Impact of falling birth rates

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In the past few decades, there has been a dramatic decline in global birth rates, with many developed economies seeing their birth rate fall well below the ‘replacement ratio’ of 2.1 – meaning that their population will be set to decline in future years. Italy gives a stark warning of the impact of a low …

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Factors that affect population size and growth

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Readers question: Explain the main factors which affect population size and growth? Population growth is determined by fertility rates  (the number of children per adult) –  fatality rates. Birth rates and mortality rates are, in turn, determined by a combination of factors. Often economic growth and economic development have led to a decline in population …

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Policies for Economic Development

policies-for-econ-development

Economic development implies an improvement in economic welfare through higher real GDP, but also through an improvement in other economic indicators, such as improved literacy, better infrastructure, reduced poverty and improved healthcare standards.

Policies for economic development could involve:

  1. Improved macroeconomic conditions (create stable economic climate of low inflation and positive economic growth)
  2. Free market supply-side policies – privatisation, deregulation, lower taxes, less regulation to stimulate private sector investment.
  3. Government interventionist supply-side policies – increased spending on ‘public goods’ such as education, public transport and healthcare.

For developing economies, other issues could involve:

  1. Export oriented Development – Reduction in tariff barriers and promoting free trade as a way to improve economic development.
  2. Diversification away from agriculture to manufacturing as a way to promote economic development.

Policies for Economic Development

policies-for-econ-development

Macroeconomic Stability

Macroeconomic stability would involve a commitment to low inflation. Low inflation creates a climate where foreign investors have more confidence to invest in that country. High inflation can lead to devaluation of the currency and discourage foreign investment. To create a low inflationary framework, it requires:

  • Effective monetary policy. E.g. given a Central Bank independence to control inflation through using monetary policy.
  • Disciplined Fiscal Policy – i.e. avoid large budget deficits.
  • For example, if you look at the current situation of China and India – they both have high rates of economic growth, but the concern is that their economies could easily ‘overheat’ and cause inflationary pressures. Therefore, to keep a lid on inflation is an important underlying factor in sustainable economic development.

A potential problem of macroeconomic stability is that in the pursuit of low inflation, higher interest rates can conflict with lower economic growth – at least in the short term. Sometimes, countries have pursued low inflation with great vigour, but at a cost of recession and higher unemployment. This creates a constraint to economic development. The ideal is to pursue a combination of low inflation and sustainable economic growth.

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Multinational Corporations in Developing Countries

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Readers Question: I have to debate why multinational corporations are good for developing countries, and I know the arguments for them being bad are strong so are there any really good positive arguments I could use to smash the opposition?  Multinational companies like Nike, Sony, Apple, Toyota, Coca-Cola all have investments and operations in developing …

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Difference between economic growth and development

Readers Question: What is the difference between growth and development?  Can a country experience economic growth without development? In summary Economic growth means an increase in real national income / national output. Economic development means an improvement in the quality of life and living standards, e.g. measures of literacy, life-expectancy and health care. Ceteris paribus, …

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Dual economy

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Readers question: What is a ‘dual economy’?

A dual economy refers to the existence of two distinct types of economic segments within an economy. This involves:

  1. A capitalist based manufacturing sector (geared towards global markets)
  2. Labour intensive agricultural sector (low productivity, geared towards subsistence farming or local markets)

dual-economy

The British economist W. Arthur Lewis wrote an influential paper on the ‘dual economy’ in 1954. He observed that in many developing economies (usually a former colonial country) that the economy was split into these different two segments.

The bulk of the economy was a labour intensive agricultural sector producing primary products. Lewis observed that in the agricultural sector, productivity was often very low, and farmers often lacked the traditional profit incentive and dynamism usually found in a free market economy.

Alongside this agricultural sector was a smaller manufacturing sector, which tended to have higher productivity. Firms in the manufacturing sector were often set up by foreign colonial powers.

It was not just that developing economies had different sectors, but that the different sectors had different economic motivations. Labourers in the agricultural sector usually lacked education, access to capital and had poor prospects for income growth. Agriculture was also focused on meeting the needs of local markets or subsistence farming and was insular in outlook. In the other manufacturing sector of the economy, there was a greater dynamism and an incentive to increase profits through expansion and investment. The manufacturing sector also faced greater global competition which spurs efficiency growth.

The dual nature of the economy may have been heightened by the fact manufacturing firms were set up / managed by owners from developed capitalist economies in the northern hemisphere.

Lewis argued that given the disparity in productivity, developing economies could make substantial economic growth by encouraging labour to move from the unproductive agricultural sector to the more profitable and productive manufacturing sector. Developing countries which concentrated on just agriculture were doomed to low savings, low productivity and low growth.

Another issue with a dual economy was that there is a potential problem from concentrating on agriculture exports. Agricultural goods tend to have a low-income elasticity of demand and are price inelastic. If a developing economy increases the output of agricultural products, this increase in supply is likely to depress prices and lead to lower export revenue. Because demand is price inelastic, they would make more revenue by restricting supply and keeping prices high. This is another reason to diversify out of agriculture and not just concentrate on agricultural output.

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Difficulties in measuring living standards

Countries_by_GDP_(PPP)_Per_Capita_in_2015

The most common method for measuring living standards is using GDP per capita. This is national income divided by population and gives a rough guide to average incomes. High real GDP per capita indicates citizens are able to purchase more goods and services. World Map of GDP per Capita GDP per Capita. Source: Source: IMF …

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Measuring Living Standards

Measuring living standards is important for economic policy. However, in practice, there are several difficulties in measuring living standards and therefore there are several different measures we could use.

The most common measure of living standards is to start with real GDP per Capita.

World Map of GDP per Capita

GDP per capita
GDP per Capita. Source: Source: IMF

 

GDP per capita – GDP measures National Output / National Income. Per capita is the average income per person in the economy. This is a rough guide to living standards because it measures average incomes / the amount produced in an economy. However, income and average output is only a rough guide to living standards. (for example, increased GDP per Capita could be at the cost of increased pollution; in this case, higher GDP could lead to a decline in living standards.

GDP – Purchasing Power Parity PPP

Countries_by_GDP_(PPP)_Per_Capita_in_2015 Source: IMF

Another important factor in measuring living standards is GDP measured at Purchasing power parity. This means that the statistics take into account the actual cost of living. For example, some countries may have lower GDP, but the cost of living is much cheaper. PPP adjusts for these different costs of living.

Real GDP per Capita / Hours Worked

A more accurate guide to living standards is to take into account the number of hours worked. If you gain high GPD per capita but have to work a 12 hour day, then this is less desirable than same income for 6 hours work per today. (measuring living standards / hours worked.)

Household expenditure/consumption

Most measures of living standards focus on income. However, income is only a rough guide to the goods and services you can actually buy. Some people may have very high living costs (e.g. rent / council tax / transport costs). Therefore, the quantity of goods and services you can actually buy will give a better guide to living standards than just income. Another issue is that some people may receive benefits in kind. E.g. those on means tested benefits often receive prescriptions and dentist visits for free. Therefore, their living standards are better than their actual income may suggest.

When comparing UK vs US, one feature of the US is that people have to devote a high % of income to health care insurance.

Poverty and Living Standards

An important factor in measuring living standards for the economy is the number of people living below the poverty line.

The poverty line is defined as:

The level of expenditure necessary to buy a minimum level of nutrition and other basic necessities. The World Bank says that the poverty line can vary somewhat from country to country, reflecting different costs of living for taking part in the everyday life of society.

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