Economic Development

Question 1

Measuring Development. What is Real GDP per capita?

Answer 1

GDP measures national output/national income/national expenditure. It is a rough measure of the average national income per person in society.

Question 2

Limitations of GDP as a measure of living standards?

Answer 2

Difficult to measure. The GDP statistics will ignore the underground economy as transactions are not recorded.

Negative externalities such as pollution and congestion; therefore a rise in real GDP will often overestimate living standards on this count.

Inequality. This ignores distribution of income; some people may be very poor despite being in a rich country.

PPP. When comparing countries’ GDP in a common currency such as the dollar, we can not attain a true comparison because there will be different purchasing power of the local currency.

Question 3

Evaluation of GDP

Answer 3

Although there are limitations to using GDP, it is a good starting point. Higher GDP enables more goods and services to be consumed. Higher GDP enables better public services such as health and education.

Question 4

Human Development Index

Answer 4

The HDI is an alternative measure of economic welfare. It takes into account real GDP per capita, but also includes measures such as health and education standards in a country.

Question 5

Advantages of using HDI

Answer 5

HDI can highlight countries with similar GDI per capita but different levels of economic development

It includes the 3 main areas of economic welfare; average incomes, education and health standards (life expectancy)

Question 6

Limitations of HDI

Answer 6

Divergence within countries

HDI reflects long term changes e.g life expectancy and may not responding to recent short term changes.

Higher GDP per capita may have widespread inequality within a country.

Economic welfare depends on several other factor such as threat of war, levels of pollution, access to clean drinking water etc.

Question 7

The Human Poverty Index

Answer 7

This is like the HDI but also takes into account the distribution of welfare within a country, to try and measure relative poverty levels.

Question 8

Define Sustainable Development

Answer 8

Sustainable development places greater stress on achieving long term improvements in economic and social indicators.

Question 9

How can we implement sustainable development?

Answer 9

Protecting environment in the long run.

Improving education and skills base of the economy. This enables higher capital labour and more potential for enterprises to develop businesses.

Question 10

Strains on Development

Answer 10

Poor Infrastructure - lack of transport increases costs and makes trade more difficult

Human Capital Inadquacies - Low levels of education and training limit the range of goods and services that can be produced. Countries with low levels of education may be constrained.

Primary product dependancy - Reliance on primary products such as oil, minerals and agriculture can limit economic development. Volatile prices can lead to fluctuating export earnings. Primary products may also be finite and will run out.

Capital/human flight - Countries with a poor repuation may struggle to attract and retain capital. also, the best skilled workers may leave for higher wages elsewhere..

Question 11

Developing of human capital to help development

Answer 11

Pros:

Government spending to improve education and training can lead to improved human capital and higher labour productivity. This is important for leading to a higher skilled economy.

Cons:

However, it can take several years to educate workers. Also government spending is not guaranteed improve labour productivity as people may be reluctant to take part in training schemes or the schemes may not meet the markets needs.

Question 12

Developing of infrastructure to help development

Answer 12

pros:

If countries invest in roads, transport, railways and networking etc. it will help improve trade and increase economic growth.

Cons:

A developing country may struggle to fund these investments and there is a danger of government failure. They need to have foreign aid, which could be a trap.

Question 13

Developing of protectionism to help development

Answer 13

Pros:

Protectionism makes greater diversity in their economic such as protecting new manufacturing industries. This will also increase their international competitiveness, which may increase their domestic exports. This would help create incentives for firms to hire businesses increasing tax revenues.

Cons:

However this is controversial, as it breaks the desire for free trade.

Question 14

Foreign aid to help development

Answer 14

Pros:

Aid can be used to finance infrastructure improvements and human capital. This can increase capital stock, thus shifting AD right and can enable higher growth rates.

Cons:

However, it depends on the quality of aid. Often aid is tied to purchasing donors’ exports and is limited in value. This could also cause the receiving country to become dependent.

Question 15

FDI as an aid

Answer 15

Pros:

Africa has benefited from inward investment from China in infrastructure. China has gained access to raw materials and in return, has built roads and railways to transport the goods. This has played a role in economic development

Cons:

The LEDC may have to pay a high cost, but also some countries due to cultural reasons may not invite FDI and therefore restrict themselves.

Question 16

IMF (International Monetary Fund)

Answer 16

Pros:

THE IMF plays a role in offering credit to countries that run into difficulties making debt payments. The IMF can arrange a loan to bail out countries.

Cons:

The IMF usually insists on certain criteria to accompany the loan. This may involve free market supply side policies, such as devaluation, control of inflation, tightening of fiscal policy, and structural reforms such as privatisation.