Download Developed and Less Developed Countries

Developed and Less
Developed Countries
Chapter 15 Microeconomics
Developed and Less Developed
Countries
• Developed Nation – has a relatively high per capita GDP
over $12,000. (Average 38K, 1.3 bill people)(US-$57,300)
• Less Developed – nations with per capita GDP of
between $1k-12k (Average 4K, 4.9 billion people)
• Underdeveloped country (UDC) – has a relatively low per
capita GDP of less than 1k per capita (1 billion people,
average of $500)
• In 2013, about 77% of the world’s population lived in
LDCs.
• CIA Factbook
• https://www.cia.gov/library/publications/theworld-factbook/
What is GDP Video
http://www.youtube.com/watch?v=yUiU_xRPwMc
http://www.youtube.com/watch?v=29S7FzI7s7g
4 Common Hardships
for LDCs
• 1. High infant mortality rates.
See Example 1 on page 15-1.
• Afghanistan – 112.8 of 1,000 born die before 1 yr. old
• 2. Inadequate diets.
See Examples 2, 3A, and 3B on page
15-1. (870 million people are currently
undernurished-98% live in LDC’s)
•
Malnutrition and Obesity becoming equal problems…
Stunted growth, inability to recover from simple diseases
4 Common Hardships
for LDCs
• 3. Unsafe drinking water and inadequate
sanitation.
See Examples 4A and 4B on page
15-2. (700 million lack water, 2.5 billion lack
proper sanitation)
• 4. Inadequate medical services.
See Examples 5 and 6 on page 15-2.
•
•
US – 1 doctor for every 400 people
LDC’s ration more like 1 to 25,000
How long to double a country’s GDP?
Use the Rule of 70
• The Rule of 70 is a rule of thumb for calculating
the approximate time required for any variable to
double at a given growth rate.
• Time to double = 70 ÷ Growth Rate
See Examples 7A, 7B, 7C, and
7D on page 15-2.
Make sure you know how to use the RULE of 70!
The Importance of Economic
Growth Rates
• Economic growth rates are very important.
• Even a small difference in economic growth rates
can make a large difference in standard of living
over a long period of time.
See Examples 8, 9, and 10
on page 15-3.
Calculate the growth Rate for the US GDP ($57,300)
and for Afghanistan at 2% per year for 3 years
US v AFG
US (57,300)
AFG ($2000)
year 0
2% growth
57,300
2,000
year 1
58,446
2,040
year 2
59,614
2,080
year 3
60,806 – 3,506
2,121 - $121
Economic Freedom and
Economic Growth Related
• Most economists believe that economic freedom is
important for economic growth.
• Economic freedom is measured by such factors as
property rights, relative size of government, level of
taxation, degree of government regulation,
international trade policy, etc.
Economic Freedom and
Economic Growth
• The twenty-five percent of nations with the freest
economies experienced an average annual
increase in per capita Real GDP of 2.35% from
1990 to 2008.
• The twenty-five percent of nations with the least
free economies experienced an average annual
increase in per capita Real GDP of .66% from 1990
to 2008.
Obstacles to Economic
Development
1. Rapid population growth.
• Population growth rates tend to be higher in LDCs
than in developed countries.
.4% growth for developed 1.8% for LDC’s
• The problem is not just overpopulation. It is
population density. A country must be able to
provide adequate services for each member of
population
High Dependency Ratio
• The problem created by a rapid population
growth rate is a “high dependency ratio”.
A high dependency ratio means that
a large percentage of the population
consists of children and the elderly.
Obstacles to Economic
Development
2. Low savings rate.
• Low standards of living in LDCs make it difficult
to save (delay consumption).
• Saving is necessary if investments in physical
capital and human capital are to be made.
Obstacles to Economic
Development
3. Cultural norms that hinder economic
development.
• LDCs often have cultural norms that are hostile
to economic development.
(rigid gender roles/no class mobility)
• Examples of counterproductive cultural norms
are “traditionalism and fatalism” (predermined)
Obstacles to Economic
Development
4. Counterproductive governmental
policies.
• Certain governmental policies are a hindrance to
economic development.
• Governments in LDCs often follow some or all of
the counterproductive policies.
Counterproductive
Governmental Policies
1. Weak private property rights (next slide)
2. Restrictions on competitive markets (allow
monopoly positions, hinder competition)
3. Restrictions on international trade (tariffs,
quotas, fixed exchange rates, sanctions)
4. Excessive inflation (poor monetary policy)
5. A large government (China an example)
6. Poor provision of public services
(Water, sanitation, phone, internet, medical)
Weak Private Property Rights
Governments of LDCs often weaken private
property rights by:
• 1. Failing to enforce private property rights
through criminal and civil law (inefficient courts)
• 2. Imposing high tax rates (some have 50% tax on
relatively low incomes)
• 3. Imposing excessive government regulations
(hard to start new business without bribes)
• 4. Permitting excessive government corruption
(a system of favors and greed)
Corruption and Standard of Living
• A high degree of corruption is associated with a
low standard of living.
• A low degree of corruption is associated with a
high standard of living.
• See the table on page 15-8.
• Transparency International Website
• http://www.transparency.org/cpi2014
Economic Book, “The Power of
Productivity”
• There is tremendous disparity between rich and
poor countries.
• See Example 16 on page 15-9.
• The book asks:
“Why do some countries achieve economic growth
and grow rich, while other countries fail to
achieve economic growth and remain poor?”
“The Power of Productivity”
Conclusions
1. A country’s standard of living depends almost
exclusively on the productivity of its labor.
• The average productivity of labor will be more
strongly influenced by large sectors of the
economy than by small sectors.
• Both the US and Japan employ 25% of its labor
force in manufacturing and 75% in retail sales.
• Japan outperforms the US in manufacturing and
the US outperforms Japan in retail
• Japan’s per capital GDP is 70% of the US
“The Power of Productivity”
2. A poorly educated labor force and a low level
of savings are not huge barriers to increasing the
productivity of labor.
• Workers can attain high productivity through onthe-job training.
• A country with high productivity will attract
financing from foreign countries.
• See Example 22 on page 15-10.
“The Power of Productivity”
3. Sound macroeconomic policies make high
productivity possible but do not guarantee high
productivity.
• See Example 23 on page 15-10.
• Japan has low inflation, flexible exchange rates
and low government debt…but its economy was
stagnant during the 2000’s due to poor
performance in competitive free markets
“The Power of Productivity”
4. A large government
is a hindrance to
productivity growth, especially for low-income
countries.
• A large government means relatively high tax
rates, especially when a large part of the
economy is informal and untaxed. (Brazil has a
work for that is ½ informal and not part of the tax base)
• See Example 25 on page 15-11.
“The Power of Productivity”
5. Free and competitive product markets are
vitally important for achieving high productivity.
• In a competitive market, more productive firms
gain market share from less productive firms.
The less productive firms must either increase
productivity or go out of business.
• See Example 26 on page 15-11.
“The Power of Productivity”
• 6. A focus on consumer interests rather than on
producer interests is necessary to achieve free
and competitive markets.
• See Examples 27 and 28 on pages 15-11 and 1512.
Free and Competitive Product
Markets
To increase productivity, countries can increase
competition in product markets by:
• 1. Reducing trade restrictions on imports.
• 2. Permitting foreign direct investment.
• 3. Loosening restrictions on store size, hours of
operation, etc.
• 4. Reducing the size of government.
Foreign Aid Curse
• Research has found no significant correlation
between the amount of foreign aid received and
the economic growth rates of the recipient
countries.
• Foreign aid may actually hinder economic
growth. This “foreign aid curse” may be similar
to “the resource curse”.
“Sweatshops” in LDCs
• American multinational corporations are often
criticized for operating “sweatshops” in less
developed countries.
• When workers in LDCs voluntarily choose jobs in
“sweatshops”, it is because these are the most
attractive jobs available.
Think Like an Economist
• You work in an American-owned sweatshop,
where you are paid $2 for a 12-hour day.
• Do you hope that a $5 per eight-hour day global
minimum wage is imposed?
LDC Research Paper due 2-3
Paper Guidelines
• Select a country that fits the LDC criteria
• Perform a PEST analysis (Political, Economic, Social, Technological)
• Political: form of government, stability, elections, corruption, taxes
• Economic: inflation, interest rates, banking, employment, exports/imports
• Social: culture, education, birth rates, life expectancy, demographics, medical
care, water/food/sanitation situation
• Technology: roads, phones, internet, access to electricity, computers per
• 5 pages, 12 pt font, Times New Roman, 1 inch
margins, use 3 sources