Macro 19 - Development Issues

Question 1

Define the term economic growth

Answer 1

Economic growth is defined as the rate of change of real GDP

Question 2

What is economic development?

Answer 2

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

Question 3

What are the key elements of economic development?

Answer 3

• To increase the availability and widen the distribution of basic life sustaining goods for all in the population
• To raise the standards of living
• Expand the range of economic and social choices

Question 4

What are the three different measurements of development?

Answer 4

• Human development index (HDI)
• The Inequality-adjusted HDI
• The Multi-Dimensional poverty index

Question 5

What is the Human development index (HDI)?

Answer 5

The HDI is a composite index of development and includes three elements. Each element has an identical weighting

Question 6

What are the three elements of the HDI?

Answer 6

• Education (as measured by average and expected years in school)
• Health (as measured by life expectancy)
• Income (as measured by real GNI per capita, using the principle of purchasing power parity, PPP)

Question 7

The higher the HDI value …

Answer 7

the higher the level of development

Question 8

What are the advantages of the HDI?

Answer 8

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

Question 9

What are the disadvantages of the HDI?

Answer 9

• The HDI does not take account of inequality. Figures used are mean averages. If income is unevenly distributed, then GNI per capita will be an inaccurate measure of the monetary well - being of people
• The HDI only takes account of the number of years in education on average. There is no account of the quality of education children receive or the inequality in education provision
• The HDI also does not take into account other qualitative factors such as political freedom, gender opportunities and the hidden economy in developing countries

Question 10

What is the Inequality adjusted HDI (IHDI)?

Answer 10

The IHDI is the HDI adjusted for inequalities in the distribution of achievements in each of the three elements of the HDI (health, education and income)

Question 11

What is the relationship between the IHDI and the HDI value when there is no inequality?

Answer 11

When there is no inequality the IHDI will be equal to the HDI, but the IHDI will fall below the HDI value as inequality rises

Question 12

What does the difference between the IHDI and HDI value represent?

Answer 12

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

Question 13

What is the Multi-dimensional Poverty index (MPI)?

Answer 13

The global MPI is an internationally comparable measure of acute poverty for over 100 developing countries including a range of components

Question 14

What is meant when a person is declared multi-dimensionally poor?

Answer 14

A person is multi-dimensionally poor if the weighted indicators in which they are deprived add up to at least 33%

Question 15

What are some of the components of the MPI?

Answer 15

Nutrition, child mortality, access to drinking water and a toilet, access to electricity, years of schooling and children enrolled in school

Question 16

Define the term headcount ratio

Answer 16

The headcount ratio is the proportion of population who are multidimensionally poor

Question 17

Define the term intensity of poverty

Answer 17

Intensity of poverty is the average percentage of deprivations each poor person experiences at the same time

Question 18

What is the MPI value?

Answer 18

The MPI value ranges from 0 to 1 and is calculated by multiplying the incidence of poverty by the average intensity of poverty

Question 19

What are some other indicators of development apart from the main 3?

Answer 19

• The proportion of the male population engaged in agriculture
• Energy consumption per person
• The proportion of the population with access to clean water
• The proportion of the population with internet access
• Mobile phones per thousand of population

Question 20

What are the 10 factors influencing growth and development?

Answer 20

• Primary product dependency
• Price volatility in commodity markets
• Levels of saving and investment
• Access to credit and banking
• Foreign currency gap
• Capital flight
• Demographic factors
• Infrastructure
• Education and skills
• Absence of property rights

Question 21

What is primary product dependency?

Answer 21

Primary product dependency occurs when a primary commodity accounts for a high percentage of a country’s export revenue, GDP or employment

Question 22

What are some of the reasons why primary product dependency is considered to be a constraint on growth and development?

Answer 22

• Price fluctuations
• Low value added
• Protectionism
• Low income elasticity of demand

Question 23

What are the effects of price volatility on growth and development?

Answer 23

• Price volatility influences the terms of trade and could lead to a sudden fall meaning that significantly more units of exports need to be sold to buy units of imports
• It creates fluctuations in incomes affecting living standards
• It creates fluctuations in foreign exchange earnings making investment decisions more difficult and uncertain
• Taxation revenue for the government will fluctuate affecting potential development spending

Question 24

What does the Harrod-Domar model state?

Answer 24

The Harrod-Domar economic growth model stresses the importance of savings and investment as key determinants of economic growth

Question 25

What is the relationship between primary products and YED?

Answer 25

Primary products tend to have a low YED

Question 26

What is the savings gap?

Answer 26

The savings gap is the idea that in low income countries, high levels of extreme poverty make it difficult to generate sufficient savings to provide the funds needed to fund investment projects leading to more dependence on aid or borrowing

Question 27

What are the chain of analysis described by the Harrod-Domar model?

Answer 27

Increased savings → increased investment → higher capital stock → higher economic growth

Question 28

What are the limitations of the Harrod-Domar model?

Answer 28

- Efficiency gains are difficult to achieve in developing countries often due to a poorly educated work force - The model ignores important factors such as labour productivity, corruption and technological innovation - Many developing countries lack a sound financial system. Increased saving by households does not necessarily mean there will be greater funds available for firms to borrow to invest - There are examples of countries who have experienced rapid growth rates despite a lack of savings such as Thailand

Question 29

What is meant by capital flight?

Answer 29

Capital flight is when investors lose confidence and withdraw their money from a country

Question 30

What are the effects of capital flight on development?

Answer 30

- It contributes to the saving and foreign exchange gap restricting investment and economic growth - It reduces the tax revenue for the country as people previously paid tax on returns on assets - It can lead to a sharp fall in the exchange rate as the supply of the currency increases making imports more expensive

Question 31

What is meant by infrastructure given some examples?

Answer 31

Infrastructure covers the whole range of structures that are essential for an economy to operate smoothly. It includes transport, telecommunications, energy supply, water supply, waste disposal

Question 32

What are some problems of having poor infrastrucure?

Answer 32

- Difficulty selling finished goods and accessing raw materials - Higher transport costs reducing international competitiveness - Difficulty to produce products - Less attractive to foreign investors - Fewer customers to choose from

Question 33

How does the absence of property rights affect development and growth?

Answer 33

- Property rights give legal ownership and protection to assets and land - Owning property gives incentives to improve an asset and protect it. If an asset is unowned and has the properties of a public good it may be exploited known as the tragedy of the commons - Owning a property allows people to borrow money perhaps for investment as they are able to use the asset as collateral

Question 34

What are the 5 Non-economic factors that affect growth and development?

Answer 34

- Corruption - Poor governance (Inefficient use of resources and decision making) - Wars - Political instability - Geography

Question 35

How does Geography affect economic growth and development?

Answer 35

- Climate: Suitability of the climate for growing crops etc... - Neighbours: Are the neighbours peaceful? - Trade: If a country is landlocked this poses difficulties for trade - Natural resources

Question 36

State the Prebisch-Singer Hypothesis

Answer 36

The Prebisch-Singer hypothesis suggests that over the long run real prices of primary commodities such as coffee and cocoa decline relative to prices of manufactured goods such as cars and washing machines