Development

IB Economics - Global Economy - Development

Gini coefficient

A measure of income inequality based on the lorenz curve where 1 represents perfect inequality and 0 represents perfect equality

Income

Money earned in a year

Wealth

Value of assets owned

Net wealth

Assets - debt

Absolute poverty

Living on an income below what is needed to meet basic needs (less than $2.15 a day at PPP)

Relative poverty

Living on an income that is significantly below the national average (more than 60% below the median income)

Multidimensional poverty index (MPI)

A composite measure of poverty that takes into account different dimensions of poverty (equally split into health, education, and living standards)

Causes of poverty and income inequality

1) Different levels of human capital

2) Inequality of opportunity

3) Different levels of resource ownership (Inheritance)

4) Government tax and benefits policies

5) Globalisation and technological change

Government policies to reduce poverty and inequality

1) Make the tax system more progressive

2) Increase transfer payments to lower income households

3) Increase spending by governmet on merit goods (education, healthcare)

4) Universal basic income

5) Wealth tax

6) Minimum wages

Foreign direct investment (FDI)

Long run investment by firms based in one country into productive activities in another country

Multinational corporation (MNC)

A company that has productive activities in more than one country

Why are MNCs attracted to developing countries

1) To extract natural resources

2) Lower cost of labour

3) Less government regulation which lowers costs

4) Better access to customers in these growing markets

Economic benefits from FDI into developing countries

1) Helps fill the savings gap and breaks poverty cycle

2) Creates employment

3) Likely a transfer of technology and better management practices

4) Likely to raise tax revenue

5) Helps to diversify the economy

Issues that may arise from FDI into developing countries

1) Repatriation of profits

2) May not create many jobs if jobs go to skilled foreign workers

3) Might not generate much tax revenue

4) Might exploit weak environmental standards and cause pollution (negative externalities)

5) Might be used to influence government policies within the country (debt-trap diplomacy)

Main barriers to economic development

1) Lack of infrastructure

2) Low levels of human capital

3) Weak institutions

4) Indebtedness

5) Landlocked with bad neighbours (lack of access to international markets)

6) Conflict trap

7) Natural resource trap

Economic growth

An increase in real GDP over time

Per capita

Adjusts for differences in population

At purchasing power parity (PPP)

Adjusts for differences in the cost of living

Economic development

Improvement in living standards

Components of economic development

1) GNI per capita at PPP

2) Health outcomes

3) Education levels

4) Crime rates

5) Human rights/political freedom

6) Pollution levels

7) Income inequality

8) Leisure time

Sustainable development

Development that meets the needs of the current generation without compromising the ability of future generations to meet their own needs

Happy Planet Index

(wellbeing x life expectance) / ecological footprint

How to measure economic development

1) GNI per capita at PPP

2) Human development Index (HDI)

3) Inequality adjusted Human Development Index (IHDI)

4) Happy Planet Index

5) Gender Inequality Index

Human Development Index (HDI)

A measure of the standard of living which brings together data on health (Life expectancy), education (expected and average years of schooling), and average income (GNI per Capita at PPP)

Strengths of the HDI

1) It is a broader measure of standard of living

2) It is the most well recognised and well understood composite measure of development

Limitations of the HDI

1) It does not take into account many other factors that affect the level of development

2) The three components are given equal weight which can be seen as arbitrary

3) GNI per capita does not take into account income distribution

Poverty trap

A vicious cycle in which low incomes lead to low savings which then means there is limited money for investment in the economy which results in low incomes in the future

Human development poverty trap

Low incomes → low spending on education and healthcare → low level of human capital → low productivity

Strategies to promote economic growth and development

1) Interventionist SSPs

2) Market based SSPs

3) Foreign direct investment

4) Trade strategies (export promotion, import substitution, economic integration)

5) Diversification

6) Institutional change

Foreign aid

Giving money to developing countries

Development Aid

Given to alleviate poverty in the long-run by helping countries break out of the poverty trap

Humanitarian Aid

Given to alleviate short term suffering which has come about as a result of emergencies such as droughts, wars or natural disasters

Bilateral Aid

Aid that flows from a developed economy to a developing economy

Multilateral aid

Aid from an international organization such as the World bank, United Nations

World Bank

An international organization that makes soft loans to developing countries in order to assist in their economic development

International Monetary Fund (IMF)

An international organization which provides assistance through loans to countries that are facing urgent balance of payments and currency crises