barriers to growth of less developed economies.docx

7/28/2019 Barriers to growth of less developed economies.docx

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Barriers to growth of less developed economies

Rapid population growth neutralises growth in GDP. The ultimate effect is that GDP per capita

remains the same or comes down.

Human resources: Lack of training and high level skills makes the workforce less productive.

Lack of natural resources: If the country is lacking in natural resources, growth can be difficult.Moreover, if the country has good natural resources, but they are not managed properly then there

will be less development.

Inefficient use of resources: If there is no optimum utilisation of workforce, or if the firms are

inefficient due to lack of competition.

Too much dependence on agricultural products: Developed countries which import these

products from less developed countries usually pay very low prices for it. Moreover, they further

process these products and sell it for higher prices to LDCs.

Poor infrastructure: Lack of infrastructure such as poor transport and communication is another

reason which hinders growth for LDCs.

Factors affecting the population

The Birth Rate

It is the average number of the children born in a country compared to the rest of the population. In

other words, it is the number of births for every 1000 people in the country.

Birth

rate=

Number of live birthsX

1000Total population

Factors affecting the birth rate in a country

Existing age-sex structure Availability of family planning services Social and religious beliefs - especially in relation to contraception and abortion Female employment Economic prosperity (although in theory when the economy is doing well families can afford to

have more children in practice the higher the economic prosperity the lower the birth rate).

Poverty levels children can be seen as an economic resource in developing countries as they canearn money

Infant Mortality Rate a family may have more children if a country's IMR is high as it is likely someof those children will die.

Conflicts Typical age of marriage

The Death Rate

The number of people who die each year compared to every 1000 people in the population is

known as death rate.


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Death

rate=

number of

deathsX 1000

Total population

Factors affecting Death rate in a country

Medical facilities and health care Nutrition levels Living standard Access to clean drinking water Hygiene levels Levels of infectious diseases Social factors such as conflicts and levels of violent crime

Net Migration

Emigration is when a person moves out of the country.

Immigration is when a person moves into a country.

Net Migration is the difference between emigration and immigration.

If net immigration is positive it will lead to a population increase, a negative net immigration will

lead to a fall in population of the country.

Dependency Ratios

It is the number of people in work with the total population of the country.

Dependency ratio

=

Total Population

Number of people in work

Dependent Population usually consists of children, students, housewives, the unemployed and old

age pensioners.

Affects of increase in dependent population

Lower standard of living

An increase in the dependent population will mean that people in work have more people to

support and thus the living standard of the country will fall.

Balance of trade

If the people in work cannot produce enough goods and services to satisfy the need of the growing

dependent population then the country has to spend its income on importing these goods and

services, which will lead to an unfavourable balance of trade.

Social Cost and benefits


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Every business activity which takes place has some benefits and costs attached to it. The benefits go

both to the owners of the firm as well as to external stakeholders. In the same way the owners and

the external stakeholders have to pay a cost for the activities of the business.

Talking about

Private cost

It is the cost of setting up the business. The owner(s) pay for the hire of machinery, buying of

materials, payments of wages. This is termed as Private Cost.

Private benefit

The monetary benefits i.e. the revenue earned by the firm is a benefit for the owner and is termed

as Private benefit.

External Cost

The problems that the external stakeholders have to bear due to the firms activity are known as

external cost. Example: cleaning a river which has been polluted by a firms waste products. Private

firms usually ignore external cost.

External benefits

Some firms can cause external benefits. These are the benefits to the external stakeholders due to

the activity of firm. For example, a firm may train workers, which might get them better wages in

other firms. These external benefits are free.

Social cost is the total cost paid for by the society due to the activities of a firm. It is the sum of all

the external cost and private cost.

Social benefit is the total benefit arising due to the production of goods and services by a firm. This

is equal to the total of private benefits and external benefits.

PROTECTIONISM

The restriction of imports into a country by government measures

REASONS FOR PROTECTIONISM

Protects UK businesses from extra competition

Helps new UK businesses to develop before they face competition

Helps protect UK jobs

Prevents foreign countries dumping lots of cheap imports into the UK Prevents imports of harmful or desirable goods

TRADE BARRIERS / METHODS OF PROTECTIONISM

- TARIFFS or IMPORT DUTIES These are taxes on imported goods. They raise the price to customers

and make them less attractive

- QUOTAS These are limits on the quantity of a product that can be imported into a country e.g.

100,000 cars

- REGULATIONS This includes laws and safety guidelines

FREE TRADE


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Trade without any protectionist / trade barriers between countries

BENEFITS OF FREE TRADE & PROBLEMS OF TRADE BARRIERS

1. Protectionism keeps UK firms away from genuine competition. They may become lazy and

inefficient

2. Free trade forces UK firms to produce quality goods and services as they face much foreign

competition

3. If the UK puts up trade barriers then other countries are likely to retaliate.

4. Free trade encourages firms to export and import. This should encourage a greater choice for

consumers and a higher standard of living

5. Trade barriers increase the cost of trading. For example, a tariff would mean that UK firms and

consumers may have to pay more for imports of raw materials or consumer goods

BENEFITS OF GROWTH

Increased profits

Increased market share

Gain new ideas from the other business

Avoid having to compete with the other business

Gain from economies of scale (page)

The new business may not need all of the workers. They could remove some workers to become

efficient and make more profit

PROBLEMS OF GROWTH

To the businesses

There may be two sets of managers who are unable to agree on the best direction for the

company. This could cause many problems.

The businesses may have different objectives and targets

It costs a lot of money to merge with or takeover another business

To customers

Possibly less choice in the market and possibly higher prices to pay

To workers

Possible job losses and job insecurity

Two key topics to understand are geographic and occupational mobility of labour

a) GEOGRAPHICAL


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People are willing and able to move between regions or areas in order to take a new job. They often

have to move home.

b) OCCUPATIONAL

People are willing and able to move between types of jobs or occupations e.g. an unemployed coal

miner becomes a salesman.

GEOGRAPHICAL IMMOBILITY OF LABOUR OCCUPATIONAL IMMOBILITY OF LABOUR

People are unemployed because they are not

prepared to move areas (e.g. leave their home

area) in order to take up work.

People are unemployed because they are unwilling

to work in a job which is different to what they had

previously

Reasons Reasons

Cost of movingAn unemployed miner doesnt neccesarily have theskills to use computers

House prices in other areas Lack of confidence

Friends in the current area Cant be botheredChildrens education Lack of education

Lack of training

The Basic Economic Problem

Capital: goods/materials that are used for the production of other items. Not consumed in their

own right.

Consumption: Using up goods/services.

Consumer Goods: goods that are wanted because they provide satisfaction to their owner.

Demerit Goods: goods that are perceived to have a negative impact/effect on society/individuals.

Economic Rent:

Economy: Total value of goods & services produced & exchanged within a country.

Enterprise: risk taking & decision making in business

Exchange:

Factors of Production: land, labour, capital, enterprise.

Fixed Capital: capital goods that do not need replacing in the short term (machinery, tools,

buildings).

Free Goods: goods that require no resources to make (wind, sunshine).


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Goods: items produced by the factors of production (usually for economic gain).

Labour: the human effort (mental & physical) required to produce something.

Land: the land we use/build on & resources that are contained in the land and water.

Markets: Place where goods & services are exchanged - (may be visible or invisible).

Merit Goods: goods that are perceived to provide positive externalities (beneficial to society)

Needs: requirements for continued existence (food, clean water, shelter)

Opportunity Cost: the cost of the next best alternative.

Production Possibility Curve: a curve that represents possible output if the factors of production

are used efficiently. Also known as the 'opportunity cost curve' as it can be used to show the

opportunity cost of producing different products/quantities).

Public Goods: good provided by the government (paid for through taxes) that everybody benefits

from (street lighting).

Resources: items that are needed/ useful for consumption or the production of other items.

Scarcity: limited availability of resources (ones that will run out eventually), not enough to satisfy

all the wants.

Services: something that fulfils a need, often not a physical object (banking, teachers, policemen).

Transfer Earnings:

Wants: the desires that people have that are not necessary for their existence/ luxuries.

Working Capital: capital products that are used up in the production process (raw materials).

Allocation of Resources

Complementary goods: goods that are purchased to support/go with another product (petrol &

cars).

Contraction in demand: movement along the demand curve to the left (higher price & lower

quantity demanded).

Contraction in supply: movement along the supply curve to the left (lower price & lower quantity

supplied).

Cross elasticity of demand:


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Demand: want/willingness to buy a product.

Diminishing Marginal utility: consumption of additional units of a product provide less utility

(satisfaction) each time.

Effective Demand: the financial ability to actually purchase the product.

Elasticity: the responsiveness of quantity supplied or demanded in relation to changes in

price/income/other products.

Equilibrium: the point at which the supply and demand curves cross/intersect

Excess Demand: quantity demanded is greater than the quantity supplied at a given price.

Excess Supply: quantity supplied is greater than quantity demanded at a given price.

Extension in demand: a movement along the demand curve to the right (lower price & higher

quantity demanded).

Extension in supply: a movement along the supply curve to the right (higher price & higher

quantity supplied).

External costs: costs of production that have to be paid by someone other than the firm/individual

(cleaning up pollution).

External benefits: benefit of production to others outside the firm/individual (1st aid training for

employees)

Individual Demand: the amount a single person would be willing to buy at a range of prices.

Inferior goods: goods that consumers demand less of as incomes increase due to them opting to

buy higher quality alternatives.

Marginal Utility: the additional satisfaction gained from the consumption of an extra unit of a

product.

Market Demand: total demand for a product

Price elastic demand: a % change in price results in greater % change in quantity demanded.

Price inelastic demand: a % change in price results in smaller % change in quantity demanded.

Price elastic supply: a % change in price results in greater % change in quantity supplied.

Price inelastic supply: a % change in price results in smaller % change in quantity supplied.

Private costs: the costs that the company/individual has to pay for production (labour, raw

materials).


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Private benefits: the benefits to the company/individual of production (profits).

Social costs: private costs + external costs

Social benefits: private benefits + external benefits

Substitute goods: goods that can be used as a substitute/alternative for a product (butter &

margarine).

Supply: the number of goods/services firms are able & willing to supply at a range of prices.

Unitary elasticity: % change in price results equal % change in quantity demanded or supplied.

Utility: the satisfaction gained from consuming a product.

The Individual as a Producer, Consumer and Borrower

Barter: system of trade through swapping items.

Cash: notes, coins and debit cards.

Central bank: the government's bank, responsible for issuing money, setting interest rates.

Checking account: Instant access account, see current account.

Commercial bank: High St bank (HSBC etc) offering a range of accounts to individuals and

businesses.

Credit card: electronic payment card that allows users to make purchases with borrowed money

that can be paid at a later date.

Current account: instant access account used for routine/regular transactions.

Debit card: electronic payment card linked to current/checking account that has the funds to make

the transaction.

Disposable income: the money available after paying taxes that you can choose how to use.

Liquidity: the ability for and item/asset to be exchanged for cash with no loss of value.

Money: commodity that is universally accepted for as payment for all goods and services.

Money supply: the sum of the notes, coins and deposits in banks & financial institution.

Piece rate: payment based on quantity produced (fruit picking etc)


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Salary: Annual payment total that is paid monthly.

Specialisation: Working on specific stage/stages of production in the aim of increasing

productivity & lowering costs.

Stock exchange: organisation that facilitates the buying and selling of shares in Public & Private

Limited Companies.

Trades union: organisation of workers that negotiate wages, working conditions & hours.

Collective bargaining.

Wage: hourly rate for labour, often calculated weekly.

Wealth: collection of assets (houses, land, shares in companies, money saved in bank accounts).

The Private Firm

Average cost: total cost/output.

Average fixed costs: downward sloping line (from left to right) as the fixed costs are shared among

increased output.

Average revenue: total revenue/number of product/services sold.

Average variable costs: initially downward sloping as increasing returns to labour and economies

of scale are achieved with increased output & then they rise with output.

Break-even Point: total revenue = total cost (no profit or loss made).

Cartel: small group of large firms that work together to keep prices high & therefore keep all their

profits high. Usually illegal.

Co-operative: organisation owned by its workers and they share the rewards.

Costs: the money paid to produce/provide the service/product.

Diseconomies of scale: when an increase in the scale of production results in increased average

costs (over-time pay etc).

Diminishing returns to labour: additional workers eventually add decreasing levels of marginal

output (eg. too many people share tools and get in each others way)

Division of labour: the allocation of workers to specific tasks in the production line.

Economies of scale: when increases in production (output) lead to reduced total average costs

(discount for bulk buying etc).


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Factory: the site/building that produces the product, a firm may have more than one.

Firm: The company/business that owns one or more factories.

Fixed costs: costs that have to be paid regardless of level production (rent, loan repayments).

Horizontal integration: merging of firms at the same stage of production.

Increasing returns to labour: initially as additional workers are employed their marginal output

increases.

Industry: A group of firms producing similar or same goods (eg: soft drinks industry - coca cola

would be a firm in this industry).

Marginal cost: the additional cost of producing an extra unit.

Marginal Product/productivity: additional output gained from the employment of an additional

worker.

Marginal revenue: the additional revenue gained from selling an extra unit.

Monopoly: Single firm controls the supply in a market (has no competitors).

Multinational Company (MNC): Company that has outlets or production facilities in more than

one country. Usually plcs.

Normal Profit: profit level just high enough to keep firms in the industry.

Oligopoly: Small number of large companies control the supply in a market.

Partnership: 2 to 20 individuals jointly own a business and share the profits(solicitors).

Primary Industry: Industries involved in extracting raw materials (agriculture, fishing, forestry,

mining).

Private Limited Company (Ltd): company owned by shareholders, but shares only sold privately,

not on the stock exchange.

Productivity: output per worker.

Profit: revenue - costs (the money you are left over with after costs are deducted).

Public Limited Company (plc): company owned by shareholders & shares sold on the stock

exchange to the public.

Revenue: total money obtained from sales (before any deductions).


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Secondary Industry: Manufacturing or construction industries. Ones that make things (factories,

carpenters, bakers, builders).

Sole-trader: Single owner of a business, usually small scale.

Super-normal Profit: increased demand in an industry leads firms to make above normal profits.

Tertiary Industry: Industries that provide a service (banking, solicitors, teachers, police forces,

doctors).

Total costs: fixed costs + variable costs.

Total Revenue: price x output (the total amount of money gained from sales of a product).

Transnational Company (TNC): see multinational company.

Variable costs: costs that are dependent on the level of production (raw materials, labour in some

cases).

Vertical Integration: merging of firms which are involved in the production of the same product

but at different stages.

Role of Government

Aggregate Demand: Total Demand in the economy (expenditure + exports + investment +government spending)

Aggregate Supply: Total Supply in the economy.

Balanced Budget: Government income = government expenditure

Budget: Government income & government expenditure for a 1 year period.

Budget deficit: Government expenditure is greater than its income for that year.

Budget surplus: Government income is greater than its expenditure for that year.

Circular flow of income: Model showing the flow of money, factors of production &

goods/services in the economy.

Direct taxes: Taxation on income and wealth (income tax, corporation tax, inheritance tax, capital

gains tax).

Fiscal policy: Use of taxation and government spending to influence the economy.


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Indirect taxes: Taxation on spending (VAT, excise duties, import taxes)

Interest Rates: Cost of borrowing or reward for saving money. Base rate set by the central bank.

Commercial bank rates generally follow base rate changes but at a higher total rate.

Monetary policy: Use of interest rates or the money supply to influence the economy.

Money supply:

Multiplier effect:

Progressive taxes: Usually implemented through direct taxes & take a higher % of income as tax

from higher earners.

Regressive taxes: Usually associated with indirect taxes - taking a higher % of income from lower

earners.

Taxation: form of income for the government through direct or indirect charges (taxes).

Economic Indicators

Consumer Price Index (CPI): very similar to the RPI - increasingly the measure of choice for

Governments.

Cyclical unemployment: unemployment linked to the boom & bust cycles of the economy.

Frictional unemployment: unemployment associated with people that are between jobs.

Full employment: everybody who is willing and able to work is in employment.

Gross Domestic Product (GDP): Total value of goods and service produced in a country.

GDP per Capita: GDP divided by the population. Useful for comparing countries & reflects changes

in population size..

Gross National Product (GNP): Total value of goods and services produced by a country, including

foreign earnings but subtracting the earnings by foreign firms within the country.

GNP per Capita: GNP divided by the population.

Human Development Index: An indicie that takes into account socio-economic indicators. Always

a number between 0 & 1, the closer to one the higher the level of development.

Net National Product (NNP): GNP minus the value of capital depreciation.

Real GDP: GDP with the effects of inflation removed.


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Retail Price Index: weighted index showing price changes as a % for a hypothetical basket of

goods.

Seasonal unemployment: unemployment that is linked to seasonal demand for labour (eg. fruit

picking & tourist industry jobs).

Structural unemployment: unemployment as a result of the labour force lacking the skills

demanded by the current industries.

Unemployment: members of the labour force that are willing and able to work and seeking

employment.

Levels of Development

Demography: The study of population.

Dependency ratio:

Human Development Index (HDI): An index that attempts to measure quality of life by taking into

account socio-economic indicators. Always a number between 0 & 1, the closer to one the higher

the level of development.

Less Developed Country (LDC):

More Developed Country (MDC):

Old dependents:

Optimum population:

Over-population: when there are not enough resources to support the population without a

decline in living standards.

Primary industry: industries that extract raw materials (mining, fishing).

Population pyramids: chart that shows the age & sex structure of a countries population

Purchasing Power Parity (PPP):

Secondary industry: industries that manufacture or construct (factories, carpenters, builders).

Tertiary industry: Industries that provide a service (banking, teaching, fire service).

Under-population: when there could be population increase without a reduction in living

standards.


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Young dependents:

International Aspects

Absolute advantage: When a country can make more than another country of a certain product

with the same amount of labour.

Balance of payments: The sum of the current, financial & capital accounts which account for all

trad & financial transactions for a country.

Balancing item:

Comparative advantage: The relative advantage of producing a certain product to trade even if the

country has an absolute disadvantage in it.

Current account: The account that records the visible & invisible trades of a country as well as

government aid payments.

Embargo: A ban on the import of a product/products from a certain country.

Exchange rate: The value of one currency in relation to another currency.

Exports: Goods sent to another country in exchange for money.

Financial & capital accounts: the Governments accounts that record the movement of money in &

out of the country (not for the sale of goods) & the sale of fixed assets.

Fixed exchange rate: when the value of a currency is pegged to (fixed to) another major currency

such as the US dollar.

Floating exchange rate:

Free trade:

Imports: Goods brought into the country in exchange for money.

Infant industries:

Internal trade: Trade within a country.

International trade: Trade between two or more countries

Protectionism: Methods of restricting imports and possibly increasing exports.

Quotas: Limits on the number of imports of certain products.

Reserve assets:


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Subsidies: Money given to industries by the Government to attract them or make them more

competitive.

Tariffs: Taxes placed on imports.

barriers to growth of less developed economies.docx

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