Macro - The Meaning and Measurement of Development

Question 1

GDP per Capita

Answer 1

The total value of all final goods and services produced in an economy in a given time period, usually a year, divided by the population of that economy.

Question 2

Purchasing Power Parity (PPP)

Answer 2

GDP statistics given in dollars with equal purchasing power - i.e. $1 would buy the same quantity of goods and services in all countries. In this way, countries with lower costs of living see their GDP figures increased by PPP, and vice versa.

Question 3

Gross National Product (GNP)

Answer 3

The total value of all final goods and services produced by resources owned by a country (irrespective of location) in a given time period, usually a year - e.g. to convert the UK’s GDP to its GNP, goods produced in the UK using foreign-owned resources would be subtracted, and goods produced abroad with UK-owned resources would be added.

Question 4

Gross National Income (GNI)

Answer 4

The the sum total of all household incomes in a country. This differs from GDP as it includes transfer payments from abroad (remittances), which is particularly significant for LEDCs.

Question 5

Limitations of GDP as a measure of development

Answer 5

• Takes no account of the cost of living in the country
• Some of the country’s GDP may result from production by foreign-owned firms, and thus not all of the revenue will benefit the country in question.
• Takes no account of income distribution - countries with a relatively high GDP may still have a very high level of poverty, e.g. Brazil.

Question 6

Economic Development - Textbook

Answer 6

The process of improving people’s economic well-being and quality of life.

Question 7

Economic Development - Michael Todaro

Answer 7

3 objectives of development:

• Greater availability of life-sustaining goods and services, e.g. food, shelter, healthcare
• Higher incomes
• Freedom to make social and economic choices

Question 8

HDI - components

Answer 8

• GNI per capita (PPP)
• Life expectancy at birth
• Mean years of schooling
• Expected years of schooling - i.e. how many years are available

Question 9

HDI - ranges

Answer 9

0. 8 - 1 = High

0. 5 - 0.8 = Medium

Question 10

HDI - Limitations

Answer 10

• Limited scope - only uses 3/4 specific indicators
• Many poorer countries do not have a reliable system of data collection, and not all countries collect the data in the same way
• Takes no account of inequality

Question 11

Human Poverty Index

Answer 11

A similar system of calculations, but uses inverse figures:

• Probability of death before age 40 rather than life expectancy
• Adult illiteracy rate rather than years of education
• Proportion of people without access to water/underweight children rather than GNI per capita

Question 12

Inequality-adjusted HDI (IHDI)

Answer 12

Introduced in 2010 - weighs a country’s HDI against its level of inequality - the UN desribes the IHDI as the measure of actual development, whilst the HDI is a measure of potential development (if there was no inequality).

Question 13

Millennium Development Goals (MDGs)

Answer 13

• Eradicate extreme poverty/hunger
• Universal primary education
• Promote gender equality/empower women
• Reduce child mortality
• Improve maternal health
• Combat diseases such as HIV/AIDS and malaria
• Ensure environmental sustainability
• Global partnership for development

Question 14

Capital Stocks

Answer 14

• Natural capital - land, mineral resources, soil quality, oceans, clean air, climate
• Human capital - skills, knowledge, enterprise
• Physical capital - machinery, buildings, infrastructure
• Social capital - difficult to define, but may be expressed as social relationships, cultural traditions, and social institutions (e.g. legal/political systems)

Question 15

Intergenerational externatilites

Answer 15

When the actions of one generation benefit themselves, but harm the prospects of future generations - generally applied to the concept of sustainability.

Question 16

Sustainable Development

Answer 16

Development which meets the needs of the current generation without compromising the ability of future generations to meet their own needs.

Question 17

Is there such thing as a typical developing country?

Answer 17

• Most developing countries exhibit low GNI per capita, high population growth, and a relatively large primary sector.

HOWEVER

• Countries are diverse in terms of their social background, factor endowments, industries, etc - each their is no one-size-fits-all formula for development.

Question 18

Poverty Cycle

Answer 18

Low incomes I

Question 19

Primary Commodities - Price Volatility

Answer 19

• Many primary commodities are viewed as essential, and demand for them will therefore be price inelastic
• Supply will also be price inelastic, as suppliers are committed to expensive, long-term production methods, such as waiting for bananas to grow and ripen
• Therefore any shifts in supply or demand are liable to cause large changes in price
• Furthermore, levels of supply are likely to be highly volatile - food is affected by good or bad harvests, metals/oil is affected by mining/drilling in rich or poor areas - this means that prices can vary hugely from year to year
• This means that it is difficult for a country which is heavily reliant on primary sector production to achieve development, as it does not have a consistent source of income

Question 20

Primary Commodities - Price Trends

Answer 20

• Primary commodities have a long-term downward trend in their price
• They are viewed as bare essentials - demand for them will not increase that much as consumer purchasing power increases. By contrast, development of new technology and production techniques result in continual, sizeable increases in their supply - this results in a consistently falling price
• Therefore, over-reliance on primary sector production will hinder the development of industry, as it will be nigh on impossible for firms to turn a sufficient profit to undertake investment profits

Question 21

Dependency Ratio

Answer 21

The ratio of those not in work to those who are - given by population not in work/population in work (x100)

High dependency ratio is a constraint on development - savings and government tax revenues have to be spent on providing for the dependent population, rather than reinvested into the economy in order to improve productivity.

Question 22

Terms of Trade

Answer 22

• The price of a country’s exports, relative to that of its imports, given by an index of export prices/index of import prices x 100
• In order to achieve development, a country may opt to focus its production on high value-added goods in order to achieve better terms of trade - e.g. S. Korea

Question 23

Problems of free trade for developing countries

Answer 23

• Deterioration in terms of trade
• Over-reliance on primary industry persists
• Stagnant productivity and wages

Question 24

Advantages of protectionism

Answer 24

• Generates gov’t revenue which can be reinvested where it is needed in order to achieve development
• Encourages the growth of domestic industry - esp. important for infant industries
• Increases employment
• Prevents dumping - domination of markets by foreign MNCs
• Provides a platform for long-term development

Question 25

Disadvantages of protectionism

Answer 25

• Short-term welfare loss for consumers outweighs welfare gain for firms
• Lower material standard of living in the short term
• Discourages the benefits of free trade - specialisation, comp. advantage, therefore is inefficient in the short term
• Firms may not be incentivised to develop or cut costs, therefore development may not be achieved

Question 26

The Washington Consensus - Fiscal Discipline

Answer 26

• Avoidance of budget deficits
• Direction of spending toward healthcare, education and infrastructure
• Widening the tax base and lowering marginal rates
• Market-determined interest rates

Question 27

The Washington Consensus - Market Liberalisation and Privatisation

Answer 27

• Privatisation of state-owned industry
• Deregulation of markets
• Legally enshrined property rights

Question 28

The Washington Consensus - Trade Liberalisation

Answer 28

• Removal of tariffs and other barriers to trade
• Removal of barriers to FDI
• Competitive exchange rates

Question 29

World Bank

Answer 29

• Has the primary aim of ending world poverty within a generation and boosting shared prosperity (trickle-down)
• Financed by 188 member economies according to the size of their respective economies
• Had significant input from Keynes
• Provides long-term, low-interest loans for development projects
• Along with the IMF, is a proponent of the Washington Consensus - accused of hampering development

Question 30

International Monetary Fund (IMF)

Answer 30

• Financed in the same way as the World Bank - the two are seen as partner organisations
• Provide short-term loans for dealing with problems with the balance of payments - seen very much as a last-resort option
• Aims to promote international financial stability in order to facilitate world trade
• Produces “surveillance reports” on the state of various economies
• Often imposes conditions for its loans