Ib Economics Syllabus SECTION 5

1. Ib EconomicsSyllabus SECTION5 5.1 Sources of economic growth and/ or development 5.2 Consequences of growth 5.3 Barriers to economic growth and/ or development 5.4 Growth and development strategies 5.5 Evaluation of growth and development strategies

2. Sources of Economic GrowthAnd Development • Natural Factors • Human Capital Factors • Physical Capital and Technological Factors • Institutional Factors

3. Human Capital Factors • Quantity of human capital Population Growth – grants and financial support Immigration levels – working visas Getting more people and women into work Quality of human capital Immigration schemes to target skilled professionals, relocation costs, tax credits Investment in education, longer hours – budget 21%of government spending – USA 4% Promoting training at work schemes (apprenticeship) Improvement in health care to extend working life

4. Physical Capital – Technological Factors Quantity of investment Changing variables such as domestic savings, level of private investment, government involvement, foreign investment Government owned organizations create 60% of GDP Reduce barriers to investment, tax credits, foreign ownership rules Stimulate Aggregate Demand and shift aggregate supply Quality of Investment Skill training for workers, higher education and research Access to foreign technology and expertise Multinational corporations

5. Institutional Factors • Adequate banking system • Legal system free from corruption • Good education system • Developed modern infrastructure • Political stability • International relations

6. Consequences of Growth • Externalities • Income Distribution • Sustainability

7. Externalities • Externalities Negative: pollution, overuse of land Positive: more efficient production methods that are better for the environment, results in larger tax base which may be spent on environment • Spillover Costs (Negative Externalities) A cost imposed without compensation on third parties by the production or consumption of other parties.  Example: A manufacturer dumps toxic chemicals into a river, killing the fish sought by sport fishers • Spillover Benefit (Positive Externalities) A benefit obtained without compensation by third parties from the production or consumption of other parties.  Example: A bee keeper benefits when the neighboring farmer plans clover.

8. Income Distribution • May increase inequality if benefits of growth only seen by a select few, or decrease inequality if benefits seen by entire population • The distribution of pretax income in the United States today is highly unequal. The most careful studies suggest that the top 10 percent of households, with average income of about $200,000, received 42 percent of all pretax money income in the late 1990s. The top 1 percent of households, averaging $800,000 of income, received 15 percent of all pretax money income. • In the longer view, the path of income inequality over the twentieth century is marked by two main events: a sharp fall in inequality around the outbreak of World War II and an extended rise in inequality that began in the mid-1970s and accelerated in the 1980s. Income inequality today is about as large as it was in the 1920s. • Over multiple years, family income fluctuates, and so the distribution of multiyear income is moderately more equal than the distribution of single-year income.

9. Sustainability • Economic growth will put pressure on the environment.

10. Barriers of Development Economics By Ervin Mafoua-NAmy

11. Bankruptcy • Refinancing • Taxation

12. Refinancing • Refinances debt by selling new bonds • Using proceeds to pay off holders of the maturing bonds

13. Taxation • The Federal Government can levy ad collect taxes • Tax increase is a government option for gaining sufficient revenue • To pay interest • To pay principal on the public debt

14. Burdening Future Generations • To eliminate the American-owned part of the public debt would require a gigantic transfer payment from Americans to Americans. • Tax payers would pay higher taxes • Holders of debt would receive an equal amount for their U.S. securities

15. Substantive issues • Income Distribution • Incentives • Foreign-owned Public Debt • Crowding Out and Stock of Capital

16. Income Distribution • The distribution of ownership of government securities is highly uneven • Public debt is usually concentrated among wealthier groups who own a large percentage all stocks and bonds • Payment of interest on the public debt probably increases income inequality • On average, Income is transferred from lower income to higher-income bondholders

17. Incentives • Higher taxes may dampen incentives • To bear risk • To innovate • To invest • To work • In this indirect way, a large public debt may impair economic growth

18. Foreign Owned Public Debt • Example:18% U. S Debt held by citizens and institutions of foreign countries is an economic burden to Americans • We do not owe that portion of debt to “ourselves” • External Public Debt • Enables foreigners to buy some of our output • Borrowed Funds from Foreign nations • United States transfer goods and services to foreign lenders • Other Foreign Countries has debt to the U.S. • They transfer goods and services as well

19. Crowding Out and Stock of Capital • The financing of large public debt can transfer real economic burden to future generations by passing on a smaller stock of capital goods. • Crowding Out Effect • Idea that Large Public Debt Results in higher real interest rates, which reduce private investment spending • If it is extensive , future generations will inherit an economy with a smaller production capacity and lower standard of living • Qualifications • Public Investment • Public-private complementarities

20. Public Investment • Part of the government spending enabled by the public debt is for public investment outlays. For Example: • Highways • Mass Transits • Electric Power Facilities

21. Public Private Complementarities Shown on Graph

22. Barriers to Economic growth and Development • Poverty cycle: low incomes --> low savings --> low investment --> low income • Institutional and political factors • International trade barriers • International financial barriers • Social and cultural factors acting as barriers

23. Institutional and political factors Ineffective taxation structure Lack of property rights Political instability Corruption Unequal distribution of income Formal and informal markets Lack of infrastructure

24. International Trade Barriers Overdependence on primary Products Consequences of adverse terms of Trade Consequences of a narrow range of Exports Protectionism in international trade A barrier to trade is a government-imposed restraint on the flow of international goods or services. The most common barrier to trade is a tariff—a tax on imports. Tariffs raise the price of imported goods relative to domestic goods (goods produced at home). Another common barrier to trade is a government subsidy to a particular domestic industry. Subsidies make those goods cheaper to produce than in foreign markets. This results in a lower domestic price. Both tariffs and subsidies raise the price of foreign goods relative to domestic goods, which reduces imports. Yet another barrier to trade is an embargo—a blockade or political agreement that limits a foreign country's ability to export or import. Barriers to trade are often called "protection" because their stated purpose is to shield or advance particular industries or segments of an economy. From an economic perspective, though, the costs to the economy almost always outweigh the benefits enjoyed by those who are protected.

25. International Financial Barriers Indebtedness Non-convertible currencies Capital flight

26. Social and cultural factors acting as barriers Religion Culture Tradition

27. 5.4 Growth and development strategies • Harrod-Domar growth model • Structural change / dual sector model • Types of aid Grant aid, soft loans Official aid Tied aid • Export-led growth / outward oriented • Strategies • Import substitution / inward-oriented • strategies / protectionism • Commercial loans • Fair trade organizations • Micro-credit schemes • Foreign direct investment • Sustainable development

28. Harrod-Domar growth model • The Harrod-Domar model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth.

29. Harrod-Domar Growth Model A Flow chart model Saving Rate Depreciation Rate Ig S s d C GDP D v= K/Y or a=Y/K In Capital/Output Ratio or Productivity Capital

30. 5.5 Evaluation of growth and development strategies • Evaluation of the following in terms of • Achieving growth and / or development • Aid and trade • Market-led and interventionist • Strategies • The role of international financial • Institutions • The International Monetary Fund • (IMF) • The World Bank • Private sector banks • Non-governmental organizations • Multinational corporations/ • Transnational corporations • (MNCs/TNCs) • Commodity agreements