edexcel Economics Unit 4

1. By Patrick, Brandon and Liam

3. LIMITS TO GROWTH &
DEVELOPMENT
 Economic Growth: measured in terms of changes in real GDP
 Economic Development: multidimensional concept
which refers to changes in living standards and welfare over time. Unlike
economic growth, economic development is a normative concept dependent
on value judgements. In order to provide some measure of development,
various composite measures are used, such as HDI
 While all countries face constraints on their growth and
development, there is an enormous difference in the scale
on the constraints affecting developed and developing
countries.

4. Problems facing developing
countries …
Poor Infrastructure
• If there is poor infrastructure then it leaves the country, for example countries on the African continent,
increasing cost as they find alternatives in transport and other ways of keeping a reliable power supply.
• Between Tanzania – Zambia the railway (Tazara) is prone to derailments and breakdowns – despite
being in operation for almost four decades. Less than 2% of the rails cargo capacity is being used as
heavy goods are transported by more expensive ways. This increases the total cost of a good, making
the price level increase and eventually making it less price competitive across the world. This leads to
less profit made and also because of this less taxation is received back to the government and so they
don’t have the ability to increase Government Spending in which they can improve the standard of the
railway to improve efficiency of the Tazara.
• With an unreliable power source companies have turned to diesel-operated power generators – this not
only increases cost in production, resulting in the similar consequences of the increased transport costs
– it also leads to externalities. Social Externalities such as air pollution and noise pollution will be
suffered due to the diesel powered engines, this decreases the standard of living developing countries
have. It could also damage the health of many of the population in which this could lead to an
unhealthy and less productive workforce. But the main problem with poor power source, which in Africa,
as many as 30 countries suffer from regular power outages, is that poor productivity occurs.

5. Human Capital Inadequacies
 What is meant by human capital inadequacies is the lack of education and
training that a workforce has received. This means they are not specialized
or informed of ways to do different jobs. The result of this is that the labour
force is not very productive in comparison to other countries.
 This impacts the growth of the countries effected. Workers cannot be utilized
to their full potential. Innovation may be lacking which results in a long term
hindrance to economic growth. Businesses will be reluctant to invest as they
may fear full productivity will not be reached, and they are unwilling to pay
for training. The same applies to the government, costs are high to educate
and the results are long term, which may conflict with short term interests.
 An example of this is Ethiopia, where the adult literacy rate was 36%
between 2005-2008. There are educational institutions, however, children
are often unable to benefit from these because parents are unable to provide
for their large families, meaning the children must also go out and work to
help. This leaves them with limited to no time for education and keeps the
amount of illiterate people high

6. Population issues
 Population growth is particularly rapid in some of the poorest countries of the world
such as Malawi and Mozambique. Meanwhile, population is falling in some developed
countries such as Italy and Germany.
 Population growth can be analysed in relation to the views of Thomas Malthus, who
predicted at the end of the 18th century that famine was inevitable because
population grows in geometric progression, whereas food production grows in the
form of an arithmetic progression.
 Although his predictions were proved to be incorrect for Britain in the nineteenth
century, some economists believe that they are still relevant for some of the poorest
developing countries. In these countries the growth of population is greater than the
growth in GDP, with the result that GDP per capita is falling.
 The size, growth, age structure and rural-urban distribution of a country's population
have a critical impact on its development prospects and on the living standards of the
poor. Poverty means that people are deprived of services, resources and
opportunities, as well as income.
 A smaller population contributes to upward mobility and helps to stimulate
development. Also smaller families share income among fewer people, average per-
capita income increases.

7.  The rapid population growth in the African country
of Zambia is so quick that it could perpetuate deep
poverty in the country despite relatively fast growth
in recent years. In Zambia, the UN predicts that the
population could triple by 2050, reaching 100
million by the end of the century.

8. Debt
 Debt provides several problems for developing one the primary
one being financing the debt and debt interest. They borrow at
times of low interest to find that some years down the line the
interest has increased significantly. The other issues which
branch of the problem of debt include, not making as much
money as projected governments may have invested the money
into a type of export which at that time was a high earned which
by the time the moneys impact can be seen that export is now
not worth much, increase in oil prices, fall in the value of
currency making imports expensive and exports cheap to
trading partners hence unable to source funding for debt and
debt from money.
 This impacts growth in several ways, the first is AD is affected
because government spending falls, investment falls as there is
less trust in the government and as the result of the first two
consumption falls. FDI too falls and if tax is increased to raise
funds for debt then short run AS falls. Obviously, no need to
expound on this but with debt

9. Ways of promoting growth and
development …
 A range of strategies may be used to promote growth and
development but there is no one simple prescription; each
country is individual, having a different history, geography
and natural resources.
 Therefore, policies which may appear to have worked in one
country will not be successful in another country.
 It is likely that a combination of strategies may be required,
with the particular blend being dependent on the
characteristics and needs of that country.

10. Aid
 Aid is given to help countries and people who are in need of supplies,
mostly in developing countries. It is used in order to improve the way of
life.
 A way in which aid helps a countries development, in terms of monetary,
is allowing the opportunity to invest to increase. If money is given to a
country, then the government will have more money to invest into
projects, which will lead to less unemployment and more people on
sustainable incomes.
 There are a few problems with aid however. If the country does develop
and investment is apparent, then it may increase demand due to an
increase of people on sustainable wages. They will spend more money,
which may lead to an increase in inflation. Moreover, the amount of aid
given is also a factor. If it’s just small amounts, it may not be enough to
change much. Finally, aid dependence is thought to undermine
governments in some cases, leading to corruption and conflict over the
aid funds that have been given.

11. Debt relief
 The burden of debt bears heavily on some countries, such as Gambia, Mali, Malawi.
 The debt is usually owed to all or some of the following; The IMF, the World Bank,
governments and banks in the developed countries. The problem is that servicing the debt
may account for a disproportionate amount of public expenditure, to the extent that
resources available for expenditure on health and education are severely limited.
 As a result, pressure to cancel the debts of the poorest countries has increased, as a way
of promoting growth and development.
 Under the Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral Debt
Relief Initiative (MDRI), the World Bank provides debt relief to the poorest countries of the
world.
 The HIPC initiative was started in 1996 by the IMF and World Bank with the aim of
reducing the external debts of the poorest and most heavily indebted countries of the
world to sustainable levels. Changes were made in 1999 to make the process quicker and
deeper, and to strengthen the links between debt relief poverty reduction and social
policies.
 In 2005, the HIPC initiative was enhanced by the MDRI in order to speed up progress
towards meeting the United Nations Millennium Development Goals (MDGs).

12.  41 countries were identified as being eligible for HIPC initiative assistance and
by the end of March 2009, 35 countries had benefited from HIPC debt relief.
 Debt relief means that developing countries would have more foreign currency
with which to buy imported capital and consumer goods from the developed
countries. To the extent that the money released from debt cancellation is used
for the purchase of capital goods, then there is the prospect of higher economic
growth in the future.
 In turn, this means that developing countries would be able to buy more goods
from richer countries. It would help to reduce absolute poverty, and both the
savings gap and foreign exchange gap. Also it might help to conserve the
environment.
 However, in comparison with aid, it is likely to take much longer to agree a debt
cancellation programme. Unless conditions are attached to debt cancellation,
there is no guarantee that the governments of these countries will pursue
sound macroeconomic policies as there is a moral hazard problem.
 Furthermore corruption might mean that the benefits of debt cancellation are
channelled to government officials rather than to the poor.
 Shareholders of banks in the developed world may bear some of the burden of
debt cancellation.
 Finally it may be much less effective than the introduction of policies to reduce
protectionism in developed countries.

13. Microfinance
 Microfinance is a means of providing small families with
small loans to help them engage in productive activities or
help grow their tiny businesses.
 It helps these small business owners invest to increase
their overall income to improve the way of life they have. It
is an alternative to raise finance as getting a loan is
almost impossible on the small incomes people have in
developing countries.
 The problem is that there is a repayment rate which can
cause problems for the holder of the loan. Moreover, there
has been questionable collection methods and accounting
practices.

14. Fair trade schemes
 Fair trade schemes help developing countries by moving AD to the
right. This is due to the fact that if the developing countries receive a
higher wage for the goods they are producing then they can build
wealth, pay taxes which the government will re-invest through
government spending on infrastructure. This will eventually increase
the standard of living of people in developing countries.
 The Lewis 2 sector model will believe that due to the increased demand
for goods, entrepreneurs will employ more people on a fixed wage and
re-invest profits he makes on goods back into the company through
fixed capital. However this doesn’t take into account pressure on wages
from trade unions. It also doesn’t take into account the fact that in
African countries there may not be a surplus in labour for agriculture
sector jobs.
 Also the extra money the producers received are re-invested back into
the product to improve the quality of the good. But Fair trade schemes
are seen as an insufficient way to get money to poor producers. As
consumers pay a large premium for the goods and most of the profits
go to supermarkets in profits.