Priyanka's Econ Blog

Economic Growth April 6, 2011

Filed under: Section 5,Uncategorized — priyanka821 @ 11:28 am

a) Explain 3 institutional factors that may contribute to potential economic growth in developing countries?

Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP (i.e. the increase in GDP after inflation has been removed).

Banking system : With a strong banking system, the country can have a higher savings rate thus overcome the poverty cycle

Political stability: If there is political instability, then it is difficult for economies to grow and develop. If businesses are to expand or foreign investment is to come in, then they need predictability and a strong politcal structure.

Education: This is essential for there to be a productive work force. Training, and basic education can greatly contribute to economic growth as this would mean labor is being used at its most efficient.

Infrastructure: A good quality social infrastructure is vital for economic development, but in the developing world the infrastructure is often very poor. Developing infrastructure can also produce jobs for those who are unemployed.

Taxation structure: Sometimes the government is corrupt and doesn’t take money from the rich. It could also be a physical problem which means that it is hard to reach the communities in the rural area.

b) Evaluate the view that economic growth will lead to economic development.

Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP (i.e. the increase in GDP after inflation has been removed).

Development is an increase in the ability of a country to produce goods and services thereby offering the opportunity for a higher material standard of living. Development is not the same as economic growth as development is an increase in the potential for an economy to grow, not growth.

– Income distribution may not be equal as measured by Gini coefficient and the Lorenz curve. This means that though the country is getting richer, it is only represented in the small proportion of the population.

-Economic development indicates an increase in income per capita as this would mean that each person is benefiting from the improved economy.

-Economic development brings qualitative and quantitative changes in teh economy where as economic growth only increases the quantitative values of an economy.

-Economic development relates to using previously unused or underused capital in an economy where as economic growth relates to allocative efficiency.

-Economic growth does not take into the black market which may b ethe reason for a family’s welfare. Economic growth also doesn’t take into account sustainable development, diseases and birth/literacy rate.

-While economic growth may lead to eventual economic development the outcome is not guaranteed. This is because the wealth may be unequally distributed which means the majority of the citizens are not benefiting. However, normally economic growth leads to an increase in tax revenue.  Assuming that the government is not corrupt, the government could provide merit goods and public goods. This includes infrastructure and education which in the long run should pay off as better economic development and have a positive feedback loop for more economic growth.


Foreign Aid April 4, 2011

Filed under: Section 5 — priyanka821 @ 1:44 am

1.       Explain the various types of aid which a developing country might receive.

Receiving aid is a growth and development strategy. Countries may receive aid because they are not self-sufficient. There are different types of aid available to a country.

-Bilateral aid: This is when one country gives support to another country directly . It can be done through money support, shipments of machines and tools, emergency aid and sending experts to help.

– Multilateral aid:  This is when a country receives funding from organizations rather than countries . This can be an organization like UNICEF.

-Grant aid: These aids are of money, goods , capital or etc. for which there is no need to pay back. It is more like a gift. For example student grants for studying.

-Soft loans: Loans in which the money is lent to a country on favorable terms.

-Official aid: This is the sum of the bilateral and multilateral aid that a country receives.

-Tied aid: Reciprocal agreements between donor and recipient. It depends on what is asked in return and where the aid is granted.

-Humanitarian aid: This can be both by an individual country or via a major organization such as the UN agencies.

b) “Aid is an effective means of promoting the development of poor countries” Evaluate this statement.

In order for aid to be successful, it should be an attempt to:

Overcome the low savings rations: Most poor people consume the vast majority of what they earn. This leads to the poverty cycle as they cannot invest.

Help reduce foreign exchange outflows: This means that promoting less imports into the country. The domestic government can use the money to build the necessary infrastructure for development of the country which will help it in the long run .

Reduce dependency on private investment: The private investment may not be available or will be found at a cost to the country that requires so much funding. This means that the aid should help the country be self-sustainable.

Improve the living standards of the poorest people: Many times as a country develops the Gini coefficient increases suggesting a more unequal distribution of income even though the country is gaining more national income.  If this continues it can often lead to political unrest.

Moves with the times: What may be a good investment 20 years ago may not be now. Local opinions and knowledge need to increase when deciding what to invest in.

Not simply provide cheap food: The only exception is during an emergency. Providing cheap food hinders the country’s economy as it undermines the domestic agricultural sector. Instead, the aid should be directed at farming equipment or etc. so that the country can be self sufficient. “Don’t give the man a fish, teach him how to fish.”

Allow choice to be exercised by the receiving country: The country should still be able to decide what is going on within it. A problem with tied aid is that it reduces the choices the developing economy gets. It may be more harmful than beneficial in the long run.

Some may argue that aid is a hypocritical way to make the rich richer.

Others may argue that aid is always taken advantage of by corrupt officials : example – Zimbabwe. The inequality has increased significantly.

Loans and grants tied to purchase of Western goods distort economic development in poor counties and increase their dependence on the rich. This means that the country never becomes self-sufficient and is highly dependent on aid.

Furthermore aid goes largely to governments that like capitalism. It allows for private investment which means that some get rich but the bottom of the poorest do not.

However, aid that is tractable and transparent should be effective in helping a country. This means that trade for even the developed countries can increase if we help the poor nations. When the nation is richer and more developed, the people are more likely to buy imported goods thus this will improve the economy of the country that provided the aid. It can alleviate the developed country’s balance of payments. Furthermore, we have a moral obligation to help those in need.  In conclusion aid that is handled well, through transparent means could be very effective in helping a poor country  develop.


Mock Exam Reflection

Filed under: Section 5 — priyanka821 @ 1:07 am

I scored fairly well on my mock exam. However, I think that this was because the focus of the mocks was on sections 2 &3, and the sections I find difficult are section 4 & 5. I think I can ensure I do just as well on my real exam by studying sections 4 & 5 thoroughly instead of reviewing the other sections that I understand again and again.

I was pleased with my score but as pointed out on the paper, some of my answers were not relevant to the question. For example, I drew the Theory of the Firm diagrams for a question about price and cross elasticity of demand and that wasn’t really needed. I can improve my answers by focusing in on the question . I also think my scored could have been better if I had remembered to make real world references. I will review by focusing and reading about sections 4 &5.