4.3 Flashcards
(25 cards)
Economic development definition
A sustainable increase in living standards for a country
What are the three factors of HDI (Human Development Index) and how are they measured?
- Health; measured by life expectancy at birth
- Education; measured by a combination of the mean years of schooling received by adults aged 25 and over + the expected years of schooling for a pre-school child
- Income; Measured by real GNI per capita at purchasing power parity
What are the limitations of the HDI?
- Quantity over quality: health measure does not account for quality of life, education measure doesn’t account for quality and success of education, income doesn’t account for the range of inequality
What are the advantages of HDI?
- Covers the three key factors
- Widely used around the world so is useful for comparison of living standards
What is the IHDI?
- The inequality adjusted HDI
- The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises
What is the MPI?
A poverty measure that reflects the deprivations that poor people face in education, health & living standards
What are the negative influences on primary product dependency on economic development?
- Dutch disease
- Prebisch singer hypothesis
- External shocks; natural disasters
- Low YED; as income rises, demand does not
- Volatile prices; inelastic supply and inelastic demand; supply = time lags, demand = necessities; rationing function
What is Dutch disease?
A rapid rise in demand for a countries commodity goods will lead to a spike in their currency value as there is more demand for exchanging to their currency to purchase the good which, in turn, results in a reduction in exports
What is the prebisch singer hypothesis and why does it come about?
- Long run price level of commodity goods decline in proportion to manufactured goods, which means those countries dependent on commodity goods will see a fall in their terms of trade
- This is because primary products have low income elasticity of demand so as income rises, the demand for commodities do not rise in a proportionate amount
Why do commodities have volatile prices?
- Many commodities cannot be quickly adjusted to a change in demand; this means that when demand increase, supply cannot adjust quick enough resulting in higher prices
- Many commodities are necessities or often required for the production of other goods; this means that small decrease in supply lead to big increases in price levels as consumers are less likely to change spending habits to small changes
How does the savings gap impact economic development?
Developing countries have lower incomes which means they have less to save consequently, banks can lend less which reduces borrowing for investment. Therefore, their AD does not increase proportionately with other countries meaning their economic growth is slower/ more stagnant
What is capital flight and how does it affect economic development?
- Capital flight is when money or assets rapidly leave a country
- This may happen due to speculation
- It reduces the money available for investment which consequently results in a decrease in economic growth
How does education skill level influence economic development and what is used to target this?
Supply-side policies aimed at education increase the potential output of the economy as it results in higher human capital; this has the potential to increase output (PPF shifts outwards)
What are the key factors influencing economic development?
- Primary product dependency
- Capital flight
- Saving gap
- Education levels
What are market orientated strategies?
Strategies that create the conditions for private individuals and firms to pursue economic activity with the aim of maximising profit
What are the key market orientated strategies?
- Trade liberalisation; increases international trade
- Subsidy removal; increases competition
- Privatisation; increases competition
- Micro-finance; helps to break the poverty cycle
What is micro-finance and what is the poverty cycle in relation?
- Micro finance are small loans made available to unemployed or low income households who otherwise would not have had access to credit
- It helps to break the poverty cycle, this is where low income leads to low education which in turn leads to low income
What are interventionist strategies?
Strategies put in place by governments to correct the failings of the free market and promote the welfare/development of its citizens
What are the key interventionist strategies?
- Protectionism; prevents lower wage rates
- Buffer stocks; price stability, income stability and increases levels of employment
- Joint ventures; increase trade and output
- Managed exchange rate; prevents Dutch disease
What is a buffer stock scheme?
- Where a government buys up supplies of agricultural products when harvests are full and there is excess supply, stores them - and then sells them when supplies are low and there is excess demand
- They implement a maximum price and minimum price of permitted price fluctuation before they intervene
- This allows for income stability and price stability
Limitations of buffer stock schemes
- Imperfect knowledge, producers must partake honestly which may not always be the case
- Producers in Vietnam have been caught importing cheap rice from Thailand and then selling it to the government at a profit in the buffer stock scheme
What are the key ‘other’ interventions for economic development?
- Debt relief; opportunity costs (-ve: not reputable for loans)
- Industrialisation
- Aid; (-ve: may breed dependency)
- Tourism
What does the IMF (International Monetary Fund) do?
- Aim to ensure that exchange rate systems work well
- They provide member countries with currency to help deal with balance of payment problems
What does the world bank do?
- It aims to bring about long-term development and a reduction in poverty
- Right now it’s focused on providing loans for projects that are designed to encourage economic development
