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Economics Notes Economics of Development (ECON7010) Notes

Economics Of Development Notes

Updated Economics Of Development Notes

Economics of Development (ECON7010) Notes

Economics of Development (ECON7010)

Approximately 81 pages

Economics of Development Full Revision Guide includes lecture notes, tutorials and relevant readings on main topics such as Introduction to Economic Development, Traditional Theories of Economic Development, Importance of Education, Income per capita, Importance of Health, Microfinance, Microsavings, Population Growth, Culture and Institutions and Foreign Aid. ...

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ECON 7010: Economics of Development

Introduction to Economics Development

Why poor countries consume less? Because they produce less

  • Lack of physical capital (no tools and machinery)

  • Lack of necessary education (low productivity)

  • Not healthy enough (low productivity)

  • High population growth, high fertility rates, have too many children (high dependency ratio)

  • Lack of access to credit, women who are main brokers of health and education cannot gain access to credit for income generating activities (require microfinance)

  • Cultures, institutions and governments

Poverty traps require a simultaneous and coordinated large scale investments in capital, education and technology

About 80% of the countries have GDP per capita below the average income per head

Poverty proxied by relative income per capita is indeed multi-dimensional. There are Proximate and Fundamental determinants of poverty.

Proximate determinants of poverty are causes that directly affect the variable of interest (low income per capita) ex. Low levels of physical capital and human capital accumulation, low levels of technology, lack of access to credit high population growth and low levels of efficiency

Lack of education low productivity, cannot acquire skills to participate in the industry low income

Fundamental determinants of poverty are causes that indirectly affect variable of interest by systematically affecting one or more causes that in turn affect income per capita. Ex. Government, geography, climate, resources, culture, ethnic composition, rule of law.

Countries near the equator have lower levels of income per capita because people in these countries have higher tendency to be malaria-striken. Poor health poor productivity low levels of income per capita

Geography: Landlocked, access to markets and trade, geopolitical area, terrain and soil quality that affect agriculture

Political and legal institutions, intellectual property rights that affect incentives to invest and innovate and government provision of public goods that is a prerequisite for certain investments

Countries with low levels of trust such as countries with slavery history translates to low levels of investment low levels of output

These causes affect income per capita by affecting the proximate causes of poverty.

Gross Domestic Product (GDP) = total value of all goods and services produced in a country in a year

Per Capita Gross Domestic Product (GDP) = Total value of goods and services/total population

Take into account inflation by using same units over time ex. In constant 1990 US$: Real per capita GDP

Unadjusted figures are Nominal per capita GDP

Compare prices of two different countries: Use market exchange rate

Limitations

  • Exchange rate can fluctuate significantly

  • Exchange rate produced biased income comparisons (exchange rate adjusts to equalize price of traded goods) but in poor countries, non traded goods are relatively less expensive than traded goods

  • Therefore x should be higher in PUS = x (PIND) where x is the market exchange rate of 1/40.

  • If we use market exchange rate, India’s GDP will be underestimated

Alternative is to use Purchasing Power Parity (PPP)

Purchasing power parity exchange rate is based on a basket of traded and non traded goods

Best income measure: PPP adjusted real per capita GDP

Richest 20% of the world population receive 62% of world income

Countries are richer today because they experience faster rates of economic growth in the past therefore it is important to understand determinants of real income per capita growth

Yt+n = Yt(1+g)n

Asian tigers: Singapore, Taiwan, Hong Kong and South Korea experienced high rates of income growth annually with about 7%

South Korea experienced rapid growth within a generation. Rise was characterized by rapidly increasing agricultural productivity, shifts of labour from agriculture to industry, steady growth of capital stock and increase in education and skills levels. Between 1965 to 1990, South Korea’s income per capita grew by 7% annually. South Korea had extensive development planning, land reforms, industrial policies and government intervention that translate to high income growth.

Of the world’s population, 13% has not enough to eat, 16% has no access to safe drinkable water and 38% do not have access to sanitation

HDI (Human Development Index)

  • Life expectancy

  • Educational attainment (adult literacy, school enrollment)

  • Per capita GDP

Traditional Theories of Economic Development

Model Key points
1. The Harrod-Domar Model

Y = S + C where Y is aggregate GDP

S = sY where s is savings rate

All savings are invested into productive capital

S = I where I is aggregate investment

I = ΔK

Goods are produced using capital and k is the capital-to-output ratio so $k of capital is needed to produce $1 of output Y

ΔK = kΔY

Therefore, sY = S = I = ΔK = kΔY

(ΔY/Y) = (s/k)

Harrod-Domar equation

A country’s savings rate is the primary determinant of growth and development

Potential problems:

  1. Production is assumed to use capital only

  2. Production assumed to be constant returns to scale

  3. Production can have other inputs like labour, skills, infrastructure

  4. Assumes that there is a necessary government or institutional structure so that savings can be converted into investment efficiently and investment is translated into capital

  5. The rich has higher income so they save more and they experience more growth. Model predicts extreme divergence in income

Policy implications: Financing gap

All that is needed to spur economic development is sufficiently high level of savings and investment but the poor are too poor to have high level of savings.

Gap between needed investment and actual savings is the financing gap that can be achieved by foreign aid or soft loans.

Foreign aid Investment Growth

Capital-output ratio k is also known as Incremental Capital to Output ratio (ICOR)

2. Rostow’s Stages of Growth
  1. Traditional society (high proportion of production in agriculture, limited productivity...

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