Chapter 20-Macro

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  • Youtube video of Hernando De Soto “The Power of the Poor”
  • Chapter 20-Macro

    1. 1. Chapter 20 Economic Development
    2. 2. How to classify economies • The World Bank (an economic development institution affiliated with the UN) estimates gross national income (GNI) – GNI measures the market value of all goods and services produced by resources supplied by the countries’ residents and firms, regardless of the location of the resource. – It measures both the value of output produced and the income that output generates.
    3. 3. GNI continue • It measures income per capita, then adjusts figures across countries based on the purchasing power of that income in each country. • The World Bank then sorts into three major groups: – High-income economies • About one-sixth of the world’s population produces threefourths of the world’s output – Middle-income economies • About 64% of the world’s population and account for about 25% of the world output – Low-income economies • About 20% of the world’s population and account for only 1% of the world output
    4. 4. GNI continue http://www.nationmaster.com/graph/eco_gro_ nat_inc-economy-gross-national-income
    5. 5. Developing and Industrial Economies • Developing countries: the low- and middleincome economies – 50% of their labor force in agriculture • Industrial Economies: the high-income economies – 84% of the world’s population in 2007 but produce only 26% of the output
    6. 6. Health and Nutrition • Malnutrition – In the poorest countries they consume only half the calories of those in high-income countries. – Contributes to more than half of the deaths of children under the age of 5 in low-income countries. – Safe drinking water is often hard to find; thus, causing many diseases
    7. 7. Health and Nutrition • Infant Mortality – The rate is much greater in low-income countries than in high-income countries.
    8. 8. High Birth Rates • Developing countries also have high birth rates • This year, more than the 80 million of the 90 million births will be added to developing countries. – WHY??
    9. 9. Women in Developing Countries • Poverty is greater among women than men, this is true for the world as a whole (on the average that is) • Women in developing countries tend to be less educated than men. – WHY???
    10. 10. Why are poor countries poor? • The simple answer: – They are poor because they produce few goods and services.
    11. 11. Low Labor Productivity • Labor Productivity: output measured by worker • Labor Productivity tends to be low in developing countries. – WHY?? • Quality of the labor • Capital • Natural resources
    12. 12. What to do? • Invest in Capital: – How? • Foreign Aid • Private Investment in Capital
    13. 13. Technology and Education • Education helps people make better use of the resources available. • It also makes people more receptive to new ideas and methods
    14. 14. Inefficient Use of Labor • Developing countries use labor less efficiently than do industrial nation. – Underemployment and Unemployment – Low productivity= Low Income= Less Saving= Less Investment in human and physical capital • Creating a “cycle of poverty”
    15. 15. Natural Resources • Many developing countries have little in natural resources. – The exceptions are the oil-rich countries
    16. 16. Financial Institutions • An important source of funds for investment is the savings of household and firms • In some developing countries, the people have little confidence in the country’s currency – Governments finance a large fraction of outlays by printing money • Hyperinflation – Zimbabwe
    17. 17. Capital Infrastructure • • • • • • • • Roads Bridges Airports Harbors Reliable Mail Service Telephone Communication Clean Water Electricity
    18. 18. Entrepreneurial Ability • Entrepreneurs are needed to bring together resources and take the risk of profit or loss in order for development to get off the ground • Sometimes government officials create what they believe the free market can do – Favors for friends and relatives of the government
    19. 19. Rules of the Game • • • • Laws Customs Conventions Property Rights
    20. 20. Social Capital • Social capital consists of the shared values and trust that promote cooperation in the economy – Lower economies typically have poorly defined property rights, and less social capital – Bribery is often commonplace – Government corruption in everyday practice
    21. 21. Trade Problems for Developing Countries • What makes up exports for developing countries? – Agricultural goods and other raw materials (about half compared to about 20% from high-income countries) – Problem with this? • Fluctuates in prices= cut in imported capital items
    22. 22. Migration and the Brain Drain • Migrants send money home to invest in their country – $238 billion in 2008 – Problems? • “Brain Drain” from their home country
    23. 23. Import Substitution Versus Export Promotion • An economy’s progress: – Agriculture to manufacturing to services • Import Substitution: a development strategy that emphasizes domestic manufacturing of products that had been imported – Tariffs and quotas
    24. 24. Import Substitution Versus Export Promotion • Why do this? – The “What to Produce” question is answered – To protect “Infant Industries” – Favored domestic industries • Problems? – Erases specialization and comparative advantage – Replace low-cost foreign goods with high-cost domestic goods – Often domestic production failed to be successful when shielded from foreign competition
    25. 25. Import Substitution Versus Export Promotion • Export promotion concentrates on producing for the export market. – The emphasis is on comparative advantage and trade expansion rather than on trade restriction. – The force is on producers becoming more efficient in order to compete in world markets
    26. 26. Foreign Aid • Foreign aid is any international transfer made on concessional terms for the purposes of promoting economic development – Grants – Loans • Concessional Loan- low interest rates, longer repayment periods, or grace periods during which repayments are reduced or even waived • Bilateral: Country-to-Country aid • World Bank: multilateral infrastructure • IMF: multilateral balance of payments
    27. 27. Does Foreign Aid Promote Economic Development? http://www.youtube.com/watch?v=CNWzYy186W8 OR http://www.youtube.com/watch?v=8Y-E6sQ9DvI
    28. 28. Does Foreign Aid Promote Economic Development? • It does provide additional purchasing power, but it is unclear if it supplements domestic saving, thus increase investment!
    29. 29. Transitional Economies • Types of Economic Systems • Enterprises and Soft Budget Constraints – Soft budget constraint: the budget condition faced by socialist enterprises that are subsidized if they lose money • Inefficient uses of resources, non-responsive to demand and supply changes, changes in prices by central planners and not the market forces
    30. 30. Institutions and Economic Development How do they work? http://www.youtube.com/watch?v=XxERamRMt24
    31. 31. The Big Bang Versus Gradualism • Gradualism ( the bottom-up approach): an approach to moving gradually from a centrally planned to a market economy by establishing markets at the most decentralized level first, such as on a small farms or in light industry – China • Big Bang Theory: the argument that the transition from a centrally planned to a market economy should be broad and swift, taking place in a matter of months
    32. 32. Privatization • Privatization is the process of turning public enterprise into private enterprises. – Cannot be accomplished overnight
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