4.1 Development economics - Economic development
→ Distinguish between economic growth and economic development.
• Economic growth: sustained increase in the real output (GDP) of an economy over a period of time
• Economic development: improvement in the quality of life of an economy over a period of time
→ Explain the multidimensional nature of economic development in terms of reducing widespread poverty, raising living standards,
reducing income inequalities and increasing employment opportunities.
• Reducing widespread poverty: poverty prevents access to basic necessities such as food and shelter
• Raising living standards: increased material wealth allows better access to education, health and other material goods
• Reducing income inequalities: extreme inequalities may result in widespread poverty as they wealth is unevenly occupied
• Increasing employment opportunities: limited employment opportunities restrict source of income, limiting access to necessities
→ Explain that the most important sources of economic growth in economically less developed countries include increases in
quantities of physical capital and human capital, the development and use of new technologies that are appropriate to the conditions
of the economically less developed countries, and institutional changes.
• Improvement in physical capital
▪ Physical capital: measurement of overall quality and quantity tangible assets that can be used in production process
▪ Increase in quantity: achieved through production of more capital
▪ Increase in quality: achieved through education, research and development, access to foreign technology
▪ Increase in potential output: increase in quantity and quality of factor causes potential output to increase (LRAS shift)
▪ Economic growth: economic growth is likely to follow (Monetarist) as potential output is increases
▪ Economic development: higher income due to growth will increase standard of living
• Improvement in human capital
▪ Human capital: measurement of the overall quantity and quality of human input available in an economy
▪ Increase in quantity: achieved through long term expanding population
▪ Increase on quality: achieved through improving health care and education
▪ Increase in potential output: increase in quantity and quality of factor causes potential output to increase (LRAS shift)
▪ Economic growth: economic growth is likely to follow (Monetarist) as potential output is increases
▪ Economic development: higher income due to growth will increase standard of living
• Development and use of appropriate technology
▪ Implementation of improved technology: better technology increases productivity and potential output
▪ Implementation of appropriate technology: increased availability of capital may have labour saving elements; this will
likely cause increased unemployment which, in turn, worsens may hinder economic growth
• Institutional changes
▪ Adequate banking system: banks channel savings towards investment opportunities to improve quality of capital
▪ Improved infrastructure: better infrastructure will improve productivity (e.g. roads-transportation, sewer-health)
▪ Better legal system: legal system allows for political stability that facilitates economic growth through increased FDI
and increased investment through improved business confidence
▪ Education: better investment in education improve the quality of workforce and increases potential output
→ Explain the relationship between economic growth and economic development, noting that some limited economic development is
possible in the absence of economic growth, but that over the long term economic growth is usually necessary for economic
development (however, it should be understood that under certain circumstances economic growth may not lead to economic
development).
• Economic development without growth: economic development with limited growth is possible if the economy allocates
resources effectively to tackle developmental issues (e.g. more money is spent on education and healthcare than military)
• Greater economic development with growth: long term benefit of growth on development
▪ Reduced poverty: economic growth increases GDP per capita, which causes increase in standard of living
▪ Greater employment opportunity: economic growth often generates job opportunities to provide income
▪ Higher government revenue: increased income allows more funds spent on healthcare and education
• Worsened economic development with growth: long term cost of growth on development (counter developmental issues)
▪ Creation of inequality: high level of economic growth (especially market-orientated growth) may worsen income
inequality, hindering reduction in widespread poverty
▪ Sustainability risks: economic growth often lead to negative externalities that may harm sustainability
→ Explain, using examples, that economically less developed countries share certain common characteristics (noting that it is
dangerous to generalize as there are many exceptions in each case), including low levels of GDP per capita, high levels of poverty,
relatively large agricultural sectors, large urban informal sectors and high birth rates.
• Low levels of GDP per capita: indicates low standard of living of the economy (and inability to invest in human capital)
• High levels of poverty: indicates low standard of living of the economy (and inability to invest in human capital)
• Relatively large agricultural sectors: indicates diminishing export revenue due to deteriorating terms of trade; decreasing growth
, • Large urban informal sectors: indicates existence of informal market that lacks labour regulations and has less tax revenue
• High birth rates: indicates larger child dependency ratio and low gender equity
→ Explain that in some countries there may be communities caught in poverty trap (poverty cycle) where poor communities are
unable to invest in physical, human and natural capital due to low or no savings; poverty is therefore transmitted from generation
to generation, and there is a need for intervention to break out of the cycle.
• Poverty cycle: self-perpetuating cycle of low income, involving a) low incomes leading to low savings and low investment and to
low income, or b) low income leading to low level of human capital that leads to low productivity that leads to low income
▪ Breaking the poverty cycle: intervention to increase income and investment or improve productivity is required to
break the poverty cycle, or the cycle will be transmitted from generation to generation
• Impact on growth side
▪ Low savings: a surplus of income is required to
save, which is not possible with low income
▪ Low investment: low saving results in less funds
available to be invested to firms
▪ Low economic growth: lack of investment causes
a) fall in aggregate demand and b) hinders the
increase in long run productivity, hindering real
output growth in the long run
• Impact on development
▪ Low level of education and health care: low
income causes poor community to be unable to
afford investment in healthcare and education
▪ Low level of human capitals: lack of healthcare
and education causes low levels of human capital
▪ Low productivity: low level of human capital
subsequently causes low productivity
→ Explain, using examples, that economically less developed countries differ enormously from each other in terms of a variety of
factors, including resource endowments, climate, history (colonial or otherwise), political systems and degree of political stability.
• Resource endowments: while human resources are commonly low, physical resources can vary immensely between countries
• Climate: many developing nations have climate disadvantages such as droughts, that work against development
• History: while many developing nations were once colonies, extent to which they were colonized vary greatly between nations
• Political systems: countries have varying political structure ranging from democracies to theocracies
• Degree of political stability: some countries are actively involved with internal and external conflicts while others are not
• Geographic factors: many poor countries are landlocked with no access to sea ports and have poor transportation network, while
others have better infrastructure and access the international market much more easily
→ Outline the current status of international development goals, including the Millennium Development Goals.
• Goal 1: Eradicate Extreme Hunger and Poverty
• Goal 2: Achieve Universal Primary Education
• Goal 3: Promote Gender Equality and Empower Women
• Goal 4: Reduce Child Mortality
• Goal 5: Improve Maternal Health
• Goal 6: Combat HIV/AIDS, Malaria and other diseases
• Goal 7: Ensure Environmental Sustainability
• Goal 8: Develop a Global Partnership for Development
• Most successful: MDG 1 (eradicate extreme poverty); >70% of the countries has reached the target
• Least successful: MDG 5 (reduce maternal mortality); <20% of the countries has reached the target
, 4.2 Development Economics - Measuring development
→ Distinguish between GDP per capita figures and GNI per capita figures.
• GDP per capita: total value of all goods and services produced in a country over a period of time divided by the population
• GNI per capita: total income generated by a country’s factors of production over a period of time divided by the population
→ Compare and contrast the GDP per capita figures and the GNI per capita figures for economically more developed countries and
economically less developed countries.
• Economically more developed nations
▪ General trend: GDP per capita ≈ GNI per capita
▪ Income flowing out (foreign production) will be similar to income flowing in (domestic production)
▪ Example: 2013 Germany's GDP per capita and GNI per capita were both about $42,000
• Economically less developed nations
▪ If nation attracts a lot of FDI: GDP per capita > GNI per capita
▪ Income flowing out (foreign production) will be greater than income flowing in (domestic production)
▪ Example: Nigeria’s GDP per capita is $1600 and GNI per capita is $1400
▪ If nation attracts a lot of FDI: GDP per capita < GNI per capita
▪ Income flowing out (foreign production) will be less than income flowing in (domestic production)
▪ Example: China’s GDP per capita is $3700 and GNI per capita $3600
→ Distinguish between GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange rates.
• GDP per capita: total value of all goods and services produced in a country over a period of time divided by the population
• GDP per capita at purchasing power parity (PPP) exchange rates: total value of all goods and services produced in a country over
a period of time, converted using purchasing power parity rates and divided by total population
• Purchasing power parity (PPP) exchange rates: amount of adjustment needed on the exchange rate between countries in order for
the exchange to be equivalent to each currency’s purchasing power
• Reason for purchasing power parity
▪ Different price of goods: goods and services do not cost the same across nations (e.g. bread will cost less in MEDCs)
▪ Limitation of exchange rates: exchange rate between two countries do not accurately reflect the relative prices
• Benefits of purchasing power parity exchange rates
▪ Determination of poverty: economists can judge the real level of poverty in LEDCs
▪ Real judgement on GDP per capita: prevents undervalue of GDP per capita figures in LEDCs
→ Compare and contrast GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange rates for
economically more developed countries and economically less developed countries.
• Economically more developed countries: GDP per capita is relatively close to GDP per capita at PPP exchange rates
• Economically less developed countries: GDP per capita at PPP exchange rates are considerably higher than GDP per capita
→ Compare and contrast two health indicators for economically more developed countries and economically less developed
countries.
Indicator MEDC (New Zealand) LEDC (Ethiopia)
Life expectancy at birth 81 years 64 years
Infant mortality 5/1000 41/1000
→ Compare and contrast two education indicators for economically more developed countries and economically less developed
countries.
Indicator MEDC (New Zealand) LEDC (Ethiopia)
Literacy rate 99% 49.1%
Primary pupil-teacher ratio 1:54 1/15
→ Explain that composite indicators include more than one measure and so are considered to be better indicators of economic
development.
• Composite indicator: indicator that includes multiple measures and so are considered to be better indicators of development
▪ Limitation of single indicators: countries may differ in their stages of various different developmental objectives
▪ Holistic overview: therefore it is better to use composite indicators for a holistic overview of a country’s development
→ Explain the measures that make up the Human Development Index (HDI).
• Human development index (HDI): composite indicator that attempts to measure and rank the degree of economic development in
three aspects (health, education, income) of development using four indicators
▪ Health: life expectancy at birth
▪ Education: means years of schooling (adults under 25 years), expected years of schooling (children of entering age)
▪ Standard of living: GNI per capita (PPP adjusted)
→ Distinguish between economic growth and economic development.
• Economic growth: sustained increase in the real output (GDP) of an economy over a period of time
• Economic development: improvement in the quality of life of an economy over a period of time
→ Explain the multidimensional nature of economic development in terms of reducing widespread poverty, raising living standards,
reducing income inequalities and increasing employment opportunities.
• Reducing widespread poverty: poverty prevents access to basic necessities such as food and shelter
• Raising living standards: increased material wealth allows better access to education, health and other material goods
• Reducing income inequalities: extreme inequalities may result in widespread poverty as they wealth is unevenly occupied
• Increasing employment opportunities: limited employment opportunities restrict source of income, limiting access to necessities
→ Explain that the most important sources of economic growth in economically less developed countries include increases in
quantities of physical capital and human capital, the development and use of new technologies that are appropriate to the conditions
of the economically less developed countries, and institutional changes.
• Improvement in physical capital
▪ Physical capital: measurement of overall quality and quantity tangible assets that can be used in production process
▪ Increase in quantity: achieved through production of more capital
▪ Increase in quality: achieved through education, research and development, access to foreign technology
▪ Increase in potential output: increase in quantity and quality of factor causes potential output to increase (LRAS shift)
▪ Economic growth: economic growth is likely to follow (Monetarist) as potential output is increases
▪ Economic development: higher income due to growth will increase standard of living
• Improvement in human capital
▪ Human capital: measurement of the overall quantity and quality of human input available in an economy
▪ Increase in quantity: achieved through long term expanding population
▪ Increase on quality: achieved through improving health care and education
▪ Increase in potential output: increase in quantity and quality of factor causes potential output to increase (LRAS shift)
▪ Economic growth: economic growth is likely to follow (Monetarist) as potential output is increases
▪ Economic development: higher income due to growth will increase standard of living
• Development and use of appropriate technology
▪ Implementation of improved technology: better technology increases productivity and potential output
▪ Implementation of appropriate technology: increased availability of capital may have labour saving elements; this will
likely cause increased unemployment which, in turn, worsens may hinder economic growth
• Institutional changes
▪ Adequate banking system: banks channel savings towards investment opportunities to improve quality of capital
▪ Improved infrastructure: better infrastructure will improve productivity (e.g. roads-transportation, sewer-health)
▪ Better legal system: legal system allows for political stability that facilitates economic growth through increased FDI
and increased investment through improved business confidence
▪ Education: better investment in education improve the quality of workforce and increases potential output
→ Explain the relationship between economic growth and economic development, noting that some limited economic development is
possible in the absence of economic growth, but that over the long term economic growth is usually necessary for economic
development (however, it should be understood that under certain circumstances economic growth may not lead to economic
development).
• Economic development without growth: economic development with limited growth is possible if the economy allocates
resources effectively to tackle developmental issues (e.g. more money is spent on education and healthcare than military)
• Greater economic development with growth: long term benefit of growth on development
▪ Reduced poverty: economic growth increases GDP per capita, which causes increase in standard of living
▪ Greater employment opportunity: economic growth often generates job opportunities to provide income
▪ Higher government revenue: increased income allows more funds spent on healthcare and education
• Worsened economic development with growth: long term cost of growth on development (counter developmental issues)
▪ Creation of inequality: high level of economic growth (especially market-orientated growth) may worsen income
inequality, hindering reduction in widespread poverty
▪ Sustainability risks: economic growth often lead to negative externalities that may harm sustainability
→ Explain, using examples, that economically less developed countries share certain common characteristics (noting that it is
dangerous to generalize as there are many exceptions in each case), including low levels of GDP per capita, high levels of poverty,
relatively large agricultural sectors, large urban informal sectors and high birth rates.
• Low levels of GDP per capita: indicates low standard of living of the economy (and inability to invest in human capital)
• High levels of poverty: indicates low standard of living of the economy (and inability to invest in human capital)
• Relatively large agricultural sectors: indicates diminishing export revenue due to deteriorating terms of trade; decreasing growth
, • Large urban informal sectors: indicates existence of informal market that lacks labour regulations and has less tax revenue
• High birth rates: indicates larger child dependency ratio and low gender equity
→ Explain that in some countries there may be communities caught in poverty trap (poverty cycle) where poor communities are
unable to invest in physical, human and natural capital due to low or no savings; poverty is therefore transmitted from generation
to generation, and there is a need for intervention to break out of the cycle.
• Poverty cycle: self-perpetuating cycle of low income, involving a) low incomes leading to low savings and low investment and to
low income, or b) low income leading to low level of human capital that leads to low productivity that leads to low income
▪ Breaking the poverty cycle: intervention to increase income and investment or improve productivity is required to
break the poverty cycle, or the cycle will be transmitted from generation to generation
• Impact on growth side
▪ Low savings: a surplus of income is required to
save, which is not possible with low income
▪ Low investment: low saving results in less funds
available to be invested to firms
▪ Low economic growth: lack of investment causes
a) fall in aggregate demand and b) hinders the
increase in long run productivity, hindering real
output growth in the long run
• Impact on development
▪ Low level of education and health care: low
income causes poor community to be unable to
afford investment in healthcare and education
▪ Low level of human capitals: lack of healthcare
and education causes low levels of human capital
▪ Low productivity: low level of human capital
subsequently causes low productivity
→ Explain, using examples, that economically less developed countries differ enormously from each other in terms of a variety of
factors, including resource endowments, climate, history (colonial or otherwise), political systems and degree of political stability.
• Resource endowments: while human resources are commonly low, physical resources can vary immensely between countries
• Climate: many developing nations have climate disadvantages such as droughts, that work against development
• History: while many developing nations were once colonies, extent to which they were colonized vary greatly between nations
• Political systems: countries have varying political structure ranging from democracies to theocracies
• Degree of political stability: some countries are actively involved with internal and external conflicts while others are not
• Geographic factors: many poor countries are landlocked with no access to sea ports and have poor transportation network, while
others have better infrastructure and access the international market much more easily
→ Outline the current status of international development goals, including the Millennium Development Goals.
• Goal 1: Eradicate Extreme Hunger and Poverty
• Goal 2: Achieve Universal Primary Education
• Goal 3: Promote Gender Equality and Empower Women
• Goal 4: Reduce Child Mortality
• Goal 5: Improve Maternal Health
• Goal 6: Combat HIV/AIDS, Malaria and other diseases
• Goal 7: Ensure Environmental Sustainability
• Goal 8: Develop a Global Partnership for Development
• Most successful: MDG 1 (eradicate extreme poverty); >70% of the countries has reached the target
• Least successful: MDG 5 (reduce maternal mortality); <20% of the countries has reached the target
, 4.2 Development Economics - Measuring development
→ Distinguish between GDP per capita figures and GNI per capita figures.
• GDP per capita: total value of all goods and services produced in a country over a period of time divided by the population
• GNI per capita: total income generated by a country’s factors of production over a period of time divided by the population
→ Compare and contrast the GDP per capita figures and the GNI per capita figures for economically more developed countries and
economically less developed countries.
• Economically more developed nations
▪ General trend: GDP per capita ≈ GNI per capita
▪ Income flowing out (foreign production) will be similar to income flowing in (domestic production)
▪ Example: 2013 Germany's GDP per capita and GNI per capita were both about $42,000
• Economically less developed nations
▪ If nation attracts a lot of FDI: GDP per capita > GNI per capita
▪ Income flowing out (foreign production) will be greater than income flowing in (domestic production)
▪ Example: Nigeria’s GDP per capita is $1600 and GNI per capita is $1400
▪ If nation attracts a lot of FDI: GDP per capita < GNI per capita
▪ Income flowing out (foreign production) will be less than income flowing in (domestic production)
▪ Example: China’s GDP per capita is $3700 and GNI per capita $3600
→ Distinguish between GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange rates.
• GDP per capita: total value of all goods and services produced in a country over a period of time divided by the population
• GDP per capita at purchasing power parity (PPP) exchange rates: total value of all goods and services produced in a country over
a period of time, converted using purchasing power parity rates and divided by total population
• Purchasing power parity (PPP) exchange rates: amount of adjustment needed on the exchange rate between countries in order for
the exchange to be equivalent to each currency’s purchasing power
• Reason for purchasing power parity
▪ Different price of goods: goods and services do not cost the same across nations (e.g. bread will cost less in MEDCs)
▪ Limitation of exchange rates: exchange rate between two countries do not accurately reflect the relative prices
• Benefits of purchasing power parity exchange rates
▪ Determination of poverty: economists can judge the real level of poverty in LEDCs
▪ Real judgement on GDP per capita: prevents undervalue of GDP per capita figures in LEDCs
→ Compare and contrast GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange rates for
economically more developed countries and economically less developed countries.
• Economically more developed countries: GDP per capita is relatively close to GDP per capita at PPP exchange rates
• Economically less developed countries: GDP per capita at PPP exchange rates are considerably higher than GDP per capita
→ Compare and contrast two health indicators for economically more developed countries and economically less developed
countries.
Indicator MEDC (New Zealand) LEDC (Ethiopia)
Life expectancy at birth 81 years 64 years
Infant mortality 5/1000 41/1000
→ Compare and contrast two education indicators for economically more developed countries and economically less developed
countries.
Indicator MEDC (New Zealand) LEDC (Ethiopia)
Literacy rate 99% 49.1%
Primary pupil-teacher ratio 1:54 1/15
→ Explain that composite indicators include more than one measure and so are considered to be better indicators of economic
development.
• Composite indicator: indicator that includes multiple measures and so are considered to be better indicators of development
▪ Limitation of single indicators: countries may differ in their stages of various different developmental objectives
▪ Holistic overview: therefore it is better to use composite indicators for a holistic overview of a country’s development
→ Explain the measures that make up the Human Development Index (HDI).
• Human development index (HDI): composite indicator that attempts to measure and rank the degree of economic development in
three aspects (health, education, income) of development using four indicators
▪ Health: life expectancy at birth
▪ Education: means years of schooling (adults under 25 years), expected years of schooling (children of entering age)
▪ Standard of living: GNI per capita (PPP adjusted)
