Economic development

• Economic development


  Sustained economic growth as an important macroeconomic objective because it is the most practical measure of the standard of living in a country
• Living standards


  The social and economic wellbeing of individuals in a country at a particular point in time
• Indicators of living standards

  • GDP per capita
  • Human Development Index (HDI)
• Real GDP per capita


  A better indicator of living standards than GDP per capita as it adjusts for inflation

  
• Human Development Index (HDI)


  • Composite indicator of living standards combining healthcare, education, and income levels
  • Can take a value from zero to one, one being the highest possible value indicating the highest level of human development
• Components of HDI


  • Healthcare (life expectancy at birth)
  • Education (mean years of schooling and expected years of schooling)
  • Income levels (national income or GDP)
• The HDI is a more comprehensive measure of living standards than real GDP per capita as it considers several key indicators rather than a single one
• Limitations of HDI


  • Ignores qualitative factors affecting living standards, such as gender inequalities and human rights
  • Does not take account of the inequitable distribution of income
  • Ignores environmental and resource depletion
  • Ignores cultural variations and different interpretations of the meaning of standards of living
• Factors causing differences in living standards and income distribution

  • Productivity levels
  • Role of governments
  • Size of population
  • Distribution of national income
  • Regional differences
  • General price level
  • Level of education
  • Level of freedom
• Poverty is a condition that exists when people lack adequate income and wealth to sustain a basic standard of living
• Absolute poverty


  Extreme outright poverty where income, if any, is entirely spent on minimal amounts of food, clothing and shelter
• Relative poverty


  A comparative measure of poverty where people have a lower standard of living in comparison to the average member of society
• Causes of poverty


  • Unemployment
  • Low wages
  • Illness
  • Age
  • Poor healthcare
  • Low literacy rates
  • High population growth
  • Poor infrastructure
  • Low foreign direct investment
  • High public debt
  • Reliance on primary sector output
  • Corruption and instability
• chart of government debts, partly because of the devastating earthquake and tsunami of March 2011, the worst natural disaster in the country's history. However, it is common for LEDCs to pay more for financing their public debts, partly due to the high interest rates imposed and partly due to a fall in the value of their currency. This makes repayment of public debt increasingly unsustainable for LEDCs, leading to further borrowing, ever-increasing debts and widespread poverty.
• Reliance on primary sector output

  • Low-income countries tend to over-rely on the production and export of primary sector output, such as agricultural products
  • These tend to have low prices and profit margins in comparison to manufactured products and tertiary sector services
  • Output is influenced by factors beyond human control, for example, drought may result in poor harvest and eventually lead to famine
• Corruption and instability


  • There are huge opportunity costs of civil war, dishonest government officials, fraudulent behaviour and the purchase of arms and weapons
  • Corruption and instability therefore hinder economic development, result in greater inequalities in income distribution, and create poverty
• Policies to alleviate poverty and redistribute income


  1. Promoting economic growth

  2. Improving education

  3. Providing more generous state benefits

  4. Using progressive taxation

  5. Introducing (or increasing) a national minimum wage
• Promoting economic growth


  • Any expansionary policy, such as lower taxes or lower interest rate, can encourage consumer spending and investment expenditure in the economy
  • Lower exchange rate can encourage export sales as the price for foreign buyers is lower
  • Sustained economic growth helps to create more income and wealth for the country, which can then be redistributed to the deprived and underprivileged members of society

  
• Improving education


  • Government provision of education can help to alleviate poverty by improving access to education for everyone, which narrows the gap between the rich and the poor
  • Policies to increase the quantity and quality of education in the economy will help to improve the human capital and productive capacity of the country, thereby creating economic growth and lowering poverty
  • Provision of and increased access to other essential services, such as healthcare and housing, will also help
• Providing more generous state benefits

  • Government provision of welfare benefits gives financial assistance to enable the unemployed and disadvantaged to meet their basic needs
  • Examples include unemployment benefit, state pension funds for the elderly, and child benefit (to reduce child poverty)
  • State benefits help to redistribute income and alleviate poverty by ensuring every citizen has access to basic necessities
  • Macroeconomic policies aimed at reducing unemployment also help, because unemployment is a major cause of poverty and inequality
• Using progressive taxation


  • Progressive tax systems reduce the gap between the rich and poor members of a country
  • Higher-income groups pay a higher percentage of their incomes in tax, with the tax proceeds being used by the government to support lower-income groups or those without any income
• Introducing (or increasing) a national minimum wage

  The introduction of a national minimum wage, or imposing a higher minimum wage rate, can improve the standard of living for low-income households
• Population refers to the total number of inhabitants of a particular country
• Birth rate


  Measures the number of live births per thousand of the population in a year
• Fertility rate


  Measures the average number of children born per woman, indicating the potential for population change in a country
• Death rate


  Measures the number of deaths per thousand of the population in a year
• The natural change in population is the difference between the birth rate and the death rate. If birth rate exceeds death rate, there is a natural increase in population.
• Net migration rate


  Measures the difference between the number of people entering and leaving a country per thousand of the population in a year
• Reasons for different rates of population growth in different countries


  • Birth rate
  • Death rate
  • Net migration rate
• Birth rate


  More economically developed countries (MEDCs) tend to have lower birth rates than less economically developed countries (LEDCs)
• Death rate


  Due to better-quality education, healthcare, nutrition and sanitation, people in MEDCs tend to live longer
• Net migration rate


  People migrate for different reasons, such as in search of better job opportunities, to take advantage of lower taxes, or to avoid civil unrest in the home country
• Optimum population


  The output of goods and services per capita (as measured by GDP per head) of the population is maximised
• Under-populated


  A country does not have sufficient labour to make the best use of its resources, so GDP per head of the population could be increased if there were more human resources
• Over-populated


  A country is too large, given the available resources, leading to negative economic consequences such as famine, housing shortages, energy shortages and diseases
• Population distribution


  Refers to the composition and structure of a country's population, including differences in the gender and age distribution
• Gender distribution


  Refers to the number of males compared to the number of females in the population
• Age distribution


  Refers to the number of people in different age groups in the population
• Dependency ratio


  Measures the dependent population (those aged 0-14 and 65+) as a proportion of the total active labour force (those aged 15-64)
• Benefits of a growing population

  • If the population is below the optimum size, the country will be able to make better use of its resources
  • Increase in size of markets, enabling firms to take greater advantage of economies of scale
  • Increased factor mobility if the rise has resulted from an increase in the birth rate or immigration
  • Increase in demand, likely to stimulate investment and lead to the introduction of new technology
  • Rise in the labour force now due to net immigration and in the future, caused by a rise in the birth rate