Economics Notes Economics of Development (ECON7010) Notes
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:
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 |
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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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