LS12 + LS14 - Measures Of Development, Factors Influencing Growth And Development Flashcards

1
Q

What is economic development and how can you measure it

A

Economic development is the sustainable increase in living standards for a country, typically characterised by increases in life span, education levels, & income

There are many measures of economic development

Single indicators e.g. number of doctors/1000 people; infant mortality rate; % of the population with access to clean drinking water

Composite indicators such as the Human Development Index (HDI

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2
Q

HDI

A

Developed by the United Nations, it is a combination of 3 indicators

Health, as measured by the life expectancy at birth e.g.in 2019 it was 81.2 years in the UK

Education, as measured by a combination of the mean years of schooling that 25 year old’s have received, together with the expected years of schooling for a pre-school child

Income, as measured by the real gross national income per capita at purchasing power parity (ppp)

Each indicator is given equal weighting in the index
The index ranks countries on a score between 0 & 1
The closer to 1, the higher the level of economic development & 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

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3
Q

Advantages of HDI

A

It is a composite indicator which provides a more useful comparison metric than single indicators do

It incorporates three of the most important metrics for households i.e. health, education & income

It is widely used all over the world which provides an opportunity for meaningful comparisons

It provides a goal for governments to use when developing their policies e.g. it may help identify that the education levels are holding back improvements to the HDI & government policy can target that

It provides citizens with an understanding of how their quality of life compares to other countries

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4
Q

Disadvantages of HDI

A

It does not measure the inequality that exists as it uses the mean GNI/capita

It does not measure or compare the levels of absolute & relative poverty that exist

For many countries it does not provide useful short-term information as gathering the data required for the calculation is difficult. This means the data often lags reality by several years

Does not differentiate between rates of development progress within a country, difference in development between urban &rural areas. The HDI does not account for income inequality within a country and the impact of inequality in development. BUT HDI can be adjusted for income inequality = income inequality adjusted HDI.

Incomes, schooling, and healthcare’s scores= weighted equally in HDI – argued to be arbitrary esp if it’s clear that a certain area such as healthcare is lacing more than another. Makes It harder to efficiently allocate funds – aid money directed to areas that aren’t at need

HDI only comprising 3 areas= quite narrow in outlook, development consists of multitude of factors such as freedom, equality, poverty alleviation. HDI used alongside Global competitiveness index, Gini coefficient, global poverty index, to fully analyse a country’s development of progress

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5
Q

IHDI

A

This is an adjustment of HDI which includes a fourth indicator of development: inequality. The Atkinson Index adjusts measures for education, health and income according to the level of inequality. It is broader than HDI but can still be criticised for not considering more measures and quality.

Created in 2010 to deal with the lack of information that the HDI provides on inequality

The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises

This means that the IHDI measures the level of human development when inequality is accounted for

The difference between the HDI & IHDI can be expressed as a percentage & represents the loss in potential human development due to inequality

It provides greater insight into the differences in human development that exist in a country as opposed to the average human development

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6
Q

Primary products

A

Products that dont undergo manufacturing processes, used/sold as found in nature
Agriculture, fish, commodities such as oil, coal

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7
Q

Primary product dependency

A

Price of primary products tend to fall over time, as incomes rise, demand for manufactured products rise
PPDs are income elastic, and with price volatility, income is not insured, meaning dependents cannot invest in capital goods
This means they cannot move towards manufacturing industry
Long term income doesnt rise, hindering economic growth

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8
Q

Savings gap

A

The Harrod-Domar model identified the following benefits of increased savings
Increased savings → increased investment → higher capital stock → higher economic growth → increased savings

Based on this, any intervention (foreign or governmental) to increase the capital stock in an economy will lead to growth

There are many criticisms of the model including

It does not account for many other factors such as labour productivity, corruption, technological innovation

It was created based on data from wealthier industrialising nations as opposed to very poor undeveloped countries

It focused only on physical investment & ignored other types such as investment in human capital (labour)

Developing countries- lower incomes= save less. Savings gap= difference between actual savings and the level of savings needed to achieve a higher growth rate.

Poor have a higher MPC income. Lack of funds for financial insertions to lend for business investment

Harrod-Domar model suggests savings provide funds which are borrowed for investment purposes and that growth rates depend on level of saving/ productivity of investment. Economic growth depends on amount of labour and capital and that developing countries have a vast labour supply, problems are caused by capital. To improve capital, investment is necessary, and investment requires savings.

EV:

Economic growth is not the same as economic development- difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt- investment could be wasted

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9
Q

Foreign currency gsp

A

Where a countrys foreign currency expenditure for imports or servicing debt exceed its foreign currency earnings from exports or FDI.
A high foreign currency gap (so low reserves of FC) can hinder economic growth as country is unable to import capital goods or raw materials to boost manufacturing and increase output

Value of current account deficit larger than value of capital inflows

a foreign currency gap refers to a situation where a country’s expenditures in foreign currency, such as payments for imports or servicing foreign debt, exceed its foreign currency earnings from exports or other sources, such as foreign investment or remittances.

Foreign currency gaps develop for a number of reasons

Oil importing countries have to pay more (reserves decrease) when world oil prices rise whereas oil exporting countries receive less (less flowing in) when world oil prices fall

Large international debt payments may require continual outflows of currency

Capital flight due to uncertainty or sanctions
This means that central banks are forced to use their reserves to buy vital imports

Developing a diversified, healthy export market prevents foreign currency gaps from developing

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10
Q

Capital flight

A

Large amount of financial assets leaving country due to events such as political or economic instability - causes investors to lose confidence
Econ development constrained as extra income that could be saved, and invested is lost.

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11
Q

Dependency ration and working age population

A

Number of dependents in population divided by number of working age people - larger working age pop. smaller dependency ratio
The larger the size of working age pop., the greater the productive capacity will be
The larger the size of non working age pop., the greater the burden on working population and state - as they have to support them with health, social care, education

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12
Q

Debt

A

Servicing a debt means paying the principal as well as the interest
High debt servicing hinders econ growth
High debt burden –> large amount of govt spending on servicing debt –> less funding for public goods, education –> infrastrcture, labour force weaker –> lower econ growth

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13
Q

Access to credit and banking

A

For firms, borrowing from banks is used to finance business operations and investments
For individuals, access to banks improves financial security and encourages saving, also being able to borrow to consume
Access to credit/banks limited in LEDCs, as:
* Lack of financial institutions limited or poor quality
* Low income population might not quality for credit, seen as risk and not creditworthy
* Low savings ratio

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14
Q

Infrastructure

A

Quality of infrastructure can determine efficiency and quantity firms produce at –> limits economic growth if infrastructure is of poor quality - common in LEDCs
Examples:
* Transport network - transporting goods/services will be inefficient; geographical immobility
* Power network - blackouts that can stop/delay production; people cannot access internet/technology
* Education - poor qualifications, low employability of population so poor quality of workforce - low productive capacity
* Healthcare - workers spend more time receiving treatment - less income, low productivity; longer wait times and poor treatment; less beds, doctors, equipment

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15
Q

Education and skills

A

Access to education is limited in LEDCs - quality of education is also low: large classes, teacher shortages/underqualified, poor teaching materials
Less years spent in education
Quality of workforce is low
Productivity is limited
Econ growth is hindered - labourforce is not productive enough, leading to less output and so lower income, and low investments

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16
Q

Absence of property rights

A

Individuals and entrepreneurs cannot use their land or property as collateral for loans - so lack funds to finance investment and expansion - lower efficiency and output - limits profit, and entrepreneurship - innovation and competition is constrained

17
Q

Political factors - corruption

A

Corruption - abuse of entrusted power for personal gain
If corruption is high in a country, then officials are likely to pursue their own interests rather than meeting needs of the public
Leads to poor quality and delays in projects such as infrastructure - Romania A3 motorway is still not completed after a decade, due to high corruption in country
Results in poor economic development
But countries like China have experiences huge development even with high levels of corruption

18
Q

Political instability

A

Can lead to fall in FDI, with political unrest causing uncertainty in an economy, harming long term prospects of development
Can also cause people to migrate to other countries deemed safer, can especially hinder econ growth if people leaving country are highly skilled

19
Q

How does primary product dependency influence growth and development

A

PP,S,F,C,B,D, NORMAL

Primary products include agriculture, mining etc. A large amount of most developing country’s economic activity is based on a primary product.

Natural disasters can wipe out production of the primary product and so means that farmers are left with no income. They are often non-renewable

Low-income elasticity of demand. The prebisch singer hypothesis suggests the L/R price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their TOT. However, in recent years, there has been a rise in the prices of some key commodities , such as food and a fall in prices of some manufactured goods due to the expansion to places like china. PREBISHC SINGER HYPOTHESIS FULL- China will also face declining terms of trade. The prebishc singer hypothesis states primary products price will fall in comparison to manufactured goods due to them having more low income elasticity of demand. This is due to the fact when incomes rise we are more likely to buy manufactured gods compared to primary products and this decling terms of trade means people in chile will be able to import comparitively less than what they could before meaning sol of matieral goods decreases. However, this problem may be insignificant for chile compared to other countries as extract say they have strengths in tourism and these goods re elastic income elasticities of demand therefore the terms of trade declining may not worsen as much as anticipated,

Resource curse Prebisch singer hypothesis- constraint on growth. Worsens TOT

Dutch disease- country becomes significant commodity producer in S/R causing an increase in demand for the currency – pushes its value up increases export prices= reduction in comp of economy= fall in output.

1960’s Netherlands exporting lots of gas, manufacturing products- less price competitive

In 2022 copper exports from Zambia accounted for 70% of their total exports & primary products in excess of 90%. They are suffering from over-specialisation

Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less than proportional increase in demand

This means that there is limited scope to continue increasing demand

Primary products have very little added value
Exporting manufactured products raises the added value, incomes & profits

20
Q

How does volatility of commodity prices influence growth and development

A

Due to the inelastic nature of both the demand & supply of commodities, small changes in demand or supply can lead to large changes in price

In 2020, 25% of Bolivia’s GDP was generated by exports. Commodities accounted for 60% of its exports

When commodity prices rise, GDP rises - & vice versa

A more diversified range of exports prevents this