent the intersection of economic growth and human development and are the major cause of poverty. Low wages are usually the result of unemployment, informal employment, a lack of skills, or a primary sector based economy.
How does education and healthcare cause poverty?
Education and healthcare cost money and with lower wage levels these are not accessible, resulting in poor human capital. People find it harder to stay well or to recover from illness resulting in lower productivity and shorter life expectancy.
How does low productivity cause poverty?
Low productivity results in low wages and the cycle continues.
How does populations cause poverty?
Populations with a large number of dependents (old people and children) for each working household tend to experience higher levels of poverty.
What are some policies that alleviate poverty and redistribute income?
Promoting economic growth, improving education, more generous state benefits, progressive taxation and establishment or increasing the national minimum wage.
What is promoting economic growth and how does it alleviate poverty and redistribute income?
Explanation:
Removing protectionism or engaging in expansionary demand and supply-side policies will promote growth
Data shows that economic growth has a very positive impact on economic development
In most cases growth precedes development
Often in less developed countries, economic growth is linked to one industry and generates many negative externalities of production possibly resulting in decreased living standards
Impact on poverty cycle:
Higher growth → higher wages → better education/healthcare → better human capital → better productivity → higher income
What is improving education and how does it alleviate poverty and redistribute income?
Explanation:
Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)
Impact on poverty cycle:
Higher education/skill levels → higher human capital → increased productivity → higher output → higher income
What is more generous state benefits and how does it alleviate poverty and redistribute income?
Explanation:
State benefits are usually given to the poorest and most vulnerable people in society
State benefits include unemployment and disability payments, pension payments, heating discounts, public transport subsidies etc.
Impact on poverty cycle:
More benefits → higher wages → better education/healthcare → better human capital → better productivity → higher wages
What is progressive taxation and how does it alleviate poverty and redistribute income?
Explanation:
A progressive tax system redistributes from those with higher income to those with lower income and reduces income inequality
Redistribution often starts with the provision of free education and healthcare
Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes
Impact on poverty cycle:
Higher redistribution → better education/healthcare → better human capital → better productivity → higher income
What is establishment/increase of national minimum wage and how does it alleviate poverty and redistribute income?
Explanation:
Minimum wages are set above the free market rate
Firms are not allowed to pay anyone less than the legal rate
Impact on poverty cycle:
Higher wages → better education/healthcare → better human capital → better productivity → higher wages
What is population?
Population refers to all of the inhabitants of a particular country
What is population growth?
The population growth rate is the size of the change in the population of a country, expressed as a percentage.
What five factors affect population growth?
Birth rate, death rate, net migration (immigration and emigration)
How does birth rate and death rate affect population growth?
A higher birth rate and lower death rate would both increase the population
How does net migration affect population growth?
More immigration than emigration would increase the growth rate
How does population growth change across different countries?
Population growth rates are currently highest in less economically developed countries such as Niger, Mali and Zambia
Population growth rates are lowest in more economically developed countries
In some MEDCs such as Italy and Japan, the population is decreasing as the number of deaths is higher than the number of births
What is natural change?
Natural change in population is calculated by deducting the death rate from the birth rate.
What factors cause a decrease in the death rate?
The agricultural revolution led to higher yields and healthier, more varied diets
Improvements to medicine and medical care
Improvements to technology and transport, leading to a wealthier population which increases life expectancy
Improved housing and sanitation
What factors cause a high birth rate in LEDCs?
Lack of access to family planning and contraception
An increase in women surviving childbirth
Families continuing to have large numbers of children to look after their parents in old age and to help support the family
Culture of having larger families which takes many years to change
Religious reasons
What factors cause the birth rate to fall in MEDCs?
Increased access to family planning and contraception
Changing social norms which include starting families later, having fewer children, or remaining single
Increased costs of child rearing and university education
What is overpopulation and what are the consequences of overpopulation?
Overpopulation occurs when there are more people in a country/region than can be supported by its resources and technology and leads to higher levels of pollution, higher crime rates, higher unemployment or underemployment, higher levels of food and water shortages and higher pressure on services such as hospitals and schools
What is underpopulation and what are the consequences of underpopulation?
Underpopulation occurs when there are more resources available than the population can use effectively and may lead to fewer people paying tax which can lead to higher taxes, underused resources, which can lead to wastage, a shortage of workers, lower levels of exports and production which affects the wealth of an area and fewer customers for goods and services
What is optimum population?
Optimum population occurs when there is a balance between the number of people and the resources/technology available. The optimum population results in the highest standard of living. There are not so many people or so few resources that the standard of living falls. There are enough people to develop the resources of the country.
What is population structure?
The characteristics of a population (the distribution of age, sex, ethnicity, religion etc), is known as the population structure. The population structure is the result of changes in the birth rate, the death rate and net migration.
What are population pyramids?
Population pyramids are used to display the gender and age structure of a given population. They illustrate the distribution of population across age groups and between male/female. Population pyramids can be used to identify the following groups:
Young dependents
Old dependents e.g number of retired people
Economically active (working population or labour force)
Dependency ratio
What are some effects of population changes?
Population changes can have major impacts within the economy resulting in changes to consumption, production, lifestyle, standards of living and government policies (fiscal, monetary and supply-side). Typical changes that occur are progressively ageing populations as economies develop, falling birth rates as economies develop and swings in net migration as influenced by war, famine, natural disasters and government policy
What are ageing populations?
Many developed economies are experiencing ageing populations and an increase in the older dependent population. The implications of this include, increased pension payments by governments, increased need for care homes (public and private), increased pressure on the healthcare service and social care results in higher government spending, it also results in a smaller labour force and often Governments collect less tax, firms suffer worker shortages and labour shortages result in increased wage costs for firms
What effects do falling birth rates have on an economy?
Falling birth rates have the following impact on an economy:
School closures due to fewer children
Future labour shortages
Governments typically put in place incentives that encourage families to have more children
Governments may change the migration laws to encourage immigration so that labour shortages are prevented
Excessive immigration can change the nature and culture of different regions within a country
What are some impacts of migration?
In some countries migration can lead to an imbalance in the population structure e.g. the UAE has significantly more males than females.
Rapid population growth caused by migration can lead to:
Increased pressure on services such as healthcare and schools resulting in increased costs for government
A shortage of housing which generates social issues in society
Increased traffic congestion which is a negative externality
Increased water and air pollution which are negative externalities
Food shortages
What are seven causes of differences in development?
Differences in income, differences in productivity, differences in population growth, differences in economic sector sizes, differences in savings and investment, differences in education and differences in healthcare
How does differences in income cause differences in development?
Countries with a higher GDP/capita tend to be more developed
Even with high GDP/capita, there may be significant inequality in the distribution of income resulting in poor living standards for many
How does differences in productivity cause differences in development?
Differences in skills result in difference in productivity
Higher levels of productivity are rewarded with higher wages, which leads to a better standard of living
How does differences in economic sector sizes cause differences in development?
conomies with a larger proportion of secondary and tertiary activity tend to be more developed due to the wages associated with each sector
Primary sector workers are usually paid low wages due to the unskilled nature of the job and the fact that raw materials often generate the lowest profits in the production chain
Secondary sector workers add value to the raw materials and these products sell for higher profits. Therefore wages tend to be higher than primary sector wages
Tertiary sector workers are paid the highest. Their jobs often require highly valued skills that take years to acquire and the products they sell or services they provide can be complex and expensive e.g. artificial intelligence coders
How does differences in population growth cause differences in development?
More densely populated countries or cities face more challenges
A larger population can mean higher tax revenues for the government but at the same time, government expenditure on services is spread across more people
Poorer economies are characterised by less government spending/capita
How does differences in saving and investment cause differences in development?
Higher savings result in higher investment and economic growth. It is believed that as economies develop, savings increase
Increased savings → increased investment → higher capital stock → higher economic growth → increased savings
If the dependency ratio is high it means there is less money available for savings and investment
How does differences in education cause differences in development?
These directly influence the level of skill in an economy
Improved skills results in higher productivity and wages
How does differences in healthcare cause differences in development?
The level of health directly impacts productivity of labour
Productivity influences output and income
Developed economies tend to have healthy workforces
The less developed the economy, the more sickness and disease there is
