macro 31 Growth and development Flashcards
Define growth?
Increase in the value of goods and services adjusted for inflation measured by the change in GDP.
What are the 5 benefits of economic growth?
- Lower unemployment.
- More tax revenue.
- Increased productivity - investment.
- Improved living standards.
- Reduces poverty.
What are 3 benefits of economic growth to developing countries?
- Access to healthcare.
- Access to education - Instead of going to work.
- Brings people out of absolute poverty and can afford nutritious meals with protein.
Define development?
Growth in the value of goods in services produced plus other non-monetary aspects of life including wellbeing.
Why does increasing GDP differ to economic welfare?
- Inequality- benefits of growth are unequally distributed.
- Environmental degradation.
- Access to human rights.
Define HDI?
composite indicator of the level of a countries development varying between 0 and 1.
What 3 things is HDI constructed of?
- Life expectancy at birth.
- Mean years of schooling.
- GNI per capita.
What is GNI?
GDP + net investment income + remittances.
What are 3 benefits of using HDI as a measure of development?
- Focuses on other things besides GDP such as healthcare and education.
- Allows comparison between countries - a country might have a high GNI per capita but low HDI because of bad quality services.
- Can be used to direct aid to countries.
What are 2 disadvantages of using HDI as a measure of development?
- Doesn’t measure indicators like happiness, environment and inequality.
- Doesn’t tell us quality of services.
What are the main sources of revenue for less developed countries?
- Agriculture- low value items so they have low productivity because gdp is not high.
- Manufacturing.
Why does a government start to prioritize non-economic indicators when the economy grows?
Because industrialization (growth) means that the government can now collect tax revenue that they couldnt from the informal sector of agriculture. This way, they have enough money to spend on improving services like schools and hospitals
What do economists say is the main reason for lack of growth, which eventually slows development?
Investment - this problem is mostly faced by developing countries.
If investment is the barrier to development, why dont developing countries target investment?
Savings gap - firms can’t take out loans if individual people don’t save money in banks.
What does the Harrod-Domar emphasise?
The importance on savings and investment.
Give the basic idea of the Harrod-Domar model?
Savings –> Investment –> Capital accumulation –> Growth.
People with excess income (MPC<1) save. Entrepreneurs can invest with that money. Leads to capital accumulation and better technology. Productivity and output rises and so workers get paid more. More savings and more, and so more savings and the cycle repeats.
The model states that the rate of GDP growth is determined by the savings ratio and the capital output ratio.
What is the capital output ratio?
THe amount of money that has to be spent on capital to get 1 pound of economic growth.
Does the country want a high or low capital output ratio?
LOW - produce a lot of output from a low amount of capital.
Formula for the Harrod-Domar model?
Savings ratio / capital output ratio.
What is the loanable funds theory?
The supply of finance is the level of savings in the economy.
When people deposit money in banks, these funds can be lent out to firms for investment in physical capital.
Higher interest rates will encourage people to save more.
ADD DIAGRAM FROM ECONOMICS HELP.
Will savings lead to investment and the accumulation of capital?
EVALUATION
NO:
1. many low income people have an MPC of 1 - so no savings.
2. Interest rates on loans will be high - the lack of savings ill reduce the amount of loanable funds. Assuming IR is set by demand and supply, the demand for money will rise and supply will fall.
3. In these countries, they will prioritise growth, leading to low IR and so less savings.
Will investment lead to higher output and income?
evaluation
NO:
1. There’s no capital in those countries - imports are leakages.
2. Capital is expensive.
3. Shrinking foreign reserves - OC.
Do developing countries struggle to finance investment.
evaluation
YES:
1. Savings gap.
NO:
1. Assumes banks are willing to lend.
2. People don’t trust banks.
3. Traditional savings methods don’t work.
What are 3 other barriers to growth and development?
- Corruption.
- Institutional factors - property rights. Developing countries don’t have strong laws, this prevents MNCs from investing.
- Poor infrastructure.
How does the UK plug the savings gap?
- Beg for money from the IMF/world bank - borrow.
- AID- receive money from countries.
- MNCs- tax cuts to invest in their country.
Explain trade liberisation as a policy to promote development?
Market oriented
Lower tariffs Increases exports, revenue
Increase, import of capital to improve productive capacity and create jobs.
EVAL:
- Creates dependancy on trade.
- Unless a huge increase in trade value, a price fall may be bad as there are low value items.
- Revenue from tax may be the largest source of income.
Explain FDI as a policy to promote development?
finish chapter
