Economic Growth, Development, and Poverty: A Global Perspective
Patterns/Sectors of Unemployment
The industrial structure of developed countries sees most people employed in the tertiary sector (services), while manufacturing and agriculture are less prominent. This distribution shifts in emerging and non-developed countries.
Externalities in Economics
An externality is the consequence of an economic activity, representing the effect of an economic choice. There are two types:
Positive Externality
A positive externality occurs when an economic activity benefits a third party. For example, a car factory opening near a metal factory creates a positive externality by reducing transportation costs. In essence, 1 + 1 = 3. Companies should always seek positive externalities.
Negative Externality
A negative externality occurs when an economic activity harms a third party. For instance, if the vapors from two factories combine to create extreme pollution or acid rain, this is a negative externality. Individually, the vapors might be harmless, but their combination leads to adverse consequences. In this case, 1 + 1 = -1.
Consumer Price Index (CPI)
The CPI measures changes in average prices over a year. Governments create an “imaginary basket of goods” representing typical consumer purchases. They record the prices of these goods in a base year and again a year later, calculating the difference. The CPI can also be calculated monthly or quarterly and may change over time. The basket’s composition reflects the percentage of a typical household’s income spent on various goods and services.
Problems with CPI
- The index doesn’t always accurately reflect how price changes impact typical consumers.
- Year-to-year comparisons can be misleading if the base year’s prices were unusually low, potentially exaggerating price increases.
- Prices are inherently volatile.
Human Development Index (HDI)
Developed by the UN in 1990, the HDI offers a broader measure of quality of life, expressed as a percentage and encompassing three key dimensions:
- Standard of living, measured by GDP per capita (e.g., USD 40,000)
- Life expectancy at birth (e.g., at least 85 years)
- Education, measured by years of schooling (e.g., 100% school enrollment)
Consequences of Unemployment
Gross Domestic Product (GDP)
GDP measures the total value of goods and services produced within an economy annually, indicating its size and evolution.
GDP Per Capita
GDP per capita is calculated by dividing a country’s GDP by its population. While GDP reflects the economy’s size (e.g., China has the world’s second-largest GDP), GDP per capita provides a better measure of a country’s wealth. Developed countries tend to have higher GDP per capita, while some countries with large GDPs, such as China, India, and Brazil, have lower GDP per capita.
Real GDP
Real GDP accounts for inflation. If a country experiences 20% inflation, its nominal GDP in local currency might increase by the same percentage, but this growth is artificial. Real GDP adjusts for inflation to provide a more accurate picture of economic output.
Problems with GDP
- Underground activities: GDP doesn’t capture the black market’s contribution.
- Income inequality: GDP doesn’t reflect income distribution. For example, if person A earns €1 million and person B earns €0, the GDP per capita is €500,000 for both, masking the inequality.
- Environmental impact: GDP only considers goods and services production, ignoring harmful effects like pollution and waste.
- Currency fluctuations: GDP is measured in local currency, which can fluctuate due to exchange rates, affecting comparisons.
Living Standards
Living standards refer to the level of material comfort individuals enjoy based on the goods and services they can afford. Factors influencing living standards include:
- Health
- Family
- Country’s wealth and welfare
- Political stability
- Life expectancy
- Education
- Security
Economic Growth
Economic growth occurs when an economy produces more goods and services over time, typically measured by GDP. Despite economic crises, the long-term trend in GDP demonstrates positive growth.
Causes of Economic Growth
Supply-Side Growth
Investment drives supply-side growth. When money flows into companies, they expand their production capacity.
Demand-Side Growth
Increased demand for goods and services, often fueled by a rising urban population, drives demand-side growth.
Consequences of Economic Growth
Positive Consequences
- Job creation
- Increased wealth
Negative Consequences
- Pollution
- Strain on natural resources
- Widening income gap
- Increased fraud and corruption
Recession
A recession is a period of economic decline characterized by two consecutive quarters of negative economic growth.
Development
Development refers to the continuous improvement of living standards and a country’s capacity to produce more goods and services over time.
Developed Country
A developed country possesses a sophisticated economy and advanced technological infrastructure compared to less industrialized nations, reflected in higher GDP, income per capita, and living standards.
Frontier Market
A frontier market is a developing country more advanced than the least developed countries but too small, risky, or illiquid to be considered an emerging market.
Emerging Market
Emerging markets are developing countries with the potential and realistic possibility of becoming developed. However, they still face challenges in certain areas.
Economic Characteristics of Emerging Markets
- Rapid economic growth
- Economic development concentrated in a few products or sectors
- High capital requirements
- Significant current account deficits
- Underdeveloped financial systems
- Regulatory and supervisory challenges due to rapid growth
Types of Poverty
Policies to Reduce Poverty
Population Growth
Population growth is the percentage change in population over a period, calculated as the difference between the ending and beginning populations divided by the beginning population.
Factors Affecting Population Growth
Population Growth in Developed and Developing Countries
Consequences of Population Change for Developed and Developing Countries
