Download Ib Economics Syllabus SECTION 5

5.1 Sources of economic growth and/ or development
5.2 Consequences of growth
5.3 Barriers to economic growth and/ or development
5.4 Growth and development strategies
5.5 Evaluation of growth and development strategies
Natural Factors
 Human Capital Factors
 Physical Capital and Technological
Factors
 Institutional Factors
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Quantity of human capital
Population Growth – grants and financial support
Immigration levels – working visas
Getting more people and women into work
Quality of human capital
Immigration schemes to target skilled professionals, relocation costs, tax
credits
Investment in education, longer hours – budget 21%of government
spending – USA 4%
Promoting training at work schemes (apprenticeship)
Improvement in health care to extend working life
Quantity of investment
Changing variables such as domestic savings, level of private
investment, government involvement, foreign investment
Government owned organizations create 60% of GDP
Reduce barriers to investment, tax credits, foreign ownership rules
Stimulate Aggregate Demand and shift aggregate supply
Quality of Investment
Skill training for workers, higher education and research
Access to foreign technology and expertise
Multinational corporations
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Adequate banking system
Legal system free from corruption
Good education system
Developed modern infrastructure
Political stability
International relations
Externalities
 Income Distribution
 Sustainability
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Externalities
Negative: pollution, overuse of land
Positive: more efficient production methods that are better for the
environment, results in larger tax base which may be spent on
environment
 Spillover Costs (Negative Externalities)
A cost imposed without compensation on third parties by the
production or consumption of other parties. Example: A
manufacturer dumps toxic chemicals into a river, killing the fish
sought by sport fishers
 Spillover Benefit (Positive Externalities)
A benefit obtained without compensation by third parties from the
production or consumption of other parties. Example: A bee keeper
benefits when the neighboring farmer plans clover.
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May increase inequality if benefits of growth only seen by a select few, or
decrease inequality if benefits seen by entire population
The distribution of pretax income in the United States today is highly unequal.
The most careful studies suggest that the top 10 percent of households, with
average income of about $200,000, received 42 percent of all pretax money
income in the late 1990s. The top 1 percent of households, averaging
$800,000 of income, received 15 percent of all pretax money income.
In the longer view, the path of income inequality over the twentieth century
is marked by two main events: a sharp fall in inequality around the outbreak
of World War II and an extended rise in inequality that began in the mid1970s and accelerated in the 1980s. Income inequality today is about as
large as it was in the 1920s.
Over multiple years, family income fluctuates, and so the distribution of
multiyear income is moderately more equal than the distribution of singleyear income.
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Economic growth will put pressure on the environment.
Refinancing
 Taxation
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Refinances debt by selling new bonds
 Using proceeds to pay off holders of the
maturing bonds
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The Federal Government can levy ad
collect taxes
 Tax increase is a government option for
gaining sufficient revenue
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› To pay interest
› To pay principal on the public debt
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To eliminate the American-owned part
of the public debt would require a
gigantic transfer payment from
Americans to Americans.
› Tax payers would pay higher taxes
› Holders of debt would receive an equal
amount for their U.S. securities
Income Distribution
 Incentives
 Foreign-owned Public Debt
 Crowding Out and Stock of Capital
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The distribution of ownership of government
securities is highly uneven
 Public debt is usually concentrated among
wealthier groups who own a large
percentage all stocks and bonds
 Payment of interest on the public debt
probably increases income inequality
 On average, Income is transferred from
lower income to higher-income
bondholders
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Higher taxes may dampen incentives
› To bear risk
› To innovate
› To invest
› To work
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In this indirect way, a large public debt
may impair economic growth
Example:18% U. S Debt held by citizens and
institutions of foreign countries is an
economic burden to Americans
 We do not owe that portion of debt to
“ourselves”
 External Public Debt
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› Enables foreigners to buy some of our output
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Borrowed Funds from Foreign nations
› United States transfer goods and services to
foreign lenders
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Other Foreign Countries has debt to the U.S.
› They transfer goods and services as well
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The financing of large public debt can transfer
real economic burden to future generations by
passing on a smaller stock of capital goods.
› Crowding Out Effect
 Idea that Large Public Debt Results in higher real interest
rates, which reduce private investment spending
 If it is extensive , future generations will inherit an
economy with a smaller production capacity and lower
standard of living
› Qualifications
 Public Investment
 Public-private complementarities
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Part of the government spending
enabled by the public debt is for public
investment outlays. For Example:
› Highways
› Mass Transits
› Electric Power Facilities
Shown on Graph
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Poverty cycle: low incomes --> low savings --> low investment --> low
income
Institutional and political factors
International trade barriers
International financial barriers
Social and cultural factors acting as barriers
Ineffective taxation structure
Lack of property rights
Political instability
Corruption
Unequal distribution of income
Formal and informal markets
Lack of infrastructure
Overdependence on primary
Products
Consequences of adverse terms of
Trade
Consequences of a narrow range of
Exports
Protectionism in international trade
A barrier to trade is a government-imposed restraint on the flow of international goods or services. The most
common barrier to trade is a tariff—a tax on imports. Tariffs raise the price of imported goods relative
to domestic goods (goods produced at home).
Another common barrier to trade is a government subsidy to a particular domestic industry. Subsidies
make those goods cheaper to produce than in foreign markets. This results in a lower domestic price.
Both tariffs and subsidies raise the price of foreign goods relative to domestic goods, which reduces
imports.
Yet another barrier to trade is an embargo—a blockade or political agreement that limits a foreign
country's ability to export or import.
Barriers to trade are often called "protection" because their stated purpose is to shield or advance
particular industries or segments of an economy. From an economic perspective, though, the costs to
the economy almost always outweigh the benefits enjoyed by those who are protected.
Indebtedness
Non-convertible currencies
Capital flight
Religion
Culture
Tradition
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Harrod-Domar growth model
Structural change / dual sector model
Types of aid Grant aid, soft loans Official aid Tied aid
Export-led growth / outward oriented
Strategies
Import substitution / inward-oriented
strategies / protectionism
Commercial loans
Fair trade organizations
Micro-credit schemes
Foreign direct investment
Sustainable development
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The Harrod-Domar model is used in development economics to
explain an economy's growth rate in terms of the level of saving and
productivity of capital. It suggests that there is no natural reason for
an economy to have balanced growth.
Saving Rate
Depreciation
Rate
Ig
d
S
s
C
D
GDP
v= K/Y or
a=Y/K
In
Capital
Capital/Output
Ratio or
Productivity
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Evaluation of the following in terms of
Achieving growth and / or development
Aid and trade
Market-led and interventionist
Strategies
The role of international financial
Institutions
The International Monetary Fund
(IMF)
The World Bank
Private sector banks
Non-governmental organizations
Multinational corporations/
Transnational corporations
(MNCs/TNCs)
Commodity agreements