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Chapter 30 Growth and the Less-Developed Countries

• Key Concepts• Summary• Practice Quiz• Internet Exercises

©2000 South-Western College Publishing

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In this chapter, you will learn to solve these economic puzzles:

Is there a difference between economic growth and

economic development?

Is trade a better “engine of growth” than foreign aid

and loans?Why are some countries

rich and others poor?

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What is one way to compare the well-being of one country to another?

GDP per capita

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What is GDP Per Capita?The value of final goods

produced (GDP) divided by the total population

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What are Industrially Advanced Countries (IACs)?

High-income nations that have market economies based on large stocks of technologically advanced capital and well-educated labor

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Who are the IACs?The United States, Canada,

Australia, New Zealand, Japan, and most of the countries of Western Europe

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What are Less-Developed Countries (LDCs)?

Economies based on agriculture which are lacking large stocks of technologically advanced capital and well-educated labor

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Who are the LDCs?Most countries of Africa,

Asia, and Latin America

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GDP per Capita for IACs and LDCs by Region, 1997

IACs Latin America and Caribbean

Europe and Central Asia

Middle East and North Africa

East Asia and Pacific

Sub-Saharan Africa

South Asia

$24,847

$3,880$2,320 $2,060

$970 $500 $390

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What are problems in comparing GDPs per Capita?• Measurement errors• Income distribution• Fluctuations in exchange rates• Differences in living standards

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Is GDP per Capita correlated with other measures of Quality

of Life?

Yes

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What are Quality of Life Indicators?

• Life expectancy• Adult literacy• Daily calorie supply• Energy consumption

per capita

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What Factors come together to Produce a Country’s Growth?

• Natural resources• Investment in capital• Investment in human capital• Low population growth• Infrastructure

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40302010

100 200

50607080

300 400 500

Economics GrowthQ

Q

Man

ufa

ctu

red

Goo

ds

Agricultural Goods

PPC1

PPC2

Exhibit 4

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Growth in resources or technological

advance

Economics Growth

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What is infrastructure?Capital goods usually

provided by the government, including highways, bridges, waste and water systems, and airports

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What is a major problem for LDCs?

They find themselves in a vicious cycle of poverty

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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

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What are the Political Factors Favorable for

Economic Growth?• Law and order• Infrastructure• International trade

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Economic growth and development

Natural resources

endowment

Human resources

development

Capital investment

Technological progress

Political environment

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What is Foreign Aid?The transfer of money

or resources from one government to another for which no repayment is required

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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

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What is the World Bank?The lending agency

that makes long-term low-interest loans and provides technical assistance to less-developed countries

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What is the International Monetary Fund (IMF)?The lending agency that

makes short-term conditional low-interest loans to developing countries

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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

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Key Concepts

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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?

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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 AID?

• What is the World Bank?

• What is the IMF?

• What is the NIEO?

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Summary

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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.

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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.

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

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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.

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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.

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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.

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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.

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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.

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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.

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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 1980s, which was resolved by writing off and restructuring the loans.

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Low income

Low savings

Low investment

Low productivity

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Chapter 30 Quiz

©2000 South-Western College Publishing

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1. An LDC is defined as a countrya. 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.

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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.

D. Interestingly, Israel, Portugal, and Greece are listed as LDCs measured primarily by annual GDP per capita.

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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.

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4. LDCs are characterized by a. high life expectancy.b. high adult literacy.c. high malnutritiond. all of the above.e. none of the above.

E. All of the above are characteristics of industrially advanced countries (IACs).

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5. According to the classification in the text, which of the following is an LDC? a. United Arab Emirates.b. Israel.c. Hong Kong.d. Greece.

A. United Arab Emirates has a high GDP per capita but there is a lack of widespread industrial development.

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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 for foreigners to buy goods and services from that country.

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7. Which of the following statements is true? a. An LDC 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.

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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.

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Consumer Goods (quantity per year)

Cap

ital

Goo

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(qua

ntity

per

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Ca

Kb

Ka

PPC2PPC1

The Effect of External Financing on LDCs

B

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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.

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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 poor.

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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.

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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.

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Economic growth and development

Natural resources

endowment

Human resources

development

Capital investment

Technological progress

Political environment

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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 economic growth.

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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.

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END