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The Economics of Developing Countries

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Classifications

• Industrially advanced countries

• High income nations

• Well-developed market economies

• Per capita income $37,665 in 2008

• Developing countries

• Middle income nations

• Low income nations

• Wide variation in income per capita

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Classifications

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Comparisons

• U.S. GDP $14.6 trillion

• Combined GDP of DVCs $15.6 trillion

• U.S. has 4.5% of population but produces 25.1% of world’s output

• U.S. per capita GDP is 150 times that of Sierra Leone

• Walmart’s annual revenue is greater than all but 23 nations’ GDP

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Growth, Decline and Income Gaps

• Some developing countries have grown considerably

• China, Malaysia, Chile, Thailand

• Some developing countries have become high-income

• Singapore, Greece, Hong Kong

• Income gap has widened

• Developing countries must grow faster to reduce the gap

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Human Realities of Poverty

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Selected Socioeconomic Indicators of Development

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• The path to economic development

• Use existing resources more efficiently

• Expand available supplies of resources

• Simple generalizations are not possible

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Obstacles to Development

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Obstacles to Development

• Natural Resources• Shortage of land, resources, power• Tropical climates hinder labor, lead to

disease• Difficult to solve

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Obstacles to Development

• Human resources• Large populations

• Reduced standard of living• Less saving and investment• Lower productivity• Overuse of land resources• Urban problems• Qualifications

• Unemployment and underemployment LO2 22W-9

Obstacles to Development

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Obstacles to Development

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Obstacles to Development

• Capital accumulation

• This is key for economic development

• Domestic capital formation

• Savings potential

• Capital flight

• Investment obstacles

•Lack of infrastructure

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• Technological advance

• Borrowed technology

• Socio-cultural obstacles

• Institutional obstacles

• Land reform

Obstacles to Development

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The Vicious Circle of Poverty

RAPIDPOPULATION

GROWTH

LOW LEVELOF DEMAND

LOWPRODUCTIVITY

LOW LEVELS OFINVESTMENT INPHYSICAL AND

HUMAN CAPITAL

LOWPER CAPITA

INCOME

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LOW LEVELOF SAVING

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Role of Government

• A positive role

• Establishing the rule of law

• Building infrastructure

• Embracing globalization

• Building human capital

• Promoting entrepreneurship

• Developing credit systems

• Controlling population growth

• Making peace with neighborsLO4 22W-15

Role of Government

• Public sector problems

• Misadministration

• Bribery

• Corruption

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Role of Government

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• Expanding trade

• Admitting temporary workers

• Discouraging arms sales

• Foreign aid

• Direct aid

• The World Bank group

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Role of Advanced Nations

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Role of Advanced Nations

• Foreign harm?

• Dependency and incentives

• Bureaucracy and centralized government

• Corruption and misuse

• Current level of foreign aid

• Flows of private capital

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Role of Advanced Nations

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Famine in Africa

• Root causes – natural and human

• Droughts – Lack of rainfall

• Civil strife – Rebellions and civil wars

• Population growth

• Ecological degradation

• Public policies

• External debt

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