2. Measuring development and Millennium Development Goals
Overall development means an improvement in living standards. But can consider 3 stages of development:
Increasing availability and widening the distribution of basic life-sustaining goods
Food, drink, shelter, clothing, health
Perhaps add education
Raising standard of living
Wider range of goods available
Expand range of economic and social choices
Freedom to choose, political rights, education
Homework: Essay “To what extent have we met the Millennium Development Goals”

3. Developed and developing
First world, “Western”, US, EU, Japan OECD
High level of education and healthcare
Good infrastructure
Non-corrupt democratic government
High GDP per capita
High productivity and investment
De-industrialising (highly developed services eg finance, IT)
Ageing population
Third world, Africa (esp sub Saharan Africa), Some Asia
Low level of education, poor healthcare
Poor infrastructure
Often corrupt and mostly not democratic
Low GDP per capita
Low productivity and investment
Agricultural based (lack of services especially finance_
High birth rate/death rate

4. Growth Growth comes from: Investment (additions to the capital stock).
Relate to Harrod-Domar and savings gap
Technical progress (quality of the capital stock)
Can countries afford the best machinery?
Number of workers
Immigration/emigration, birth/death rates
Skills of workers
Key factor of human capital - education

5. Harrod-Domar g = s/k (s = savings rate, k = capital/output ratio)
A model helps to explain how growth has occurred and how it may occur again in the future.
Basically, the model suggests that the economy's rate of growth depends on:
The productivity of capital investment (this is known as the capital-output ratio)
The level of national saving (S)
The Capital-Output Ratio (COR)
For example, if £100 worth of capital equipment produces each £10 of annual output, a capital-output ratio of 10 to 1 exists.
A 3 to 1 capital-output ratio indicates that only £30 of capital is required to produce each £10 of output annually.
If the capital-output ratio is low, an economy can produce a lot of output from a little capital. If the capital-output ratio is high then it needs a lot of capital for production, and it will not get as much value of output for the same amount of capital.
Key point: When the quality of capital resources is high, then the capital output ratio will be lower
g = s/k (s = savings rate, k = capital/output ratio)
Savings finances investment, which adds to the capital stock and so potential output
Consider PPF capital vs consumer, ie investment means less consumption today (which is what saving is)

6. Rate of growth of GDP = Savings ratio / capital output ratio
Numerical examples:
If the savings rate is 10% and the capital output ratio is 2, then a country would grow at 5% per year.
If the savings rate is 20% and the capital output ratio is 1.5, then a country would grow at 13.3% per year.
If the savings rate is 8% and the capital output ratio is 4, then the country would grow at 2% per year.
Based on the model therefore the rate of growth in an economy can be increased in one of two ways:
Increased level of savings in the economy (i.e. gross national savings as a % of GDP)
Reducing the capital output ratio (i.e. increasing the quality / productivity of capital inputs)
LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development. Boosting investment generates economic growth which leads to a higher level of national income. Higher incomes allow more people to save.

8. Limitations / problems of the Harrod-Domar Growth Model
Increasing the savings ratio in lower-income countries is not easy.
Many developing countries lack a sound financial system. Increased saving by households does not necessarily mean there will be greater funds available for firms to borrow to invest
Efficiency gains that reduce the capital/output ratio are difficult to achieve in developing countries due to weaknesses in human capital, causing capital to be used inefficiently
Research and development (R&D) needed to improve the capital/output ratio is often under-funded
Borrowing from overseas to fill the savings gap causes external debt repayment problems later.

10. Rostow stages of growth
Stage 1 Traditional society
Stage 2 Pre-conditions for take-off
Stage 3 Take-off
Stage 4 Drive to maturity
Stage 5 The age of mass consumption.
Beginning of London Olympics?

11. Understand how poor infrastructure acts as a constraint on growth & development
Infrastructure includes physical capital such as transport networks, energy, power and water supplies and telecommunications networks.
africa/a
Poor infrastructure hampers growth because it causes higher supply costs and delays for businesses.
It reduces the mobility of labour and affects the ability of exporters to get their products to international markets.

12. Understand how human capital inadequacies acts as a constraint on growth & development
Human capital is “the knowledge, skills, competencies embodied in individuals that facilitate the creation of personal, social and economic well-being.” (OECD)
Poor education
Measured in HDI, low spending in developing countries on education
Rapid growth in population
High dependency ratios (too many children)
Lower GNI per capita
More support needed

13. Understand how human capital inadequacies acts as a constraint on growth & development
Disease - HIV/Aids (and malaria)
Costs rise (medical treatment, funerals)
Potential output/GDP falls (eg 25% of households in Botswana have lost an earner)
Productivity falls (farming households revert to subsistence)
Education worsens (children look after sick adults)

14. Understand how primary product dependency acts as a constraint on growth & development
Many nations still relying on exporting low value added primary commodities
Volatile pricing
When prices fall, an economy will see a sharp reduction in export incomes, an adverse movement in their terms of trade, risks of a higher trade deficit and a danger that a nation will not be able to finance state-led investment in education, healthcare and core infrastructure
Despite being rich in natural resources, for many countries this is a curse rather than a blessing

15. Prebisch-Singer Hypothesis
Over the long run the price of primary goods such as coal, coffee cocoa declines in proportion to manufactured goods such as cars, washing machines and computers
Countries with a high export dependence on primary products may lose out from a worsening of the terms of trade.
These countries should use revenues from primary commodity exports to fund education, the development of skills and expand technological capacity.

16. Understand how savings gap acts as a constraint on growth & development
Savings are part of Harrod-Domar model and Rostow – crucial for growth
Savings gap - a situation where the currently level of savings is insufficient to achieve an economic objective.
In the UK economy and other developed economies, a savings gap refers to the gap between current savings for retirement and that necessary to generate a desirable income from retirement
In less developed economies a savings gap commonly refers to the deficit between current aggregate savings and the level of savings required to provide funds for business investment

17. Understand how capital flight acts as a constraint on growth & development
When citizens and businesses of a country believe that the economy will deteriorate in the future and so send their money abroad by buying foreign currencies and other assets
This reduces the financial resources available within the country.

18. Understand how foreign currency gap acts as a constraint on growth & development
When exports are not high enough if developing countries are resource poor. What do they need to import?
Current account deficit > capital inflows
If exports are insufficient to provide currency for machinery

19. Understand how demographic factors acts as a constraint on growth & development

20. Understand how debt acts as a constraint on growth & development

21. Understand how access to credit and banking acts as a constraint on growth & development

22. Understand how absence of property rights acts as a constraint on growth & development

24. June 13