Economic Development Overview

Overview

This chapter explores the main concepts of economic development, focusing on living standards, poverty, and population. It explains what these terms mean, how they are measured, why they matter to governments, and how they influence the development of economies. The chapter also examines the reasons for differences in living standards and poverty, and discusses the impact of population structure on economic growth and development.

Living Standards

• Definition:
  Living standards (or standard of living) refer to all the factors that contribute to a person's well-being and happiness. This includes income, health, education, access to goods and services, and overall quality of life.

• Government Interest:
  Governments are concerned with living standards because improving them increases citizens' welfare, supports economic stability, and promotes growth. Living standards are a key focus in macroeconomics, as they reflect the overall well-being of the population.

• Why Governments Care:
  Governments may intervene to improve living standards because higher living standards can lead to a happier, healthier, and more productive population. This, in turn, supports economic growth and stability.

• Measuring Living Standards:
  Economics relies on measurable data and analysis, so living standards must be quantified using specific indicators.

  • GDP per head (GDP per capita):

    • Measures the average income per person in an economy.
    • Used because it reflects total production, is linked to employment, and is readily available for analysis.
    • Merits:
      • Indicates the material well-being of the economy.
      • Correlates with employment and output; higher output often means more jobs and higher incomes.
      • Data is easily accessible and widely used for economic analysis and forecasting.
      • Useful for making predictions and comparisons.
    • Limitations:
      • Does not show what people can actually buy with their income (purchasing power).
      • Ignores unpaid work, such as volunteer services.
      • Does not account for technological changes or improvements in quality of life.
      • Excludes factors like environmental quality, leisure, and health.
      • Fails to capture income distribution and inequalities; a high average can hide poverty among some groups.
      • Does not include non-market activities or the value of free services.
      • Does not reflect changes in technology or access to new products.
      • Does not consider the range of goods and services available to people.

  • Human Development Index (HDI):

    • Developed by the United Nations to provide a broader measure of living standards.
    • HDI is a value between 0 (lowest) and 1 (highest), based on three main indices:
      • Income Index: Average national income per person (GNI per head).
      • Education Index: Average years of schooling and educational attainment.
      • Healthcare Index: Life expectancy at birth.
    • How HDI Works:
      • Each factor is scored, and the scores are combined to give an overall HDI value.
      • Used to compare living standards across countries.
    • Benefits:
      • Considers major aspects of well-being: income, education, and health.
      • Includes social factors, not just economic output.
      • Allows for global comparisons of living standards.
      • Produced by a reputable international organization (UN), making it reliable and widely recognized.
      • More comprehensive than GDP alone.
    • Limitations:
      • Combines separate indicators into a single value, which may mask differences between areas.
      • Does not reflect income and wealth inequalities within countries; a high average can hide disparities.
      • Omits other important factors like environmental quality and access to clean water.
      • Data may be incomplete or unavailable for some countries, limiting comparability.
      • Does not consider all aspects of well-being, such as environmental quality, leisure, or access to basic services.
      • May not be available for every country or region.

Differences in Living Standards

• Within Countries:

  • Regional differences in income, job opportunities, education, healthcare, and local government policies lead to varying living standards.
  • Urban areas often have higher incomes and better services compared to rural regions.
  • Local government decisions and the distribution of resources can create disparities.
  • Differences in the types of jobs available (e.g., manufacturing and services in cities) affect income and access to services.
  • Local government control over education and health can result in different outcomes across regions.

• Between Countries:

  • Differences arise from industry productivity, availability of natural resources, tax systems, government effectiveness, corruption, war, crime, and exposure to natural disasters.
  • Countries with productive industries or valuable resources (like oil) often have higher living standards.
  • Effective tax collection and government spending can improve infrastructure and services, while corruption and conflict can lower living standards.
  • Natural disasters and war can negatively impact health, education, and income, reducing living standards.
  • The ability of citizens to pay taxes and the government's use of tax revenue for public services also affect living standards.
  • Corruption can prevent tax money from being used to benefit the population.
  • War, crime, and natural disasters can disrupt health, education, and income, lowering living standards.

Poverty

• Types of Poverty:

  • Absolute poverty: Inability to afford basic necessities such as food, water, shelter, healthcare, and education.
  • Relative poverty: Having fewer resources compared to others in the same society, reflecting income inequality. Relative poverty is about having less than the average in your society, even if basic needs are met.

• Causes of Poverty:

  • Unemployment, leading to lack of income and inability to afford basic needs.
  • Low education levels, resulting in fewer job opportunities and lower earning potential.
  • Large family size, increasing the financial burden on households as income must be shared among more people.
  • Age, as older individuals may face health issues and limited employment opportunities.
  • Poor government support, with inadequate welfare or unemployment benefits.
  • Poor health, which can prevent individuals from working and earning income.
  • Overpopulation, straining resources and increasing competition for jobs and services.

• Policies to Reduce Poverty:

  • Reducing unemployment through expansionary fiscal policy (increasing demand and job creation).
  • Implementing progressive taxation, where higher earners pay more tax to support welfare programs.
  • Providing welfare services and direct support to those in need, such as unemployment benefits.
  • Improving education through supply-side policies to enhance skills and employability.
  • Increasing the quantity and quality of education to help people gain skills for better jobs.
  • Using tax revenue to support the poor and help them return to employment.

Population

• Definition:
  Population refers to the total number of people living in an economy. Population size and structure affect government policy, resource allocation, and economic planning.

• Why Population Matters:
  Governments aim to keep population at a manageable level. Too high a population makes it difficult to implement regulations and provide services.

• Birth Rate:

  • Defined as the average number of children born per year per population.
  • Factors affecting birth rate:
    • Living standards: Better health and lower child mortality often lead to lower birth rates, as families do not need to have as many children to ensure some survive.
    • Access to contraception and legalization of abortion: More access leads to lower birth rates, as families can control the number of children they have.
    • Customs and religion: Some beliefs encourage larger families or restrict contraception, leading to higher birth rates.
    • Female employment: Higher female participation in the workforce often results in lower birth rates, as women may delay or have fewer children to focus on their careers.
    • In poorer countries, higher birth rates may result from fear of child mortality and the need for children to help with work.

• Death Rate:

  • Number of deaths per 1,000 people per year.
  • Factors affecting death rate:
    • Living standards: Higher standards lead to lower death rates and longer life expectancy.
    • Advances in healthcare and technology: Improve survival rates and reduce mortality.
    • Natural disasters and wars: Increase death rates in affected regions.

• Migration:

  • Movement of people between countries for better living standards, employment opportunities, or favorable climate.
  • Migration can affect the size and structure of a country's population, as well as its labor force and economic growth.
  • People migrate for better jobs, higher living standards, or improved climate.

Population Structure

• Age Distribution:

  • Refers to the number of people in each age group within a population.
  • Affects the size of the labor force and government spending on services like education and pensions.
  • Consequences of an aging population:
    • Declining workforce as more people retire, reducing the number of people available to work.
    • Increased government spending on pensions, healthcare, and welfare for the elderly.
    • Higher demand for products and services tailored to older people, such as healthcare and mobility aids.
    • Need for investment in infrastructure to support mobility and care for seniors.
    • Fewer people in the working-age group can lead to slower economic growth and increased pressure on younger workers.
    • The government may need to invest in technology and services to support an aging population.

• Gender Distribution:

  • The ratio of males to females in a population.
  • Imbalances can result from war, violence, or cultural factors, such as a preference for sons.
  • More females can lead to higher birth rates, but balanced gender ratios are important for stable population growth.
  • Gender imbalances can affect family formation, labor markets, and social stability.
  • Causes of gender imbalance include war (more males die), violence against women, and cultural preferences.
  • Changes in gender distribution can affect birth rates and population growth.

• Effects of Increasing Population Size:

  • Expands the domestic market, increasing demand for goods and services.
  • Increases the supply of labor, which can boost production and economic growth.
  • May require more capital goods and infrastructure to meet the needs of a larger population.
  • If resources are limited, a larger population can lead to lower productivity, higher unemployment, and strain on services like healthcare and education.
  • Governments must manage population growth to ensure sustainable development and avoid negative effects such as overcrowding and resource depletion.
  • A larger population can increase demand and supply, but may also reduce productivity if resources are scarce.

Economic Development

• Definition:
  Economic development is the process of increasing the economic welfare of people through growth in productive capacity and wealth. It involves improving living standards, reducing poverty, and managing population growth.

• Characteristics of Developed Economies:

  • High life expectancy, high literacy rates, and low death rates.
  • Well-developed infrastructure, healthcare, and education systems.
  • Low levels of poverty and high living standards.

• Influences on Economic Development:

  • Improvements in living standards, poverty reduction, and balanced population growth all contribute to economic development.
  • Economic development is shaped by the interplay of income, health, education, and population structure.
  • Developed economies are able to provide better opportunities and welfare for their citizens, while less developed economies may struggle with poverty, high population growth, and limited resources.
  • High population growth is often seen in less developed countries, especially where access to contraception is limited.

• Interconnectedness:

  • Living standards, poverty, population size, and structure are all interconnected and contribute to the overall development of an economy.
  • Policies that improve one area, such as education or healthcare, can have positive effects on others, leading to greater economic development.
  • All the concepts discussed in this chapter—living standards, poverty, and population—are linked and together determine the level of economic development.

Key Terms & Definitions

• Living standards: All factors contributing to personal well-being and happiness, including income, health, education, and access to goods and services.
• GDP per capita: Average income per person in an economy, used as a measure of living standards.
• HDI (Human Development Index): Composite index measuring income, education, and health to assess living standards.
• Absolute poverty: Inability to afford basic necessities of life, such as food, water, shelter, healthcare, and education.
• Relative poverty: Having less compared to others in the same society, reflecting income inequality.
• Birth rate: Average number of children born per year, per population.
• Death rate: Number of deaths per 1,000 people per year.
• Age distribution: Number of people per age group in a population, affecting the labor force and government spending.
• Economic development: Increase in economic welfare through productive growth and wealth, leading to higher living standards and reduced poverty.

Action Items / Next Steps

• Review and compare the definitions and uses of GDP per capita and HDI as measures of living standards, noting their strengths and limitations.
• Prepare examples illustrating causes of poverty and government policy responses, including how different policies can address various causes.
• Study population dynamics, including factors influencing birth and death rates, and their impact on economic development and government planning.
• Practice analyzing case studies that compare developed and less developed economies, focusing on the interplay between living standards, poverty, and population structure.
• Consider how changes in population structure, such as aging or gender imbalances, can affect economic growth and government policy.