CHAPTER 5: ECONOMIC DEVELOPMENT

5.1 LIVING STANDARDS.

Living standards or standards of living refer to all the factors that contribute to a person’s

well-being and happiness.

There are two main measures or indicators of living standards:

1. GDP per capita (or GDP per person) - this measures the average income per person

in an economy.

2. Human development index (HDI)

GDP per capita.

GDP per capita is a commonly used indicator to assess the economic well-being and
standard of living of a population. It provides insights into the average level of economic
productivity and income available to individuals within a specific geographic area. Higher
GDP per capita generally indicates a higher level of economic development and potential
for a higher standard of living, although it does not provide information about income
distribution or other non-economic factors that also contribute to living standards.

Human development index (HDI)

The Human Development Index (HDI) is a composite statistical tool used to measure and
compare the average achievements in key dimensions of human development across
different countries or regions. It was developed by the United Nations Development
Programme (UNDP) in 1990 as an alternative to purely economic measures of national
development, such as GDP per capita. The HDI is based on three basic dimensions of human
development:

1
 a) Health: Measured by life expectancy at birth. This indicator reflects the overall
health status of a population and its access to healthcare services. The better the
healthcare in a country, the greater its social and economic wellbeing tends to be.
b) Education: This indicator measures the mean years of schooling in the country. The
higher the average years of schooling, the greater the degree of human
development.
c) Income levels: The higher the national income of a country, the greater human
development tends to be. Hence, for countries such as Afghanistan, Sudan and
Rwanda tends to have a low HDI. Wealthy the countries such as Norway new
Zealand and Canada have a high HDI

ADVANTAGES OF USING HDI

Using the Human Development Index (HDI) instead of Gross Domestic Product (GDP) offers

several advantages when it comes to measuring the overall well-being and development of

a country. Some of these advantages include:

a) Inclusivity: HDI considers factors beyond economic output, such as education and

health, providing a more comprehensive picture of human development. This

inclusivity ensures that aspects like literacy rates, life expectancy, and access to

healthcare are taken into account alongside economic factors.

b) Quality of Life: HDI reflects the quality of life of citizens by incorporating indicators

like life expectancy and education levels. This provides a more holistic view of a

country's development, focusing on the well-being and capabilities of its people

rather than solely on economic performance.

c) Long-term Sustainability: HDI emphasizes sustainable development by

considering factors like education and health, which contribute to human capital

formation and long-term economic growth. This perspective encourages

2
 investments in education, healthcare, and other social services that promote human

development and productivity over time.

d) International Comparisons: HDI allows for meaningful comparisons between

countries by providing a standardized measure that goes beyond GDP. This is

particularly valuable when assessing the relative development and well-being of

nations, as it takes into account differences in income distribution and social

services provision.

e) Public Perception: HDI resonates more with the general public as it reflects

aspects of life that individuals can relate to, such as education and health, rather

than abstract economic indicators like GDP. This can foster a greater understanding

of development challenges and priorities among citizens.

f) Human-centered Development: HDI puts human beings at the center of

development efforts, aligning with the idea that the ultimate goal of economic

growth is to improve people's lives. This human-centered approach encourages

policies and interventions that prioritize the well-being and capabilities of

individuals and communities.

DISADVANTAGES OF USING HDI

 Data Availability and Reliability: HDI relies on data availability and quality, which

can vary significantly across countries and over time. Inaccurate or incomplete data

can distort HDI rankings and make comparisons less reliable.

 Weighting of Indicators: The weights assigned to different components of HDI

(education, health, and income) may not accurately reflect their relative importance

3
 in determining overall well-being. This can lead to debates over the appropriate

weighting scheme and potential biases in the index.

 Lack of Dynamism: HDI is typically updated only annually or less frequently, which

means it may not capture rapid changes or short-term fluctuations in development

indicators. This lack of dynamism can limit its usefulness for timely policy

interventions and decision-making.

 Subjectivity in Indicator Selection: The selection of indicators and thresholds

used in HDI calculation involves subjective judgments, which can vary depending on

the preferences and values of those constructing the index. This subjectivity may

lead to debates over the appropriateness of specific indicators or thresholds.

 Neglect of Non-Material Aspects: HDI's focus on material aspects of well-being,

such as income and education, may neglect non-material dimensions of human

development, such as cultural identity, social cohesion, and spiritual fulfillment,

which are important to many individuals and communities.

 Global Comparability: HDI's components and methodology are designed for global

comparisons, which may not always be relevant or meaningful at the national or

sub-national levels. Differences in social, economic, and cultural contexts between

countries can affect the interpretation and comparability of HDI scores.

4
 COMPARING LIVING STANDARDS AND INCOME DISTRIBUTION

There are many factors that cause differences in living standards and income distribution

within and between countries. These factors include:

 Level of freedom Various measures of living standards include consideration of civil

liberties, political rights, religious freedom and economic rights.

 Level of education the more educated and well qualified a person is, the higher their

earnings tends to be.

 Productivity of industries: more productive industries yield more output and incomes

 Major industries: what makes countries like Qatar and Norway achieve some of the

world’s highest per capita incomes is that their income comes mostly from petroleum

industries that are scare and highly demanded internationally

 Population: dense population lower per capita income and put pressure on scarce

resource

 Ability of citizens to pay taxes: higher tax-base and taxable incomes allow governments

to invest in infrastructure and welfare programmes

 Provision of health and educational facilities

 Variety of goods/services produced: if citizens can choose from a wide variety of

products, living standards rise. Western countries like US enjoy this

 War, crime and natural disasters: war-struck countries of Asia, the high crime rates of

Latin America and frequent natural disasters in island countries, drive down their living

standards as they damage infrastructure and put people into hardship

5
 5.2 POVERTY

Poverty is a state or condition characterized by a lack of material possessions or financial

resources necessary for a minimum standard of living. It is often associated with

inadequate access to basic needs such as food, shelter, clothing, healthcare, and education.

There are two categories of poverty:

 Absolute poverty

 Relative poverty

Absolute Poverty:

Absolute poverty refers to a fixed standard of living below which individuals or families are
considered to be living in poverty.

It is often defined in terms of a specific income threshold or the inability to afford basic
necessities such as food, shelter, clothing, healthcare, and education.

The measurement of absolute poverty focuses on determining whether individuals or

families have enough resources to meet their basic needs and maintain a minimum
standard of living.

Examples of absolute poverty measures include the international poverty line set by
organizations like the World Bank, which is based on the cost of purchasing a basic basket
of goods and services.

Relative Poverty:

Relative poverty is defined in relation to the standards of living within a particular society
or community.

It is based on comparing individuals' or families' income or resources to the average

income or wealth of the broader population.

6
Relative poverty is concerned with disparities in income or wealth distribution within a
society, rather than solely focusing on the absolute level of material deprivation.

Individuals or families experiencing relative poverty may have enough resources to meet
basic needs but still fall below the average standard of living in their society, leading to
social exclusion and reduced opportunities.

Relative poverty can be influenced by factors such as income inequality, social policies, and
changes in the cost of living within a society.

CAUSES OF POVERTY.

 Unemployment and Underemployment: Lack of job opportunities or insufficient

income from employment can contribute to poverty.

 Low Levels of Education: Limited access to quality education and low educational

attainment can restrict job opportunities and earning potential.

 Economic Inequality: Disparities in income and wealth distribution can leave

certain groups or communities marginalized and in poverty.

 Health Issues: Poor health, chronic illnesses, and high healthcare costs can push

individuals and families into poverty.

 Discrimination: Discrimination based on factors such as race, gender, ethnicity, or

disability can limit access to opportunities and resources, perpetuating poverty.

 Environmental Factors: Natural disasters, environmental degradation, and climate

change can destroy livelihoods and exacerbate poverty, particularly in vulnerable

regions.

 Lack of Access to Basic Services: Inadequate access to essential services such as

clean water, sanitation, healthcare, and education can hinder socio-economic

development and contribute to poverty.

7
  Political Instability: Political instability, conflict, and corruption can disrupt

economic activities, displace populations, and hinder poverty alleviation efforts.

 Geographical Location: Poverty is often concentrated in rural and remote areas

with limited infrastructure, services, and economic opportunities.

 Family Structure: Single-parent households, large families, and dependency on

informal or irregular income sources can increase the risk of poverty.

POLICIES TO ALLEVIATE POVERTY

 Introduce measures to reduce unemployment: an expansionary fiscal/monetary policy

will increase aggregate demand and increase employment opportunities. Income and

standards of living will rise.

 Impose progressive taxes: income taxes are progressive, that is, they increase as

income increases. Imposing these will mean that people on higher incomes will pay a large

percentage of their incomes as tax and help reduce relative poverty.

 Introduce welfare services: money from taxes can be provided as income support to

people with very low incomes. It can also be used to provide free or low-cost homes,

healthcare and education.

 Introduce minimum wage legislation to raise the wage of low-paid employees.

 Increase the quantity and quality of education.

 Attract and invite inward investments from firms abroad to provide jobs and incomes for

people.

 Overseas aid could be gained from foreign governments and aid agencies. This will include

food aid, financial aid, technological aid, loans and debt relief.

8
 TYPES OF UNEMPLOYMENTS

Unemployment can be categorized into several types based on different factors. Here are
some common types of unemployment:

1. Frictional Unemployment:

This type of unemployment occurs when individuals are in-between jobs or transitioning
from one job to another.

It is usually short-term and often voluntary as individuals search for better job
opportunities or wait for suitable employment options.

2. Structural Unemployment:

Structural unemployment results from a mismatch between the skills or location of

workers and the available job opportunities.

It occurs when changes in technology, shifts in consumer demand, or other structural

changes in the economy render certain skills obsolete or certain industries decline.

3. Cyclical Unemployment:

Cyclical unemployment is directly related to fluctuations in the business cycle.

It occurs during economic downturns or recessions when there is a general decline in

aggregate demand for goods and services, leading to reduced production and layoffs.

4. Seasonal Unemployment:

Seasonal unemployment is driven by seasonal fluctuations in demand for labor.

It affects industries such as agriculture, tourism, and retail, where demand for labor varies
according to seasonal patterns.

5. Underemployment:

Underemployment occurs when individuals are employed in jobs that are below their skill
level, part-time workers who desire full-time employment, or workers who are
overqualified for their current positions.

9
It reflects an underutilization of human capital and can lead to lower productivity and
wages.

6. Long-term Unemployment:

Long-term unemployment refers to individuals who have been unemployed for an

extended period, typically six months or longer.

It can result in skills depreciation, loss of confidence, and difficulty re-entering the labor
market, exacerbating the challenges of finding employment.

5.3 – POPULATION
Define the following terms:
 Fertility rate
 Replacement Fertility rate
 Death rate
 Net migration rate
 Optimum population

Population is the total number of people inhabiting a specific area. Two-hundred years
ago, the world population was just over a billion, now it is about 7.7 billion, with China and
India having populations above 1 billion each! It is projected to hit 10 billion by 2056.

Factors affecting population growth

 Birth rate - the number of births per 1000 people. A country with 30 births per
1000 people has a birth rate of (30/1000) x 100 = 3%. A young population and high
fertility rate may cause birth rates to be high
 Life expectancy - the number of years an average person in a country is expected to
live. In Japan it's over 85 years while in the Central African Republic its around 53
years!
 Infant mortality - this is the average number of babies dying before they reach one
year old

10
 Fertility rate - the average number of children a woman of child-bearing age is
expected to have in her lifetime.
 Death rate - the number of deaths per 1000 people . To get the percentage that this
represents you must divide by 10 (which works out to be the same as the formula
given for birth rate above). The age of the population and availability of health care
impacts a country's death rate
 Natural increase - this is the difference between the birth and death rates. If the
birth rate of a country is 30 per 1000 people and the death rate is 10 per 1000
people then the natural increase is 20 per 1000 people or 2% (when the fraction is
multiplied by 100).
 Migration - this is the movement of people (usually permanently) from one area to
another. These people are referred to as migrants. When people move away (out-
migration or emigration) it can cause a decrease in population. When migrants
come into a country (in-migration or immigration) it increases population growth.
 Overpopulation - refers to a situation where a country's resources are unable to
meet the needs of its existing population. Countries facing such challenges are often
forced to adopt anti-natal policies such as mandatory birth control to curb
population growth, such as the two-child policy in China.
 Under-population - refers to a situation where a country's resources are
underutilized because there are insufficient people living in the area. France and
Denmark are countries that have implemented policies to encourage people to have
more children.
 Optimum population - refers to an ideal situation where the needs of the existing
population are adequately met and there is maximization of resources' use.

11
 REASONS FOR DIFFERENT RATES OF POPULATION GROWTH IN DIFFERENT
COUNTRIES
The world’s population has continually grown. However, there are differences in population
growth rates in different countries. Several reasons for the different rates of population
involves differences in the factors that affect population growth:
 Birth rate- More economically developed countries (MEDCs) tends to have lower
birth rates than less economically developed countries (LEDCs). This is partly due to
education and access to contraception, the high cost of raising children and women
choosing to pursue careers.
 Death rate- Due to better quality education, healthcare, nutrition and sanitation,
people in MEDCs tend to live longer. Famine, poverty, poor housing and diseases
tends to reduce life expectancy.
 Net migration rate- People migrate for various reasons, e.g. search of better jobs,
take advantage of lower taxes or to avoid civil unrest in home country.
POPULATION DISTRIBUTION

Population distribution refers to the composition of a country’s population. The study of

population is called demographics. Such demographics include differences in the gender

and age distribution.

Gender distribution

This refers to the number of males compared to the number of females in the population.

Age distribution

This refers to the number of people in different age groups in the population. Low income
countries tend to have a relatively larger proportion of their population in the younger age
groups. By contrast, wealthier countries tend to have an ageing population with a growing
number of people in older age groups.

12
Population pyramids

These are graphical representation of the age and gender distribution on a country’s
population (Ref pg 248)

Dependency ratio

This is a comparison of the number of people who are not in labour force with the number
of people in active paid employment.

The dependent population typically includes all those aged between 0 and 14 and those
aged 65 and above. However, it also includes full-time students and the unemployed.

Dependency ratio = dependent population

Working population

The higher the dependency ratio, the greater the tax burden on the working population to
support those who are not economically active.

The dependency ratio can increase because of:

 Higher birth rates, which mainly occur in less economically developed countries
 A higher compulsory school leaving age, raising the number of people classified as
part of dependent population.
 Social changes such as workers entering the labour force at a later stage due to
greater demand for higher education or more people choosing retirement (thus
reducing the size of working population)

Explain how the changing size and structure of the population such as age and gender
can have effects on the following:

a) Consumers
b) Firms
c) Government
d) Economy
e) The natural environment

13
 DIFFERENCES IN ECONOMIC DEVELOPMENT BETWEEN COUNTRIES.

Economic development is an intangible concept that considers both quantitative and

qualitative variables. Essentially, economic development refers to an increase in the

standard of living within a country. Factors contributing to this include a reduction in

poverty and income inequalities, and an increase in self-esteem, gender equality and

political freedom.

FACTORS ACCOUNTING FOR DIFFERENCES IN ECONOMIC DEVELOPMENT

1. Difference in Income:

Income disparities can arise due to various factors such as differences in productivity,
educational attainment, access to resources, and institutional quality.

Countries with higher levels of economic development often have higher average incomes
due to increased productivity, better infrastructure, and more diversified economies.

2. Differences in Productivity:

Productivity differences can stem from variations in technology adoption, access to capital
and resources, efficiency of labor markets, and the quality of institutions.

Economies with higher productivity levels tend to experience faster economic growth and
higher incomes.

3. Differences in Population Growth:

Population growth can impact economic development by affecting labor supply, demand
for goods and services, and resource availability.

Rapid population growth can strain resources and infrastructure, hindering economic
development in some cases, while slower population growth can allow for more
sustainable development.

14
 4. Differences in Primary, Secondary, and Tertiary Sectors:

The structure of the economy across primary (agriculture, mining), secondary

(manufacturing), and tertiary (services) sectors influences economic development.

Economies that successfully transition from primary to secondary and tertiary sectors
often experience higher productivity, income levels, and overall economic development.

5. Differences in Savings and Investments:

Variation in savings and investment rates can affect capital accumulation, which in turn
impacts productivity, technological advancement, and economic growth.

Countries with higher savings and investment rates tend to have more capital available for
productive use, leading to faster economic development.

6. Differences in Education:

Education is a crucial determinant of human capital and productivity. Higher levels of

education enable individuals to acquire skills and knowledge necessary for innovation,
entrepreneurship, and higher-paying jobs.

Disparities in education levels across countries can lead to differences in productivity,

income distribution, and overall economic development.

7. Differences in Healthcare:

Access to healthcare services and population health levels affect labor productivity,
workforce participation, and overall economic productivity.

Countries with better healthcare systems tend to have healthier populations, lower
absenteeism rates, and higher productivity levels, contributing to economic development.

In summary, differences in economic development can be attributed to a complex interplay

of various factors including income levels, productivity differentials, population dynamics,

15
sectoral composition of the economy, savings and investment rates, educational

attainment, and healthcare quality. These factors interact and reinforce each other, shaping

the overall economic development trajectory of countries.

16