Deck 21: Economic Development Economic Data Glossary Spanish Glossary Index

Question 1

WORLDS APART Per capita income most recently was 160 times greater in the United States than in the Congo. Suppose income per capita grows an average of 3 percent per year in the United States and 6 percent per year in the Congo. Assuming such growth rates continue indefinitely into the future, how many years would it take before per capita income in the Congo exceeds that of the United States? (To simplify the math, suppose at the outset per capita income is $160,000 in the richer country and $1,000 in the poorer country.)

Answer 1

Required number of years to surpass the GDP of another country:
Per capita income of United States is 160 times greater than that of Congo. United States per capita income grows 3 percent per year, whereas Congo's per capita income grows at 6 percent. Thus, Per capita income of Congo grows 3 percent faster than United States.
The following formula is used to calculate the number of years required for Congo to surpass: …… (1)Where,
G = growth rate
t = required number of years
N = per capita income
Substitute the respective values in Equation (1) to obtain the required number of years. Hence, if both the countries grow in present rate, then after years, per capita income of Congo will surpass United States.

Question 2

(Why Incomes Differ) What factors help workers in high-income economies become more productive than those in other economies?

Answer 2

3)Import substitution replaces the foreign imports. A country wants to be self-sufficient. It doesn't want to be depending on foreign products. Thus, the country reduces its foreign dependency through the local production of the industrial products. This is called import substitution.
Export promotion refers to the intervention of the government and private initiatives to improve the trade performance of the country.
High-income countries are those countries, in which the national income, per-capita income, and education level are high compared to low income countries.
Low income countries are those countries in which the national income, per-capita income, and education level is very low.
Domestic producers mostly prefer an import substitution approach, because due to import substitution, the industries in domestic countries will grow. The sales of domestic industries also grow. Thus, they will get profits than export substitution.
In export promotion approach, countries should export high quality goods, and innovative products to compete in the foreign markets.
2)Labor productivity is measured in terms of output per worker. Labor productivity depends on the quality of labor, the quality of other inputs that combine with it, including capital and natural resources.
The difference between the productivities of the two income groups arises due to the different levels of education, training programs, level of capital investment in various sectors, quality of infrastructure and so on.
Developing countries mostly depends on labor intensive products. For these countries, it is difficult to produce high quality goods, and innovative products. Therefore, these countries mostly prefer import substitution than export promotion.
Consumers prefer those goods, in which they can get high quality goods at a low price.
3)Import substitution replaces the foreign imports. A country wants to be self-sufficient. It doesn't want to be depending on foreign products. Thus, the country reduces its foreign dependency through the local production of the industrial products. This is called import substitution.
Export promotion refers to the intervention of the government and private initiatives to improve the trade performance of the country.
Domestic producers mostly prefer an import substitution approach, because due to import substitution, the industries in domestic countries will grow. The sales of domestic industries also grow. Thus, they will get profits than export substitution.
In export promotion approach, countries should export high quality goods, and innovative products to compete in the foreign markets.
Developing countries mostly depends on labor intensive products. For these countries, it is difficult to produce high quality goods, and innovative products. Therefore, these countries mostly prefer import substitution than export promotion.
Consumers prefer those goods, in which they can get high quality goods at a low price.

Question 3

IMPORT SUBSTITUTION VERSUS EXPORT PROMOTION Explain why domestic producers who supply a good that competes with imports would prefer an import-substitution approach to trade policy rather than an export-promotion approach. Which policy would domestic consumers prefer and why?

Answer 3

Import substitution policy:
Import substitution policy refers to the government policy which discourages the imports of goods and service and encourages production of those goods within the country.
Export promotion policy:
Export promotion policy refers to the government policy which encourages the domestic firm to export more goods and services.
Producer prefers import substitution policy:
The import goods prices are lower than the domestic price. This creates more competition, which reduces the price of goods consequently and in turn reduces the profit of the domestic firm. Therefore, to protect the firm from the competition and avoid reduction in the price and profit, domestic firms prefer import substitution policy over export promotion.
Consumer prefers imports:
Import goods create competition in the domestic market, which in turn causes price reduction and offers best-quality products. Hence, consumer prefers foreign imports over the import substitution policy.

Question 4

INTERNATIONAL TRADE AND DEVELOPMENT From the perspective of citizens in a developing country, what are some of the benefits and drawbacks of international trade?

Question 5

FOREIGN AID AND ECONOMIC DEVELOPMENT Foreign aid, if it is to be successful in enhancing economic development, must lead to a more productive economy. Describe some of the problems in achieving such an objective through foreign aid.

Question 6

(In-Kind Aid) What has been an unintended consequences of richer countries giving food and clothing to poorer countries?