Economic Development | A-Level Economics Notes
These revision notes cover everything you need to know about Economic Development for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is economic growth?
Economic growth is when there is an increase in real GDP.
What is economic development?
Where there is a sustained improvement in people's quality of life and living standards.
What is the key measure of economic development?
The key measure of economic development is the Human Development Index.
The HDI measures improvements in health, education and living standards. It tracks
- average life expectancy at birth
- mean years of schooling
- GNI per capita at PPP
What are two alternative measures to economic development?
The Inequality-adjusted HDI (IHDI) is the HDI adjusted for inequalities in the distribution of achievements in each of the three dimensions of the HDI (health, education and income). The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises. The difference between the HDI and the IHDI represents the ‘loss’ in potential human development due to inequality and can be expressed as a percentage.
The Multi-dimensional Poverty Index (MPI) identifies deprivations across the same three dimensions as the HDI (in health, education and standard of living). It shows the number of people who are multi-dimensionally poor (suffering deprivations in 33% of weighted indicators) and the number of deprivations with which poor households typically contend. It can be deconstructed by region, ethnicity and other groupings as well as by dimension, making it a useful tool for policymakers.
What are primary products?
Primary products are natural resources or raw materials such as rice, sugarcane, coffee beans.
Explain the issue behind volatile commodity prices
- commodity prices are volatile because they can be easily affected by supply-side shocks such as changes in the weather.
- additionally, demand for commodities is more likely to be price inelastic
- this means that a small change in supply can cause a large change in price
- this can lead to farmers having unstable incomes.
- this can cause unpredicatable fluctuations in economic growth and living standards.
Explain the issue behind primary product dependency (Prebisch-Singer hyptothesis)
- primary products like rice have a lower YED (closer to 0) compared to manufactured goods like a TV or a phone
- this means that when incomes increase, demand for primary products remains low whilst demand for secondary products increases.
- low demand for primary products leads to declining relative prices.
- this means that farmers' incomes will fall over time.
- this can lead to issues such as slow economic growth, high inequality, low export revenue and a foreign currency gap.
Explain how low savings can constrain development
The Harrod-Domar model links economic growth to their savings ratio and capital-output ratio.
Rate of growth of GDP = savings ratio/ capital output ratio
Savings ratio
- if people in a given country are unable to increase their savings, banks will not be able to increase lending, as they do not have enough deposits.
- as banks are unable to lend, firms are unable to access affordable loans.
- this reduces investment from firms in capital goods.
- this means productivity and economic growth remains low.
- this means real gdp and incomes remain low, which reinforces the cycle as those with low incomes are likely to have a low marginal propensity to save.
Capital output ratio
A lower capital output ratio means that investment is more efficient (the same given investment in capital can lead to a greater increase in output).
Explain how lack of access to credit and banking can constrain development
- lack of access to credit and banking services means that individuals are unable to secure loans
- this makes it more difficult for individuals to start businesses
- this restricts economic growth
- this also re-inforces the issues behind the savings gap.
Explain how a foreign currency gap can constrain development
- a foreign currency gap is when a country owns a lack of foreign currencies such as dollars
- this makes it difficult for them to afford goods like oil without selling/exchanging more of their own currency
- as they sell their currency, it depreciates
- this causes imports to become more expensive, leading to problems such as cost-push inflation or a current account deficit.
- a separate issue is that the country's central bank may have trouble managing their exchange rate since they lack the reserves.