Economic development
Development Economics Web Guide, Unit 5B
The causes of economic growth in developing countries.
The significance of economic growth for development
· The role of both physical and human capital
· Technological progress
Examine the sources of economic growth and the extent to which they can be affected by government intervention. 15
Evaluation of the impact of government policies.
Factors affecting economic growth in developing countries
Keynesian Approaches
1
Savings and Investment
There are some economic facts of life that underpin all macroeconomic explanations of growth. Perhaps the most important is that in order for capital goods to be accumulated to produce greater quantities of consumer goods in the future, consumer goods have to be given up in the present. For example, if workers are building a textile factory they cannot simultaneously be making textiles – these will only appear in the future as a result of the sacrifices of the present.
Increases in the amount of capital goods are called investment. For growth to occur the level of investment has to be greater than the amount of depreciation, i.e. the amount by which machines wear out or become obsolete during the year. The higher the level of investment above depreciation the greater the potential output of the economy in the future.
Unfortunately, the resources to enable investment have to come from somewhere. The only way that workers can be freed from making cars to build car factories is by an increase in savings by households – i.e. by the postponement of any decision to buy goods today in favour of future consumption. Look now at the investment figures for your six case study countries and think about the differences between them, particularly those between Asian and Latin American countries. Notice also the very marked regional differences in investment and savings rates.
The analysis above gives the traditional PPF model of economic growth. In the diagram below, a country starting with high
The causes of economic growth in developing countries.
The significance of economic growth for development
· The role of both physical and human capital
· Technological progress
Examine the sources of economic growth and the extent to which they can be affected by government intervention. 15
Evaluation of the impact of government policies.
Factors affecting economic growth in developing countries
Keynesian Approaches
1
Savings and Investment
There are some economic facts of life that underpin all macroeconomic explanations of growth. Perhaps the most important is that in order for capital goods to be accumulated to produce greater quantities of consumer goods in the future, consumer goods have to be given up in the present. For example, if workers are building a textile factory they cannot simultaneously be making textiles – these will only appear in the future as a result of the sacrifices of the present.
Increases in the amount of capital goods are called investment. For growth to occur the level of investment has to be greater than the amount of depreciation, i.e. the amount by which machines wear out or become obsolete during the year. The higher the level of investment above depreciation the greater the potential output of the economy in the future.
Unfortunately, the resources to enable investment have to come from somewhere. The only way that workers can be freed from making cars to build car factories is by an increase in savings by households – i.e. by the postponement of any decision to buy goods today in favour of future consumption. Look now at the investment figures for your six case study countries and think about the differences between them, particularly those between Asian and Latin American countries. Notice also the very marked regional differences in investment and savings rates.
The analysis above gives the traditional PPF model of economic growth. In the diagram below, a country starting with high