Download 3 Theories and Models linked to Development

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