IDENTIFYING MAIN IDEAS

Write the letter of the correct answer in the blank provided. (10 points each)

TestC H A P T E R 1 8

Name _______________________________________________ Class _________________________ Date ___________

____ 1. The primary measure of a nation’s level of development is its

A. population.B. industrialization.C. gross domestic product.D. per capita gross domestic product.

____ 2. The literacy rate is

A. how fast people can read.B. the proportion of a country’s people

that can read and write.C. the number of languages people in a

country can speak.D. the percentage of people who have fin-

ished high school.

____ 3. One factor that is usually higher inless developed countries (LDCs) than in developed countries is

A. per capita GDP.B. level of material well being.C. life expectancy.D. infant mortality.

____ 4. Rapid population growth is occurring in many LDCs because

A. life expectancy is increasing, and birthrates far outpace deaths.

B. governments encourage large families so that there will be more workers andconsumers.

C. the food supply is increasing.D. foreign investment is increasing.

____ 5. When a country does not have sufficient human capital

A. malnutrition will decrease.B. foreign investment will be discouraged.C. literacy rates will climb.D. its population will grow.

____ 6. Few LDCs can finance development with internal financing because

A. there are no banks.B. people prefer selling companies to

other nations.C. citizens have little money to save.D. the World Bank does not permit inter-

nal financing.

____ 7. A great deal of foreign direct investment in LDCs comes from

A. mutual funds.B. other less developed countries.C. multinational corporations.D. local banks.

____ 8. The largest provider of development assistance to less developed countries is the

A. World Bank.B. United Nations Development ProgramC. International Monetary Fund.D. International Stock Exchange.

____ 9. Which of the following is NOT an important step in moving from a centrally planned economy to a market economy?

A. revising the legal systemB. setting up price controlsC. privatizationD. changing the work ethic

____ 10. China’s steps to modify its centrally planned economy included

A. an emphasis on subsistence agriculture.B. a loosening of political controls.C. special economic zones to encourage

foreign investment.D. an increase in the military budget.

80 CHAPTER 18 Guide to the Essentials © Pearson Education, Inc., publishing as Pearson Prentice Hall. All Rights Reserved.

Economic Development and TransitionC H A P T E R

18 LEVELS OF DEVELOPMENTSECTION 1

Development is the process by which a nation improves its people’s economic,political, and social well-being.Developed nations, such as the United

States, have a high average levelof material well-being. Mostnations are less developedcountries (LDCs), with lowlevels of material well-being.

The primary measure of levelof development is per capitagross domestic product

(per capita GDP)—a nation’s grossdomestic product (GDP) divided by itstotal population. For example, Australiaand India have similar GDPs. However,India has about 50 times as many people,so it has a much lower per capita GDP.Another way to measure development isthe amount of energy, such as oil and gas,used per person. Most developed nations

have high levels of industrialization,the extensive organization of an economyfor the purpose of manufacture. Countrieswith a high level of industrialization uselarge amounts of oil and electricity. Bycontrast, most LDCs use less amounts ofenergy per person, since large numbers of people engage in subsistenceagriculture. They raise only enoughfood to feed their families.

Other ways to measure developmentinclude the literacy, life expectancy, andinfant mortality rates. The literacy rate,the proportion of people over age 15 thatcan read and write, is higher in developedcountries. So is life expectancy, the aver-age expected life span of an individual.The infant mortality rate, the numberof deaths that occur in the first year of lifeper 1,000 births, is lower in developedcountries.

TEXT SUMMARY

1. What is measured by per capitaGDP?

2. Graph Skills Which country hasthe larger population? Which coun-try has the larger per capita GDP?

REVIEW QUESTIONS

GRAPHIC SUMMARY: Comparing Two Countries

Nations with the lowest

per capita GDP are the

nations with the lowest

level of development.

The world’s nationsexperience differentlevels of economicdevelopment.

T H E BIG I D E A

Source: Population Reference BureauSource: Population Reference Bureau

Population

Mill

ions

1,250

1,000

750

500

250

0Australia India Australia India

Per Capita GDP

U.S.

dol

lars

24,000

20,000

16,000

12,000

8,000

4,000

0

76 CHAPTER 18 Guide to the Essentials © Pearson Education, Inc., publishing as Pearson Prentice Hall. All Rights Reserved.

Rapid population growth is a serious prob-lem in many less developed countries. Thepopulation growth rate, the increase ofa country’s population in a year, includingbirths, deaths, and migrations, averagesabout 1.7 percent in LDCs. In developednations, the rate is about 0.5 percent.Many LDCs are experiencing an increasein life expectancy, and birth rates far out-pace deaths. This leads to rapid populationgrowth. Increased populations requireincreased job opportunities, health andeducation facilities, industrial and agricul-tural production, and exports and imports.

The uneven distribution of naturalresources throughout the world alsoaffects development. Only 10 percent ofEarth’s land is arable, or suitable forgrowing crops.

LDCs often lack the physical andhuman capital necessary to developresources. Without physical capital,human-made resources used to creategoods and services, industry cannot grow

and agricultural output will remain low.Human capital, the skills and knowledgeof workers, is critical to economic devel-opment. Access to education is limited,and literacy rates are low, especially forgirls, who often haveless opportunity thanboys. When a countrydoes not have sufficienthuman capital, it lacksthe skilled workers nec-essary to manage indus-tries. Foreign investorswill be discouraged frominvesting in that country’s businesses.

Other problems for LDCs are healthand political issues. Many people inLDCs suffer from malnutrition, orinadequate nutrition. Political factorshave limited the development of manypoor nations. These include dependenceon former colonial powers, experimentswith central planning, and corrupt orunstable governments.

ISSUES IN DEVELOPMENTSECTION 2

TEXT SUMMARY

1. Why is a high population growthrate a problem for LDCs?

2. Graph Skills Which three of thesenations are experiencing the mostrapid population growth?

REVIEW QUESTIONS

GRAPHIC SUMMARY: Population Growth Rates of Selected Nations

Source: Population Reference Bureau

Yemen

Chad

Guatemala

Venezuela

Cambodia

Haiti

India

United States

Taiwan

Japan

Sweden

Czech Republic

–0.5 0.5 1.5 2.0Natural rate of population increase (annual percent)

3.51.00 2.5 3.0

LDCs’ problems includerapid population growth,limited natural resources,and lack of physical andhuman capital.

T H E BIG I D E A

Nations with high

population growth

rates have difficulty

providing goods and

services to their

rapidly growing

populations.

© Pearson Education, Inc., publishing as Pearson Prentice Hall. All Rights Reserved. Guide to the Essentials CHAPTER 18 77

FINANCING DEVELOPMENTSECTION 3

A country can use two methods to financeits economic development. Internalfinancing comes from citizens’ savings.In less developed countries (LDCs), how-ever, citizens have little money to save.For that reason, most LDCs turn to foreign investment, external invest-ment originating from other countries, tofinance development. There are two types of foreign investment. Foreign

direct investment (FDI)is the establishment of anenterprise by a foreigner.Much foreign direct invest-ment comes from multina-tional corporations (MNCs),large corporations that produce and sell through-

out the world. Foreign portfolioinvestment occurs when foreigners buy ina country’s stock and bond markets, oftenby purchasing shares in mutual funds.

Foreign governments may give moneyto LDCs for development or disaster relief.

There may be military, political, and economic reasons for this foreign aid. Forexample, during the early 1940s theUnited States gave nearly $50 billion insupplies to its allies in World War II.

International institutions also promotedevelopment. The World Bank, thelargest provider of development assis-tance, offers loans, advice, and otherresources to LDCs. The United NationsDevelopment Program (UNDP) isdedicated to the elimination of pov-erty through development. TheInternational Monetary Fund (IMF),originally created to stabilize interna-tional exchange rates, has expanded itsrole to promote development. The IMFoffers advice and technical assistance toLDCs. It can also help LDCs that are hav-ing trouble repaying a debt to a nationthat lent it money. It does this by helping to arrange debt rescheduling,lengthening the time of repayment andforgiving or dismissing part of the loan.

TEXT SUMMARY

1. What are three international institutions that promotedevelopment?

2. Diagram Skills What are four means of foreign direct investment?

REVIEW QUESTIONS

GRAPHIC SUMMARY: Foreign Direct Investment

LDCs can obtain capitalfor developmentthrough investment,loans, and foreign aid.

T H E BIG I D E A

A foreign firm might . . .

purchase a firm in a country.

build a factory in a country.

enter a partnership with a firm in a country.

merge with an existing firm

in a country.

Foreign firms have several

ways of investing directly

in other countries.

78 CHAPTER 18 Guide to the Essentials © Pearson Education, Inc., publishing as Pearson Prentice Hall. All Rights Reserved.

Many LDCs are attempting the difficulttransition from centrally plannedeconomies to free markets. One step inthis transition is privatization, the saleor transfer of state-owned businesses toindividuals. Another step is to changethe legal system to guarantee and protectprivate property rights. Inefficient busi-nesses may fail in a competitive system,leading to rising unemployment andunrest. Workers who never had incen-tives to work hard must learn a newwork ethic, a system of values thatgives central importance to work.

Russia is an example of a country thatcompletely threw out its centrally plannedeconomy and replaced it with one basedon free markets. Until the late 1980s,Russia was part of the communist SovietUnion. But communism and the SovietUnion itself collapsed in 1991. Russiansexperienced hardships as they movedquickly to a market-based economy.

Without price controls, prices of manygoods tripled. Billions of dollars floodedthe country from the IMF and other insti-tutions, but because ofmismanagement andcorruption, the fundswere not used efficiently.

China is a commu-nist country that isattempting to modifyits centrally plannedeconomy with somefree market practices. The governmenthas contracts with farmers to grow a cer-tain amount of crops, letting them profitfrom any extra crops they are able togrow. With an incentive to grow more,farmers increased production. China also set up special economic zones,designated regions where foreign invest-ment is encouraged. Since the start ofthese reforms, China’s economy hasquadrupled in size.

TRANSITIONS TO FREE

ENTERPRISESECTION 4

TEXT SUMMARY

1. What is privatization? 2. Diagram Skills What are threeways a government can privatizeits state-owned businesses?

REVIEW QUESTIONS

GRAPHIC SUMMARY: Privatizing State-Owned Businesses

A government has several options in privatizing its state-owned businesses.

A government can…

sell businesses to individual owners.

sell shares in businesses to interested individuals.

give every citizen a voucher or certificate that can be used

to purchase shares in businesses.

A nation’s governmentand people face largechallenges when shiftingfrom a command economyto a market economy.

T H E BIG I D E A

SECTION 4

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