Development Flashcards
Economic Growth
Increase in the size of a nation’s GDP
Economic Development
Measures the change in living standards over a period of time
Using normative, value-based judgements.
Why is using GDP alone a bad indicator of development ?
Usually nations with a higher GDP do have a higher living standard, however fails to measure overall quality of life;
Income inequality
Leisure
Health
Education
Hidden Economy ?
Political Freedom
Conlfict
Safety
Human Development Index (HDI)
United Nations (UN)
Includes -
- Health = Life Expectancy
- Education = Years in schooling
- Standard of Living = GNI per Capita
Purchasing Power Parity (PPP)
The measurement of prices in different countries, using the prices of specific goods to compare the absolute purchasing power of the countries’ currencies, and, to some extent, their people’s living standards.
Key causes of Inequality
Wage and tax levels
Unemployment levels
Education
Property Ownership
Govt. welfare system
Key Barriers to development
Poor Infrastructure
International Competitiveness
Missing Markets
Corruption / Political Instability
Savings Gap
Primary Dependency
Poor Human Capital
Lack of Property Rights
How does Poor Infrastructure prevent development ?
Poor Infrastructure
High transport costs
Weak communication
Expensive Supply Chains
Geographical / Factor Immobilty
High Geographical Unemployment
How does international competition affect development ?
High foreign competition
Failing infant industries
Relative cost disadvantages
Unable to use EoS
- Leading to a lack of diversification and potential primary dependency
How do missing markets prevent development ?
Education / Healthcare
Weak human capital (low HCI)
Inefficiency workforce - low productivity
Unattractive to foreign investment
How does corruption / instability prevent development ?
Volatile Markets
Low Confidence - consumer / investor
Deter FDI
Ineffective use of tax revenue
Regulatory Capture
Poor use of foreign aid
Inadequate provision of policing - high crime rates
What is a Savings Gap ?
The gap between levels of savings in an economy and the level of investment needed to facilitate economic growth in the economy.
The lack of capital investment means that incomes will remain low and savings gap will persist.
Capital Flight
People choose to save their incomes abroad, due to instabilty / low interest rates.
Causing a Savings Gap
Lost Tax Revenue
Foreign Exchange Gap
When capital outflows exceed capital inflows, often caused by primary dependency / debt servicing
Harrod-Domar Model
Rate of Growth (GDP) = Savings Ratio / Capital Output Ratio
Savings Ratio - This is the % of GDP that is saved in an economy, the same as the average propensity to save
Capital Output Ratio - The quantity of capital required to produce one unit of output.
Key Principles of Primary Dependency
Global Price Fluctuations
Prebisch-Singer Hypothesis
Dutch Disease
How do global price fluctuations affect development ?
Economic stability is crucial to sustainable growth as stability promotes FDI and maintains investor confidence.
An economy that lacks diversity becomes very susceptible to supply/demand side shocks.
For example, if a global recession occurs and demand for exports majorly falls (demand-side shock like covid), then the economy will receive very little income into the circular flow.
Prebisch - Singer Hypothesis
The price of primary commodities declines relative to the price of manufactured goods long-term.
This can lead to a deterioration of the terms of trade.
This hypothesis is supported by the concept of YED, where a rise in global incomes, the demand for commodities remains constant, whereas the demand for manufactured goods increases - leading to greater profits from manufactured goods.
Dutch Disease
The phenomenon whereby the growth of an export industry strangles out all other industries.
As demand for primary commodities increases, the demand for the currency increases, leading to increasing price levels.
Consequently, appreciation of the exchange rate will make other industries less internationally competitive.
Human Capital Index (HCI)
Measures the health, knowledge and standard of living of an economies workforce.
How does a low HCI affect development ?
With a low HCI, workforces possess less skills and consequently are less productive which can prevent development.
Key principles of a lack of property rights
Tragedy of the Commons
Issue of Ownership
Tragedy of the Commons
When property rights are absent, resources can be exploited, due to no incentive to preserve for future stock. This is an example of a market failure, in which quality of life can decrease over time.
Lack of Property Rights - Collateral / Ownership
Less developed countries often have inadequate financial and legal institutions, therefore the ability to prove legal ownership of a house etc. as collateral becomes harder. Consequently, loans are not issued, preventing people from buying basic capital to establish a firm. Therefore, Ill-defined property rights can inhibit long-run growth and development.
