Ib EconomicsSyllabus SECTION

5

5.1 Sources of economic growth and/ or development 

5.2 Consequences of growth 

5.3 Barriers to economic growth and/ or development 

5.4 Growth and development strategies 

5.5 Evaluation of growth and development strategies

Sources of Economic GrowthAnd Development

Natural Factors Human Capital Factors Physical Capital and Technological

Factors Institutional Factors

Human Capital Factors Quantity of human capitalPopulation Growth – grants and financial supportImmigration levels – working visasGetting more people and women into work

Quality of human capitalImmigration schemes to target skilled professionals, relocation costs,

tax creditsInvestment in education, longer hours – budget 21%of government

spending – USA 4%Promoting training at work schemes (apprenticeship)Improvement in health care to extend working life

Physical Capital – Technological FactorsQuantity of investment

Changing variables such as domestic savings, level of private investment, government involvement, foreign investment

Government owned organizations create 60% of GDPReduce barriers to investment, tax credits, foreign ownership rulesStimulate Aggregate Demand and shift aggregate supply

Quality of InvestmentSkill training for workers, higher education and researchAccess to foreign technology and expertiseMultinational corporations

Institutional Factors Adequate banking system Legal system free from corruption Good education system Developed modern infrastructure Political stability International relations

Consequences of Growth Externalities Income Distribution Sustainability

Externalities ExternalitiesNegative: pollution, overuse of landPositive: more efficient production methods that are better for the

environment, results in larger tax base which may be spent on environment

Spillover Costs (Negative Externalities) A cost imposed without compensation on third parties by the

production or consumption of other parties.  Example: A manufacturer dumps toxic chemicals into a river, killing the fish sought by sport fishers

Spillover Benefit (Positive Externalities) A benefit obtained without compensation by third parties from the

production or consumption of other parties.  Example: A bee keeper benefits when the neighboring farmer plans clover.

Income Distribution May increase inequality if benefits of growth only seen by a select few, or

decrease inequality if benefits seen by entire population The distribution of pretax income in the United States today is highly

unequal. The most careful studies suggest that the top 10 percent of households, with average income of about $200,000, received 42 percent of all pretax money income in the late 1990s. The top 1 percent of households, averaging $800,000 of income, received 15 percent of all pretax money income.

In the longer view, the path of income inequality over the twentieth century is marked by two main events: a sharp fall in inequality around the outbreak of World War II and an extended rise in inequality that began in the mid-1970s and accelerated in the 1980s. Income inequality today is about as large as it was in the 1920s.

Over multiple years, family income fluctuates, and so the distribution of multiyear income is moderately more equal than the distribution of single-year income.

Sustainability Economic growth will put pressure on the environment.

Barriers of Development Economics

By Ervin Mafoua-NAmy

Bankruptcy Refinancing Taxation

Refinancing Refinances debt by selling new bonds Using proceeds to pay off holders of

the maturing bonds

Taxation The Federal Government can levy ad

collect taxes Tax increase is a government option for

gaining sufficient revenue › To pay interest› To pay principal on the public debt

Burdening Future Generations

To eliminate the American-owned part of the public debt would require a gigantic transfer payment from Americans to Americans.› Tax payers would pay higher taxes› Holders of debt would receive an equal

amount for their U.S. securities

Substantive issues Income Distribution Incentives Foreign-owned Public Debt Crowding Out and Stock of Capital

Income Distribution The distribution of ownership of

government securities is highly uneven Public debt is usually concentrated among

wealthier groups who own a large percentage all stocks and bonds

Payment of interest on the public debt probably increases income inequality

On average, Income is transferred from lower income to higher-income bondholders

Incentives Higher taxes may dampen incentives

› To bear risk› To innovate› To invest › To work

In this indirect way, a large public debt may impair economic growth

Foreign Owned Public Debt Example:18% U. S Debt held by citizens and

institutions of foreign countries is an economic burden to Americans

We do not owe that portion of debt to “ourselves” External Public Debt

› Enables foreigners to buy some of our output Borrowed Funds from Foreign nations

› United States transfer goods and services to foreign lenders

Other Foreign Countries has debt to the U.S.› They transfer goods and services as well

Crowding Out and Stock of Capital

The financing of large public debt can transfer real economic burden to future generations by passing on a smaller stock of capital goods.› Crowding Out Effect

Idea that Large Public Debt Results in higher real interest rates, which reduce private investment spending

If it is extensive , future generations will inherit an economy with a smaller production capacity and lower standard of living

› Qualifications Public Investment Public-private complementarities

Public Investment Part of the government spending

enabled by the public debt is for public investment outlays. For Example:› Highways › Mass Transits› Electric Power Facilities

Public Private Complementarities

Shown on Graph

Barriers to Economic growth and Development

Poverty cycle: low incomes --> low savings --> low investment --> low income

Institutional and political factors International trade barriers International financial barriers Social and cultural factors acting as barriers

Institutional and political factors

Ineffective taxation structureLack of property rightsPolitical instabilityCorruptionUnequal distribution of incomeFormal and informal marketsLack of infrastructure

International Trade BarriersOverdependence on primaryProductsConsequences of adverse terms ofTradeConsequences of a narrow range ofExportsProtectionism in international tradeA barrier to trade is a government-imposed restraint on the flow of international goods or services. The

most common barrier to trade is a tariff—a tax on imports. Tariffs raise the price of imported goods relative to domestic goods (goods produced at home).

Another common barrier to trade is a government subsidy to a particular domestic industry. Subsidies make those goods cheaper to produce than in foreign markets. This results in a lower domestic price. Both tariffs and subsidies raise the price of foreign goods relative to domestic goods, which reduces imports.

Yet another barrier to trade is an embargo—a blockade or political agreement that limits a foreign country's ability to export or import.

Barriers to trade are often called "protection" because their stated purpose is to shield or advance particular industries or segments of an economy. From an economic perspective, though, the costs to the economy almost always outweigh the benefits enjoyed by those who are protected.

International Financial Barriers

IndebtednessNon-convertible currenciesCapital flight

Social and cultural factors acting as barriers

ReligionCultureTradition

 5.4 Growth and development strategies

Harrod-Domar growth model Structural change / dual sector model Types of aid Grant aid, soft loans Official aid Tied aid Export-led growth / outward oriented Strategies Import substitution / inward-oriented strategies / protectionism Commercial loans Fair trade organizations Micro-credit schemes Foreign direct investment Sustainable development

Harrod-Domar growth model

The Harrod-Domar model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth.

v= K/Y ora=Y/K

Capital

GDP

s

Saving Rate

C

Sd

Depreciation Rate

D

In

Ig

Harrod-Domar Growth Model A Flow chart model

Capital/Output Ratio or Productivity

 5.5 Evaluation of growth and development strategies

Evaluation of the following in terms of Achieving growth and / or development Aid and trade Market-led and interventionist Strategies The role of international financial Institutions The International Monetary Fund (IMF) The World Bank Private sector banks Non-governmental organizations Multinational corporations/ Transnational corporations (MNCs/TNCs) Commodity agreements