Chapter 5 - Economic development

Question 1

What is economic development?

Answer 1

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

Question 2

What are two measures of living standards?

Answer 2

Real GDP per head and the human development index.

Question 3

What is real GDP per capita?

Answer 3

Real GDP is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation
Real GDP per capita = rGDP / the population
It shows the mean wealth of each citizen in a country. This makes it easier to compare standards of living between countries.

Question 4

What are the disadvantages of rGDP per capita?

Answer 4

It is a single indicator so provides very limited information
It is an average so there may be significant poverty in many parts of a country that has a high rGDP/capita

Question 5

What is the human development index (HDI)?

Answer 5

It is a combination of three factors: health, education and income. Health, as measured by the life expectancy at birth, Education, as measured by a combination of the mean years of schooling that 25 year olds have received, together with the expected years of schooling for a pre-school child and Income, as measured by the real GDP.

Question 6

What is the weighting of the human development index?

Answer 6

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

Question 7

What are some advantages of the human development index?

Answer 7

It is a composite indicator and includes several important indicators of living standards.
It includes rGDP/capita which is an average - so the HDI still does not take into account inequality in the distribution of income.
It does not measure environmental damage or resource depletion.
It does not take into account cultural differences or measure qualitative factors such as happiness or equal rights.

Question 8

What are the ten reasons for differences in living standards and income distribution?

Answer 8

Economic system, the government, corruption, tax system, productivity levels, size of the population, education levels, inflation, regional differences and personal freedoms.

Question 9

How does different governments cause differences in living standards the income distribution within and between countries?

Answer 9

The Government: the values of a government influence their economic agenda, tax system and government spending. Governments are more easily held accountable by the citizens in countries with a low level of corruption

Question 10

How does different economic systems cause differences in living standards the income distribution within and between countries?

Answer 10

Economic system: a mixed economy provides the highest quality of living standards. There is much debate on how much government planning there should be. However, countries in Scandinavia with a more mixed economic system score very highly on HDI and living standards. With completely free markets (unchecked capitalism), wealth inequalities increase exponentially. With planned economies, shortages abound

Question 10

How does different productivity levels cause differences in living standards the income distribution within and between countries?

Answer 10

Productivity levels: differences in skills result in difference in productivity and higher levels of productivity are rewarded with higher wages, which leads to a better standard of living

Question 11

How does different tax systems cause differences in living standards the income distribution within and between countries?

Answer 11

Tax system: most countries have a progressive tax system for corporate and personal income tax. However, there can be many indirect taxes which completely change the quality of life for the poorest households

Question 11

How does corruption cause differences in living standards the income distribution within and between countries?

Answer 11

Corruption: significantly undermines quality of life and the standards of living

Question 12

How does different population sizes cause differences in living standards the income distribution within and between countries?

Answer 12

Size of the population: more densely populated countries or cities face more challenges. A larger population can mean higher tax revenues but at the same time, government expenditure on services is spread across more people often resulting in less government spending/capita

Question 13

How does different education levels cause differences in living standards the income distribution within and between countries?

Answer 13

Education levels: These directly influence productivity and wages

Question 13

How does regional differences cause differences in living standards the income distribution within and between countries?

Answer 13

Regional differences: Many countries have historically poor areas, as well as wealthier ones. Poverty in certain regions can be much higher

Question 14

How does inflation cause differences in living standards the income distribution within and between countries?

Answer 14

Inflation: Tends to impact poorer households more as any increase in general price levels represents a larger absolute value of their wages when compared to wealthier households

Question 15

How does different personal freedoms cause differences in living standards the income distribution within and between countries?

Answer 15

Personal freedoms: religious, economic, personal, political and civil freedoms improve the quality of life within a nation

Question 16

What is poverty?

Answer 16

Poverty is a situation where a person lacks the financial resources to sustain a basic standard of living.

Question 17

what is absolute poverty?

Answer 17

Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence.

Question 18

What is relative poverty?

Answer 18

Relative poverty is a situation where household income is a certain percentage less than the median household income in the economy. Relative poverty is the main form of poverty that occurs in developed countries.

Question 19

What are some causes of poverty?

Answer 19

Low wages, education and healthcare, low productivity and population

Question 20

How do low wages cause poverty?

Answer 20

Low wages represent the intersection of economic growth and human development and are the major cause of poverty. Low wages are usually the result of unemployment, informal employment, a lack of skills, or a primary sector based economy.

Question 21

How does education and healthcare cause poverty?

Answer 21

Education and healthcare cost money and with lower wage levels these are not accessible, resulting in poor human capital. People find it harder to stay well or to recover from illness resulting in lower productivity and shorter life expectancy.

Question 22

How does low productivity cause poverty?

Answer 22

Low productivity results in low wages and the cycle continues.

Question 23

How does populations cause poverty?

Answer 23

Populations with a large number of dependents (old people and children) for each working household tend to experience higher levels of poverty.

Question 24

What are some policies that alleviate poverty and redistribute income?

Answer 24

Promoting economic growth, improving education, more generous state benefits, progressive taxation and establishment or increasing the national minimum wage.

Question 25

What is promoting economic growth and how does it alleviate poverty and redistribute income?

Answer 25

Explanation: Removing protectionism or engaging in expansionary demand and supply-side policies will promote growth Data shows that economic growth has a very positive impact on economic development In most cases growth precedes development Often in less developed countries, economic growth is linked to one industry and generates many negative externalities of production possibly resulting in decreased living standards Impact on poverty cycle: Higher growth → higher wages → better education/healthcare → better human capital → better productivity → higher income

Question 26

What is improving education and how does it alleviate poverty and redistribute income?

Answer 26

Explanation: Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards) Impact on poverty cycle: Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

Question 26

What is more generous state benefits and how does it alleviate poverty and redistribute income?

Answer 26

Explanation: State benefits are usually given to the poorest and most vulnerable people in society State benefits include unemployment and disability payments, pension payments, heating discounts, public transport subsidies etc. Impact on poverty cycle: More benefits → higher wages → better education/healthcare → better human capital → better productivity → higher wages

Question 27

What is progressive taxation and how does it alleviate poverty and redistribute income?

Answer 27

Explanation: A progressive tax system redistributes from those with higher income to those with lower income and reduces income inequality Redistribution often starts with the provision of free education and healthcare Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes Impact on poverty cycle: Higher redistribution → better education/healthcare → better human capital → better productivity → higher income

Question 28

What is establishment/increase of national minimum wage and how does it alleviate poverty and redistribute income?

Answer 28

Explanation: Minimum wages are set above the free market rate Firms are not allowed to pay anyone less than the legal rate Impact on poverty cycle: Higher wages → better education/healthcare → better human capital → better productivity → higher wages

Question 29

What is population?

Answer 29

Population refers to all of the inhabitants of a particular country

Question 30

What is population growth?

Answer 30

The population growth rate is the size of the change in the population of a country, expressed as a percentage.

Question 31

What five factors affect population growth?

Answer 31

Birth rate, death rate, net migration (immigration and emigration)

Question 32

How does birth rate and death rate affect population growth?

Answer 32

A higher birth rate and lower death rate would both increase the population

Question 33

How does net migration affect population growth?

Answer 33

More immigration than emigration would increase the growth rate

Question 34

How does population growth change across different countries?

Answer 34

Population growth rates are currently highest in less economically developed countries such as Niger, Mali and Zambia Population growth rates are lowest in more economically developed countries In some MEDCs such as Italy and Japan, the population is decreasing as the number of deaths is higher than the number of births

Question 35

What is natural change?

Answer 35

Natural change in population is calculated by deducting the death rate from the birth rate.

Question 36

What factors cause a decrease in the death rate?

Answer 36

The agricultural revolution led to higher yields and healthier, more varied diets Improvements to medicine and medical care Improvements to technology and transport, leading to a wealthier population which increases life expectancy Improved housing and sanitation

Question 37

What factors cause a high birth rate in LEDCs?

Answer 37

Lack of access to family planning and contraception An increase in women surviving childbirth Families continuing to have large numbers of children to look after their parents in old age and to help support the family Culture of having larger families which takes many years to change Religious reasons

Question 38

What factors cause the birth rate to fall in MEDCs?

Answer 38

Increased access to family planning and contraception Changing social norms which include starting families later, having fewer children, or remaining single Increased costs of child rearing and university education

Question 39

What is overpopulation and what are the consequences of overpopulation?

Answer 39

Overpopulation occurs when there are more people in a country/region than can be supported by its resources and technology and leads to higher levels of pollution, higher crime rates, higher unemployment or underemployment, higher levels of food and water shortages and higher pressure on services such as hospitals and schools

Question 40

What is underpopulation and what are the consequences of underpopulation?

Answer 40

Underpopulation occurs when there are more resources available than the population can use effectively and may lead to fewer people paying tax which can lead to higher taxes, underused resources, which can lead to wastage, a shortage of workers, lower levels of exports and production which affects the wealth of an area and fewer customers for goods and services

Question 41

What is optimum population?

Answer 41

Optimum population occurs when there is a balance between the number of people and the resources/technology available. The optimum population results in the highest standard of living. There are not so many people or so few resources that the standard of living falls. There are enough people to develop the resources of the country.

Question 42

What is population structure?

Answer 42

The characteristics of a population (the distribution of age, sex, ethnicity, religion etc), is known as the population structure. The population structure is the result of changes in the birth rate, the death rate and net migration.

Question 43

What are population pyramids?

Answer 43

Population pyramids are used to display the gender and age structure of a given population. They illustrate the distribution of population across age groups and between male/female. Population pyramids can be used to identify the following groups: Young dependents Old dependents e.g number of retired people Economically active (working population or labour force) Dependency ratio

Question 44

What are some effects of population changes?

Answer 44

Population changes can have major impacts within the economy resulting in changes to consumption, production, lifestyle, standards of living and government policies (fiscal, monetary and supply-side). Typical changes that occur are progressively ageing populations as economies develop, falling birth rates as economies develop and swings in net migration as influenced by war, famine, natural disasters and government policy

Question 45

What are ageing populations?

Answer 45

Many developed economies are experiencing ageing populations and an increase in the older dependent population. The implications of this include, increased pension payments by governments, increased need for care homes (public and private), increased pressure on the healthcare service and social care results in higher government spending, it also results in a smaller labour force and often Governments collect less tax, firms suffer worker shortages and labour shortages result in increased wage costs for firms

Question 46

What effects do falling birth rates have on an economy?

Answer 46

Falling birth rates have the following impact on an economy: School closures due to fewer children Future labour shortages Governments typically put in place incentives that encourage families to have more children Governments may change the migration laws to encourage immigration so that labour shortages are prevented Excessive immigration can change the nature and culture of different regions within a country

Question 47

What are some impacts of migration?

Answer 47

In some countries migration can lead to an imbalance in the population structure e.g. the UAE has significantly more males than females. Rapid population growth caused by migration can lead to: Increased pressure on services such as healthcare and schools resulting in increased costs for government A shortage of housing which generates social issues in society Increased traffic congestion which is a negative externality Increased water and air pollution which are negative externalities Food shortages

Question 48

What are seven causes of differences in development?

Answer 48

Differences in income, differences in productivity, differences in population growth, differences in economic sector sizes, differences in savings and investment, differences in education and differences in healthcare

Question 49

How does differences in income cause differences in development?

Answer 49

Countries with a higher GDP/capita tend to be more developed Even with high GDP/capita, there may be significant inequality in the distribution of income resulting in poor living standards for many

Question 50

How does differences in productivity cause differences in development?

Answer 50

Differences in skills result in difference in productivity Higher levels of productivity are rewarded with higher wages, which leads to a better standard of living

Question 50

How does differences in economic sector sizes cause differences in development?

Answer 50

conomies with a larger proportion of secondary and tertiary activity tend to be more developed due to the wages associated with each sector Primary sector workers are usually paid low wages due to the unskilled nature of the job and the fact that raw materials often generate the lowest profits in the production chain Secondary sector workers add value to the raw materials and these products sell for higher profits. Therefore wages tend to be higher than primary sector wages Tertiary sector workers are paid the highest. Their jobs often require highly valued skills that take years to acquire and the products they sell or services they provide can be complex and expensive e.g. artificial intelligence coders

Question 50

How does differences in population growth cause differences in development?

Answer 50

More densely populated countries or cities face more challenges A larger population can mean higher tax revenues for the government but at the same time, government expenditure on services is spread across more people Poorer economies are characterised by less government spending/capita

Question 51

How does differences in saving and investment cause differences in development?

Answer 51

Higher savings result in higher investment and economic growth. It is believed that as economies develop, savings increase Increased savings → increased investment → higher capital stock → higher economic growth → increased savings If the dependency ratio is high it means there is less money available for savings and investment

Question 52

How does differences in education cause differences in development?

Answer 52

These directly influence the level of skill in an economy Improved skills results in higher productivity and wages

Question 53

How does differences in healthcare cause differences in development?

Answer 53

The level of health directly impacts productivity of labour Productivity influences output and income Developed economies tend to have healthy workforces The less developed the economy, the more sickness and disease there is