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Economics > Development > Flashcards

Development Flashcards

1
Q

What is Amartya Sen’s definition of economics?

A

The process of improving people’s quality of life, involving improvements in standards of living, health and education, reducing poverty, and increased freedom and economic choice.

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2
Q

State three benefits of economic growth.

A

Higher incomes

Greater profits

Improvement in government finances

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3
Q

What do higher incomes lead to?

A

Better material standards of living and a reduction in income inequality and poverty, therefore improving quality of life.

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4
Q

What do higher profits lead to?

A

More jobs created to meet demand, better technology and investment in R&D to promote sustainable growth.

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5
Q

What causes and results from an improvement in government finances?

A

Causes:
- more tax collected
- ‘grow’ out of debt

Results:
- increased spending in public sector
- increased spending on merit goods

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6
Q

What are three drawbacks to economic growth?

A

Income inequality

Negative externalities and unsustainability

Growth focused in one dominant sector

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7
Q

What are common characteristics of developing countries?

A
  • Low standards of living
  • Low productivity
  • Low levels of savings
  • High population growth
  • Primary sector dominance
  • Incomplete markets
  • High unemployment/ underemployment
  • Low economic power on the international stage
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8
Q

What is HDI?

A

A measure of development, calculated using equal weightings of healthcare (life expectancy at birth), education (adult literacy rate and school enrolment) and standard of living (GDP per Capita PPP).

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9
Q

What are the pros and cons of using HDI to measure development?

A

Pros
- Broad
- Development can be measured over time and compared
- Attention focus on those with low development

Cons
- Hides income inequality
- Arbitrary/ unclear weighting
- Doesn’t show freedom of choice

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10
Q

What are the three main domestic factors of development?

A

Education

Healthcare

Infrastructure

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11
Q

How can better education increase development?

A
  • More skills and training so access to better jobs
  • Increase in productivity
  • Increase in the number of jobs available
  • Educated in health
  • Technological advancements
  • Gender equality in workforce
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12
Q

How can better healthcare increase development?

A
  • People are sick less so are more productive
  • Better standards of living
  • Better sanitation and access to drinking water
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13
Q

How can better infrastructure increase development?

A
  • Access to markets
  • Firms benefit from economies of scale
  • Access to school and hospitals
  • Attracts inward FDI
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14
Q

What are some other institutional factors of development?

A
  • Taxation
  • Appropriate use of technology
  • Empowerment of women
  • Income distribution
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15
Q

Why is political instability important to an economy?

A

FDI: firms more willing to operate/ trade in country as regulations will be fair and processes will be quick

Aid: countries will provide aid knowing that it will be used correctly and fairly

Democracy: needs and wants of people are listened to and met

Political instability can lead to revolutions/ civil wars, loss of infrastructure and loss of investment/ FDI

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16
Q

List the 5 ways in which corruption hinders development.

A
  • Inefficient regulation
  • Loss of FDI
  • Bribes (increases cost of production and government spending is left to private sector)
  • Resources allocated/ projects given to highest bidder instead of most efficient
  • Laws not upheld/ legal issues not resolved
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17
Q

What is the difference between absolute and relative poverty?

A

Absolute poverty - income below threshold set by World Bank ($2.15 per day)

Relative poverty - income less than average earner domestically

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18
Q

Outline the growth poverty cycle.

A
  1. Low incomes
  2. Low levels of savings
  3. Low levels of investment (due to low economic activity)
  4. Low economic growth
  5. Low incomes
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19
Q

Outline the development poverty cycle.

A
  1. Low levels of income
  2. Low levels of healthcare and education
  3. Low levels of human capital
  4. Low productivity
  5. Low levels of income
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20
Q

What is microfinancing?

A

The distribution of small loans to individual entrepreneurs or groups to stimulate business activity, profits and incomes.

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21
Q

What are the pros of microfinance?

A
  • Fills savings gap
  • Can reduce poverty
  • Source of finance without huge interest
  • Can empower women
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22
Q

What are the cons to microfinance?

A
  • Entrepreneurial ventures not always successful
  • Lenders can apply exorbitant interest rates and bully debtor
  • Loans are usually not enough to alleviate poverty and spent on consumption instead
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23
Q

How can the four factors of production be better utilised to achieve long run growth?

A

Land - better fertilisation and agricultural techniques, more/ efficient acquisition and use of natural resources, building vertically

Labour - increase population, improve health and education, vocational training and retraining

Capital - increase quantity to increase productive potential and quality to improve efficiency and productivity

Enterprise - better financial institutions, legal systems, health and education

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24
Q

What are the four benefits of engaging in trade to increase development?

A

Exploit comparative advantage (natural resources): increase exports, AD, growth and development

Consumers benefit from lower prices, increased competition and choice, and improved political relations

Economies of scale and efficiency benefits: increased profits, lower prices, increased corporation tax revenues

Technological transfer and growth of secondary industries breaking dualistic structures (away from agriculture into tech based goods and services)

25
Q

What are the drawbacks to increasing trade for development (aka international barriers to development)?

A

Primary commodity dependence - subject to falling prices, depletion/ degradation of resources, falling demand

Price fluctuations and volatility (inelastic demand and supply leading to large price changes)

Access to international markets limited due to protectionist measures and tariff escalation

Difficulty in exchanging and using currencies

Long term decline in terms of trade (export prices relative to import prices fall)

26
Q

How are terms of trade calculated?

A

(Index of export prices / index of import prices) x100

27
Q

Outline the Prebisch-Singer hypothesis.

A

Long run decline in the Terms of Trade for countries that depend on natural resource exports.

YED and wealth effect (X income inelastic, M income elastic)
M prices rise faster than X prices
X must rise to fund same quantity of M

Advice: use revenues from X to promote diversification

28
Q

How does Import Substitution Industrialisation work?

A

Tariffs are placed on imported manufactured goods to allow domestic manufacturing industries to grow.

29
Q

What are the benefits of Import Substitution Industrialisation?

A
  • Protects domestic jobs
  • Protects domestic economy from foreign influence
  • Restricts dominance and influence of MNCs
30
Q

What are the drawbacks to Import Substitution Industrialisation?

A
  • Opportunity cost of short run job creation vs long run unemployment and restricted growth
  • Loss of comparative gains
  • Retaliatory protectionism (trade wars) and deterioration of foreign relations
31
Q

How does Export Promotion work?

A

Remove protectionism to encourage trade and therefore increase GDP, incomes and development.

32
Q

What are the benefits of Export Promotion?

A
  • Developing countries can exploit their comparative advantage of primary product dependence
  • Potential technological advancements
33
Q

What are the drawbacks of Export Promotion?

A
  • Existing protectionism abroad
  • Wider income inequality (not all industries benefit)
  • Over-dominance of MNCs
34
Q

What is trade liberalisation?

A

Washington Consensus: grouping of 10 policies to allow markets to work freely without government intervention.
Promotes:
- Fiscal discipline
- Market liberalisation (deregulation, privatisation)
- Trade liberalisation (reduce protectionist measures)

35
Q

What are the benefits of trade liberalisation?

A
  • Sustainable growth and development, reducing market failures and promoting allocative efficiency
  • Creating macroeconomic sustainability
  • ‘Trickle down’ effect - benefits to all
36
Q

What are the drawbacks to trade liberalisation?

A
  • MNCs with too much power
  • Increase in income inequality and exploitation of workers
  • Potential fiscal cuts in key areas like healthcare and education
37
Q

What are bilateral trade agreements?

A

Encouraging trade between groups (e.g. EU, BRICS)

38
Q

What are the benefits to bilateral trade agreements?

A
  • Better market access, lower transport costs
  • Greater specialisation gains
39
Q

What are the drawbacks to bilateral trade agreements?

A
  • Coincidence of wants (e.g. if African countries increase trade with each other, they will quickly realise they are exporting the same goods)
  • Increase costs of production (trade diversion)
  • Trade barriers in countries outside PTA
40
Q

What is diversification?

A

Moving away from primary product dependence towards manufacturing and improving technology.

41
Q

What are the benefits of diversification?

A
  • Protect against resource curse and volatile prices of primary products
  • New technology, new avenues for growth and promotes high skilled labour
42
Q

What are the drawbacks to diversification?

A
  • Tariff escalation
  • Highly skilled workers needed
43
Q

What is FDI?

A

When a firm has headquarters in one part of the world, and decides to open another branch and operate in another part of the world (MNCs).

44
Q

Why does FDI often occur in developing countries?

A
  • Firms want to make use of the abundant natural resources
  • Markets are growing so profits potential may be huge
  • Labour costs are low
  • Regulations and standards are a lot lower than developed countries
45
Q

List the benefits of FDI.

A
  • Injection into circular flow - increase employment and potential growth
  • Fills savings gap
  • Positive BoP effects
  • MNCs and infrastructure development
  • Improves productivity domestically (domestic firms face competition from MNCs so have to become more productive)
  • Technological transfer
  • Increase in tax revenue collection
46
Q

List the drawbacks of FDI.

A
  • Employment maybe short term or less than expected (MNCs may not maintain operations or use domestic labour force)
  • MNCs have too much power (use their power to negotiate better policies such as lower tax)
  • MNCs may invest in labour saving technology
  • MNCs may strip resources and leave
  • Environmental costs
  • Tax revenue collection may be lower than expected (due to subsidises and tax advantages)
47
Q

Define sustainability.

A

Meeting the need of the present without reducing the ability of future generations to meet their own needs.

48
Q

Evaluate whether growth can lead to sustainable development.

A

Growth can lead to sustainable development by improving healthcare, education and productive potential of economy.

Growth can also lead to resource depletion and degradation, deforestation, and the overuse and burning of fossil fuels (unsustainable, negative effects to development).

In the short term, unsustainable forms of growth may be necessary to generate incomes/ profits to find more sustainable approaches.

49
Q

What are the 2 different types of aid and their purpose?

A
  • Humanitarian (food, medical, emergency); alleviates short term suffering
  • Development: long-term loans, tied (certain imports can only be bought from donor), project (infrastructure), technical assistance (subsidise research and development), commodity (lowering costs of production); fill the savings gap and promote economic development
50
Q

List the concerns with foreign aid.

A
  • Corruption
  • Dependency
  • Aid weariness
  • Indebtedness
  • Inequality
  • Economic/ political gain (selective)
  • Political influence
51
Q

What has happened in the past that has led to many countries stuck with debt?

A
  • Persistent current account deficits (especially during 1970s)
  • 3rd world debt crisis (western banks repackaging oil profits into loans, followed by global recession)
  • IMF bailouts accompanied by strict fiscal discipline conditions
52
Q

List the solutions to indebtedness.

A
  • Debt relief
  • Reschedule debts
  • Debt swaps (NGOs redistribute money)
  • Cancel debt
53
Q

List the market-based policies that promote development.

A
  • Promoting FDI
  • Privatisation
  • Deregulation
  • Trade liberalisation
  • Smaller state
54
Q

What are the benefits to using market based policies to promote development?

A
  • More efficient resource allocation
  • Incentives to invent and innovate
  • Firms not held back by bureaucracy
  • Encourages FDI
  • Usually requires less government spending; positive effect on budget/ less risk of gov failure/ crowding out
55
Q

What are the drawbacks to using market based policies to promote development?

A
  • Will infrastructure be built?
  • Markets unlikely to efficiently provide certain goods and services
  • Market failures: environmental
  • Increases income inequality
  • Protectionism in advanced economies holds back trade liberalisation
  • A lack of well-functioning financial institutions limits role of free market
56
Q

List the government based policies that promote development.

A
  • Import substitution,
  • Protectionism
  • Exchange rate intervention
  • Regulations
  • Nationalisation
  • Increase government spending
57
Q

What are the benefits to using government based policies to promote development?

A
  • Infrastructure development; overcome public goods issue
  • Government is a major employer and investor in human capital within the public sector
  • Stable macroeconomy
    -Welfare state and pension provision
58
Q

What are the drawbacks to using government policies for development?

A
  • Bureaucracy, inefficiency and corruption
  • Nationalised industries can be loss making and inefficient
  • Increasing government spending too much can lead to indebtedness

Economics (4 decks)

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