characteristics of less developed economies
- low GDP, low life expectancy, high infant mortality, low GNI, low education levels, high levels of crime
- corruption political internal instibility
- low income per capita
- high levels of poverty
- shortage of capital
- population explosion and high dependancy
- high unemployment / underemployment
- predominance of agriculture
- unproductive investment
what is unproductive investment and how is it a characteristic of less developed economies
expenditure that does not increase the productive capacity (AS) of an economy, fails to enhance productivity, doesn’t lead to the creation of new capital goods.
Consuming existing wealth or resources rather than expanding production.
- (low levels of saving)
how is predominance oof agriculture a characteristic of less developed economies
reliance on primary production; low productivity
factors effecting growth and development
- political and institutional factors
- education and skills (and training)
- infrastructure and technology
- absolute poverty /income distribution
- access to credit and banking (microfinance)
- demographic factors (ageing population) Japan
- international trade
- commodities
- debt
- FDI and portfolio capital flows
- gender issues
how does absolute poverty influence growth and development
if widespread, restricts human capital
how does income distribution effect growth and development
high inequality leads to lower opportunity and incentives
how do political and institutional factors effect growth and development
regarding the strength of government, corruption and bribery, regulation
- rent seeking
how does demographic factors influence growth and development
- eg. ageing population
An older population increases demand for healthcare, pensions, and assisted living, creating new markets but also higher public spending (e.g., UK)
if size of population is static then output will fall, because there are fewer workers - eg. High Youth Dependency (LEDCs)
High birth rates create many young dependents (under 18s), straining education, healthcare, and job markets, slowing development despite potential future workforce growth (e.g., Africa).
large amounts of unemployment/underemployment because economies cant provide enough jobs for the large cohorts of young people joining the working population
how does international trade influence growth and development
- encourages efficiency from having comparative advantage
- access to new technology, eg textile industry
- innovations
how does debt influence growth and development and example
- debt can become hard to repay if interest rates or exchange rate changes
- money spent on war not growth
gov, encouraged debt in the 70s so Many dev countries borrowed heavily due to low interest rates
- Loans were used inefficiently or on unproductive projects
- Rising interest rates (1980s): Debt repayments increased sharply
- Debt crisis: Countries struggled to repay → defaults and reliance on IMF bailouts which lead to Austerity & slower growth: Spending cuts reduced growth and living standards.
how does FDI and portfolio capital flows influence growth and development
- injecting finance
- boosting capital stock
- creating jobs
- transferring technology (FDI)
leading to higher LRAS and productivity
both impact Balance of Payments and Aggregate Demand,
why is FDI better for long term growth and development
- long-term funding for new factories, infrastructure, and technology, increasing productive capacity
- Transfer of skills & technology; improves labour productivity
- Employment creation; raising incomes and living standards.
- Improved human capital: Training and knowledge spillovers benefit domestic firms over time
- Export growth: FDI increases export capacity, improving CA
FDI is harder to withdraw, making it more reliable for long-term development
but FDI’s benefits depend on host country’s human capital/institutions
why are portfolio capital flows only impactful in the short turn
portfolio flows (hot money) offer short-term finance but are volatile
what is difference to direct and indirect jobs
Direct jobs are hands-on roles essential for creating a product or core service (like a factory worker or tour guide), while indirect jobs support those roles by supplying goods, services, or administrative functions
why does FDI’s benefits depend on host country’s human capital/institutions
- Skilled workforce needed to absorb new technology
- Strong institutions ensure efficient use of FDI
- Rule of law & low corruption encourage reinvestment
FDI boosts long-term growth only with strong human capital and institutions
the savings gap
developing countries have a lack of savings to fund capital investment due to high levels of extreme poverty leading to over reliance on aid or borrowing from overseas
foreign exchange gap
occurs when a country does not earn enough foreign currency from exports to pay for essential imports (e.g. capital goods, raw materials, technology).
It limits economic growth and development because countries cannot import what they need to expand productive capacity.
Common in developing economies with low export revenues. Higher growth rates possible but insufficient conditions for economic growth
Harrod - Domar growth model
strong link between savings and wealth
→ increased investment
→ higher capital stock
→ higher economic growth
→ increased savings (bank invests with the savings)
how do commodities affect less developed countries
- commodity prices are volatile and fluctuate meaning it is difficult to predict income flows, can discourage investment, primary product dependent, low YED (as world income rises demand for manufactures goods will rise faster than for commodities)
- the more dependent on the commodity export the greater the risk there will be sizeable changes in GDP when commodity price changes
- commodity price declines; TOT for commodity export dependent countries fall
in terms of goods produced why are poor countries staying poor compared to rich countries
countries producing luxury goods get richer because there is a high income elasticity of demand, so rich countries get even richer with what they are producing
resource curse
countries rich in natural resources experience slower economic growth and development than resource-poor countries
- Over-reliance on one export → vulnerability to price volatility
- Dutch disease (strong currency harms manufacturing exports)
- Corruption & weak institutions linked to resource revenues, commodity resources can be controlled by a small groups that seek to maximise their own rewards at the expense of the rest of the population
- Underinvestment in human capital
Result: resource wealth can hinder long-term development rather than promote it.
how does access to credit and banking (microfinance) influence growth and development
- lack of financial institutions to be able to save money with interest to be spent later or borrow now to spend at a reasonable interest
- microfinance; very small loans given out particularly to women in dev countries, to startup/ invest into their businesses, peer pressure encourages the loans to be spent responsibly
Dutch disease + effects
Dutch disease occurs when a boom in one export sector (e.g. natural resources) leads to a decline in other sectors like manufacturing
- Cause: Large inflows of foreign currency from exports increase demand for the domestic currency.
- Exchange rate effect: Currency appreciates, making exports more expensive and imports cheaper.
- Impact on firms: Non-booming export industries become less competitive → fall in output and jobs.
- Resource movement effect: Labour and capital shift to the booming sector, reducing productivity elsewhere.
- Result: Deindustrialisation and increased dependence on one sector.
Examples: Netherlands (natural gas), Nigeria (oil), Norway (oil – managed better).
Why it matters: Can cause long-term economic instability if the boom ends
capital flight
savings are sent abroad by citizens and firms of a country which to another country which is either seen as being more secure or where the money can be hidden from gov. authorities
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macro indicators63
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macro term 167
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consumption + AD57
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balance of payments+unemployment98
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macro policies140
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real life application22
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definitions18
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chain Of Reasonings6
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Trade and exchange rates68
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Keynesianism22
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protectionism/globalisation57
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development54
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financial markets129
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real life examples3
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calculations1
