Chapter 30
Growth and the LessDeveloped Countries
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1
In this chapter, you will
learn to solve these
economic puzzles:
IsIsthere
tradeaadifference
better “engine
between
of
Why
are
some
countries
growth”
economic
thangrowth
foreign
and
aid
rich
and
others
poor?
economic
anddevelopment?
loans?
2
What is one way to
compare the well-being of
one country to another?
GDP per capita
3
What is GDP Per Capita?
The value of final goods
produced (GDP) divided
by the total population
4
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
5
Who are the IACs?
The United States, Canada,
Australia, New Zealand,
Japan, and most of the
countries of Western Europe
6
What are Less-Developed
Countries (LDCs)?
Economies based on
agriculture which are
lacking large stocks
of technologically
advanced capital and
well-educated labor
7
Who are the LDCs?
Most countries of Africa,
Asia, and Latin America
8
GDP per Capita for IACs and LDCs by Region, 1997
$24,847
$3,880
$2,320
IACs Latin
America
and
Caribbean
Europe
and
Central
Asia
$2,060
Middle
East
and
North
Africa
$970
$500
$390
East SubSouth
Asia Saharan Asia
and
Africa
Pacific
9
What are problems in
comparing GDPs per Capita?
• Measurement errors
• Income distribution
• Fluctuations in exchange rates
• Differences in living standards
10
Is GDP per Capita
correlated with other
measures of Quality
of Life?
Yes
11
What are Quality of
Life Indicators?
• Life expectancy
• Adult literacy
• Daily calorie supply
• Energy consumption
per capita
12
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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80
70
60
50
40
30
20
10
Exhibit 4
Economics Growth
Manufactured Goods
Q
PPC2
PPC1
Agricultural Goods
100
200
300
Q
400 500
14
Economics
Growth
Growth in resources
or technological
advance
15
What is infrastructure?
Capital goods usually
provided by the
government, including
highways, bridges,
waste and water
systems, and airports
16
What is a major
problem for LDCs?
They find themselves in a
vicious cycle of poverty
17
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
18
What are the Political
Factors Favorable for
Economic Growth?
• Law and order
• Infrastructure
• International trade
19
Economic growth and development
Natural
resources
endowment
Human
resources
development
Capital
investment
Technological
progress
Political
environment
20
What is Foreign Aid?
The transfer of money
or resources from one
government to another
for which no
repayment is required
21
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
22
What is the World Bank?
The lending agency
that makes long-term
low-interest loans and
provides technical
assistance to lessdeveloped countries
23
What is the International
Monetary Fund (IMF)?
The lending agency that
makes short-term
conditional low-interest
loans to developing
countries
24
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
26
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?
27
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?
28
Summary
29
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.
30
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.
31
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.
32
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.
33
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.
34
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.
35
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.
36
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.
37
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.
38
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.
39
Low income
Low productivity
Low savings
Low investment
40
Chapter 30 Quiz
©2000 South-Western College Publishing
41
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.
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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.
43
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 malnutrition
d. 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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Capital Goods
(quantity per year)
The Effect of External Financing on LDCs
Kb
B
Ka
PPC1
PPC2
Ca
Consumer Goods
(quantity per year)
50
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.
52
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.
54
Economic growth and development
Natural
resources
endowment
Human
resources
development
Capital
investment
Technological
progress
Political
environment
55
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.
56
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.
57
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END
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