Chapter 30 Growth and the Less Developed Countries

Chapter 30 Growth and the Less. Developed Countries • Key Concepts • Summary • Practice Quiz • Internet Exercises © 2002 South-Western College Publishing 1

What is one way to compare the wellbeing of one country to another? GDP per capita 2

What is GDP per capita? The value of final goods produced (GDP) divided by the total population 3

What are industrially advanced countries ? High-income nations that have market economies based on large stocks of technologically advanced capital and well-educated labor 4

Who are the IACs? The United States, Canada, Australia, New Zealand, Japan, and most of the countries of Western Europe 5

What are lessdeveloped countries? Economies based on agriculture which are lacking large stocks of technologically advanced capital and well-educated labor 6

Who are the LDCs? Most countries of Africa, Asia, and Latin America 7

What are problems in comparing GDPS per capita? • Measurement errors • Income distribution • Fluctuations in exchange rates • Differences in living standards 8

Is GDP per capita correlated with other measures of quality of life? Yes 9

What are quality of life indicators? • Life expectancy • Adult literacy • Daily calorie supply • Energy consumption per capita 10

What factors come together to produce a country’s growth? • Natural resources • Investment in capital • Investment in human capital • Low population growth • Infrastructure 11

Q Manufactured Goods 80 70 60 50 40 30 20 10 Exhibit 4 Economics Growth PPC 2 PPC 1 Agricultural Goods 100 200 300 Q 400 500 12

Economics Growth in resources or technological advance 13

What is infrastructure? Capital goods usually provided by the government, including highways, bridges, waste and water systems, and airports 14

What is a major problem for LDCs? They find themselves in a vicious cycle of poverty 15

What is the vicious circle of poverty? The trap in which countries are poor because they cannot afford to save and invest, but they cannot save and invest because they are poor 16

What are the political factors favorable for economic growth? • Law and order • Infrastructure • International trade 17

Economic growth and development Natural resources endowment Human resources development Capital investment Technological Political progress environment 18

What is foreign aid? The transfer of money or resources from one government to another for which no repayment is required 19

What is the Agency for International Development? AID is the agency of the U. S. State Department that is in charge of U. S. aid to foreign countries 20

What is the World Bank? The lending agency that makes long-term lowinterest loans and provides technical assistance to lessdeveloped countries 21

What is the International Monetary Fund (IMF)? The lending agency that makes short-term conditional low-interest loans to developing countries 22

What is the New International Economic Order (NIEO)? A series of proposals made by LDCs calling for changes that would accelerate the economic growth and development of the LDCs 23

Key Concepts 24

Key Concepts • What is GDP per capita? • What are industrially advanced countries (IACS)? • What are less-developed countries (LDCS)? • What are quality of life indicators? • What factors come together to produce a country’s well being? 25

Key Concepts cont. • What is the vicious circle of poverty? • What are the political factors favorable for economic growth? • What is foreign aid? • What is the World Bank? • What is the IMF? • What is the NIEO? 26

Summary 27

GDP per capita provides a general index of a country’s standard of living. Countries with low GDP per capita and slow growth in GDP per capita are less able to satisfy basic needs for food, shelter, clothing, education, and health. 28

Industrially advanced countries (IACs) are countries in which GDP per capita is high and output is produced by technologically advanced capital. Countries that earn high income without widespread industrial development, such as the oil-rich Arab countries, are not included in the IAC list. 29

Less-developed countries (LDCs) are countries with low production person. In these countries, output is produced without large amounts of technologically advanced capital and well-educated labor. The LDCs account for about threefourths of the world’s population. 30

The Four Tigers of the Pacific Rim are Hong Kong, Singapore, South Korea, and Taiwan. These newly industrialized countries have achieved high growth rates and standards of living approaching those of many of the IACs. 31

GDP per capita comparisons are subject to four problems: (1) the accuracy of LDC data is questionable, (2) GDP per capita ignores the degree of income distribution, (3) changes in exchange rates affect gaps between countries, and (4) there is no adjustment for the cost-of-living differences between countries. 32

Economic growth and economic development are related, but somewhat different, concepts. Economic growth is measured quantitatively by GDP per capita, while economic development is a broader concept. 33

In addition to GDP per capita, economic development includes quality-of-life measures, such as life expectancy at birth, adult literacy rate, and per capita energy consumption. 34

Economic growth and development are the result of a complex process that is determined by five major factors: (1) natural resources, (2) human resources, (3) capital, (4) technological progress, and (5) the political environment. There is no single correct strategy for economic development, and a lack of strength in one or more of the five areas does not prevent growth. 35

The vicious circle of poverty is a trap in which the LDC is too poor to save and therefore it cannot invest and shift its production possibilities curve outward. As a result, the LDC remains poor. 36

One way for a poor country to gain savings, invest, and grow is to use funds from external sources, such as foreign private investment, foreign aid, and foreign loans. Borrowing by many LDCs led to the debt crises of the 1980 s, which was resolved by writing off and restructuring the loans. 37

Low income Low productivity Low savings Low investment 38

Chapter 30 Quiz © 2002 South-Western College Publishing 39

1. An LDC is defined as a country a. without large stocks of advanced capital. b. without well-educated labor. c. with a low GDP per capita. d. that is described by all of the above. D. LDCs are economies based on agriculture such as most countries of Africa, Asia, and Latin America. They have a low level of capital, a low level of education, and low standard of living. 40

2. According to the definition given in the text, which of the following is not an LDC? a. India. b. Egypt. c. China. d. Ireland. e. None of the above. D. Interestingly, Israel, Portugal, and Greece are listed as LDCs measured primarily by annual GDP per capita. 41

3. Which of the following is true when comparing GDPs per capita between nations? a. The GDP per capita is subject to greater measurement errors for LDCs compared to IACs. b. The GDP per capita does not measure income distribution. c. The GDP is subject to fluctuations from changes in exchange rates. d. All of the above. D. United Arab Emirates, for example, has a high GDP per capita, but is not a IAC because of a lack of widespread industrial development. 42

4. LDCs are characterized by a. high life expectancy. b. high adult literacy. c. high malnutrition d. all of the above. e. none of the above. E. All of the above are characteristics of industrially advanced countries (IACs). 43

5. According to the classification in the text, which of the following is not an LDC? a. Hong Kong b. Israel. c. Argentina. d. Greece. A. Hong Kong has a technologically advanced infrastructure and a well educated labor force. 44

6. When the government fixes the exchange rate above market exchange rates, a. international trade falls. b. the infrastructure improves. c. real GDP per capita rises. d. the vicious circle of poverty is broken. A. When the exchange rate of a country increases it becomes more expensive foreigners to buy goods and services from that country. 45

7. Which of the following statements is true? a. IDC is a country with a low GDP per capita, low levels of capital, and uneducated workers. b. The vicious circle of poverty exists because GDP must rise before people can save and invest. c. LDCs are characterized by rapid population growth and low levels of investment in human capital. d. All of the above are true. D. All of the above statements are true statements. 46

8. An outward shift of the production possibilities curve represents a. economic growth. b. a decline in economic development. c. a decrease in human capital. d. a decrease in resources. A. 47

Capital Goods (quantity per year) The Effect of External Financing on LDCs Kb Ka B PPC 1 PPC 2 Ca Consumer Goods (quantity per year) 48

9. Which of the following problems do LDCs face? a. Low per capita income and high GDP growth rate. b. Low population growth and low per capita income. c. Rapid population growth and low human capital. d. Low per capita income and high saving rate. C. Investment in human capital generally results in increases in GDP per capita. 49

10. Which of the following best defines the vicious circle of poverty? a. The GDP per capita must rise before people can save and invest. b. People cannot save while capital accumulates. c. Increased GDP per capita relates to lower population growth. d. Poverty, saving, and investment are related like a circle. A. The vicious circle of poverty is the trap in which countries are poor because they cannot afford to invest and save, but they cannot save and invest because they are 50 poor.

11. Which of the following is infrastructure? a. International Harvester tractor plant. b. Waste and water system provided by government. c. USAir airplane. d. Service of postal workers. B. Infrastructure refers to capital goods usually provided by the government, including highways, bridges, and airports. 51

12. Economic growth and development in LDCs are low because many of them lack a. capital investment. b. technological progress. c. a favorable political environment. d. all of the above. e. none of the above. D. Economic growth and development involve a complex process that is determined by several interrelated forces. 52

Economic growth and development Natural resources endowment Human resources development Capital investment Technological Political progress environment 53

13. Which of the following makes short-term conditional low-interest loans to developing countries? a. Agency for International Development (AID). b. World Bank. c. International Monetary Fund (IMF). d. New International Economic Order (NIEO). C. AID is the agency of the U. S. State Department that is in charge of U. S. aid to foreign countries. The World Bank makes long-term low-interest loans to LDCs. NIEO is a series of proposals made by LDCs to improve their 54 economic growth.

14. Which of the following argues that IACs should help LDCs by imposing lower trade barriers on poor countries than on rich countries? a. The Agency for International Development (AID) b. The World Bank. c. International Monetary Fund (IMF). d. New International Economic Order (NIEO). D. The NIEO has made a series of proposals to help improve LDCs economic growth. Lower trade barriers is one of these proposals. 55

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