Economic growth and development

• Economic development


  The sustainable increase in living standards for a country, typically characterised by increases in life span, education levels, and income
• Economic growth


  An increase in output and does not involve a change in structure in society. Measured using GDP, GNP, etc.
• characteristics of LESS developed economies

  • high rates of population growth
  • high foreign debts
  • uneven distribution of wealth
  • over dependence on one product
  • poor infrastructure
  • poor healthcare
  • poor levels education
  • poor living conditions
  • large primary sector
• HDI (human development index)

  • a composite indicator

  included the following three aspects

  • life expectancy
  • mean years of schooling
  • income - GNI per capita at PPP (purchasing power parity)

  • GNI means gross national income

  • index score between 0 and 1

  • the closer to 1, the higher the level of economic development and the better the standard of living

  UK HDI is 0.931
• Limitations of HDI


  • quantitative data so can be subject to bias and errors in data interpretation

  •subject to political agendas

  MAIN DISADVANTAGES

  1. does not measure inequality
  2. does not measure or compare the levels of poverty
  3. does not provide useful short term information. data often lags reality by several years.
• Advantages of HDI

  1. composite indicator which provides a more useful comparison metric than single indicators
  2. incorporates three of the most important metrics for households
  3. used globally which provides opportunity for meaningful comparisons
  4. provides goal for governments to use when developing their policies
  5. provides citizens with an understanding of how their quality of life compares to other counties
• Trade liberalisation (market led g&d strat)


  Removing the barriers to international trade such as tariffs, quotas etc.
• Trade liberalisation advantages

  • More trade increases output, employment & incomes
  • increases competition
  • Lowers costs of production for firms
  • May result in lower prices for consumers as international counties produce same goods at lower prices.
  • More efficient global allocation of resources due to comparative advantage
• trade liberalisation disadvantages

  • global competition intensifies and some firms may fail
  • may be element of structural unemployment as inefficient industries die out
• privatisation as a g&d strategy

  encourages new firms to enter the market and compete

  => increased supply

  => decreased prices
• privatisation advantages

  • may increase competition leading to increased output, employment (derived demand) and incomes (profits)
  • private firms may be more efficient than government due to increased competition (removal of monopoly)
  • may result in lower prices
  • money from sale of govt assets can be used by govt elsewhere
• privatisation disadvantages

  • free lunch syndrome - assets sold below fair marker value
  • quality of services may deteriorate as firms focus on profit maximisation
  • unemployment may increase as private firms seek to cut their wages in order to maximise profits
  • prices may rise as firms provide a monopoly service e.g rail travel
• deregulation as a g&d strategy

  • removing previously imposed regulations
  • removes barriers to entry such as bureaucracy, red tape.
  • decreases costs of production
  • increased contestability incentivises firms to enter market
  • may result in more innovation and enterprise
  • increases supply. market led strategy
• tax changes as a g&d strategy

  • interventionist strategy
  • redistributes income to those on lower incomes
  • e.g progressive tax system used in UK
• Tax increase advantages

  • redistribution often starts with provision of free education, healthcare, paid for by taxation revenue
  • provides means for supporting poorer households and unemployed through unemployment benefits and other means-tested benefits.
• tax increase disadvantages

  • benefits of progressive tax may be opposed through multiple regressive taxes
  • this is because lower socio-economic groups have greater MPC so higher incomes increased spending e.g on demerit goods with duty tax
  • taxes can be a disincentive to work
  • incentivises tax avoidance
• transfer payments as a g&d strat

  • interventionist strategy
  • these are payments made by the government for which no goods or services are exchanged
  • examples include unemployment, welfare benefits and subsidies
  • usually given to poorest and most vulnerable.
• transfer payments advantages

  • poorest households supported
  • equitable
  • more equal
  • generates consumption in economy ^ AD
• transfer payments disadvantages

  • poorer countries have less money available to support poor
  • opportunity cost for government associated with each transfer payment
  • unemployment trap associated with work-related costs (national insurance contributions, tax) relative to lower private costs associated with receiving benefits
• minimum wages as a g&d strat

  • set above the free market rate that firms must legally pay workers
  • increases GNI per capita. interventionist strategy
• minimum wage advantages

  • workers receive higher wages so have greater disposable income
  • consumption increases leading to higher AD => demand side SR econ growth
  • standard of living may increase with higher income
• minimum wage disadvantages

  • costs of production for firms increasing - particularly challenging for smaller firms with normal profits (MC) whereas monopoly, oligopoly have greater ability to absorb costs or pass these on to consumers through increasing prices (price makers)
  • higher costs of production lead to reduced demand for labour (labour diagram) hence, real wage unemployment.