Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
David Ricardo wikipedia , lookup
Transformation in economics wikipedia , lookup
Balance of trade wikipedia , lookup
Economic globalization wikipedia , lookup
International factor movements wikipedia , lookup
Heckscher–Ohlin model wikipedia , lookup
Development economics wikipedia , lookup
3 Theories and Models linked to Development • • • There is no one agreed ‘theory of development’. Each model, like Rostow, gives an insight into one or two dimensions of the complex process of development Theory is used to analyse and evaluate development. Be familiar with their assumptions, weaknesses and predictions Do not be afraid to adopt a critical view of the validity of models and their predictions. Be balanced and justify your analysis with recent case study evidence 3.1.1 What is Economic development theory Economic development theories and models seek to explain and predict how: • Economies develop (or not) over time • Barriers to growth can be identified and overcome • Government can induce (start), sustain and accelerate growth with appropriate development polices 3.1.2 What are the limitations of development theories? Theories are generalisations. • While LDCs share similarities, every country’s unique economic, social, cultural, and historical experience means the implications of a given theory vary widely from country to country. • There is no one agreed ‘model of development’. Each theory, like Rostow, gives an insight into one or two dimensions of the complex process of development. Eg Rostow helps us to think about the stages of development LDCs might take and Harrod Domar model explains the importance of adequate savings in that process. 3.1.3 What is the difference between a necessary and sufficient condition for growth? Necessary and sufficient conditions are useful analytical and evaluative tools. Eg • If net investment always means an increase in productive capacity hence growth then net investments a necessary and sufficient condition for growth • If growth leads to an increase in GDP but significant externalities, depletion of non-renewable resources and worsening income distribution then growth does not always lead to development. Growth is necessary (has to happen) but insufficient (not enough) condition for development. 3.1.4 What are the characteristics of growth in DCs? Simon Kuznets identified these characteristics for all DCs: • GNP growth; • GNP per capita growth; • Population growth; • Productivity growth; • Structural transformation; • International trade; • Social and ideological change 3.2 Theories explain cause of LDC problems and potential policies Some of Kuznets' characteristics of a DC can be applied to LDCs to explain underdevelopment caused by a lack of • Productivity growth; • Structural transformation; • International trade; • Social and ideological change • Policies which enable the above facilitate development International trade & comparative advantage 3.2.1 Why do countries trade? International trade is the exchange of goods and services between countries. Trade improves consumer choice and total welfare. Different countries have different factor endowments eg climate, skilled labour force, and natural resources vary between nations. Therefore some countries are better placed in the production of certain goods than others. Economic theory predicts all countries gain if they specialise and trade the goods in which they have a comparative advantage. This is true even if one nation has an absolute advantage over another country. Tutor2u Development Economics Q&A Autumn 2003 © Richard Young Page 22 3.2.3 Distinguish between absolute & comparative advantage International trade allows increased specialisation so that higher output allows economies of scale. • A larger market allows domestic producers greater scope for economies of scale. Without trade the domestic market only allows Q1 output. Access to overseas markets means Q2 output at lowest unit cost. • International competition stimulates competition. Domestic firms strive to become ‘world class’, adapting modern technology, product and process innovations that reduce unit costs. • • Exploiting economies of scale through mass production Unit cots 3.2.2 How can external trade promote economic development and growth? LAC Q2 with trade Q1 without trade Output Absolute advantage occurs when a country or region can create more of a product with the same factor inputs. Comparative advantage exists when a country has lower opportunity cost in the production of a good or service 3.2.4 Explain the theory of comparative advantage Comparative advantage is based on differing opportunity costs reflecting the different factor endowments of the countries involved. The theory assumes free trade, willingness to specialise and factor mobility. Specialisation and trade benefits countries providing at an exchange rate between the respective opportunity cost ratios. 3.2.5 Give an example of countries benefiting from trade using the theory of comparative advantage Countries benefit if they specialise in the production of a good or service in which they have a comparative advantage ie a lower internal opportunity cost: Consider a LDC and DC producing two goods cars and cocoa. If each country allocates half its resources to the production of both goods, the production possibilities are as shown in the table opposite. What does each country give up to produce one extra tonne of cocoa? • For the LDC, the opportunity cost of each extra tonne of cocoa is 2000/1000 ie two cars. • For the DC, the opportunity cost of each extra tonne of cocoa is 2400/800 ie three cars. Therefore, the LDC has a comparative advantage in cocoa Assume complete specialisation. Where each country specialises in the products in which it has the comparative advantage. Output of both products increases representing a gain in economic welfare. Tutor2u Development Economics Q&A Autumn 2003 Output Pre Specialisation Cars Cocoa (tonne) LDC 2000 1000 DC 2400 800 TOTAL OUTPUT 4400 1800 Tip: prepare a simple worked example for a LDC trading with a DC Comparative advantage is used to justify free trade and oppose protectionism. What does each country give up to produce one extra car? • For the DC the opportunity cost of one extra car is 800/2400 ie 1/3 tonnes of cocoa. • For the LDC the opportunity cost is 1000/2000 ie 1/2 tonnes of cocoa. Therefore the DC has the comparative advantage in cars Output After Specialisation Cars Cocoa (tonne) LDC 0 2000 DC 4800 0 TOTAL OUTPUT 4800 (+400) 2000 (+200) © Richard Young Page 23