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CHAPTER 42
The Economics of Developing Countries
A. Short-Answer, Essays, and Problems
1. What is the extent of income inequality among nations? Explain, citing relevant data on incomes received
2. How are countries classified based on income?
3. What is the magnitude of the differences in GDP per capita between industrially advanced countries and
developing countries?
4. Assume real per capita income in an industrially advanced country is $37,665 per year and $523 per year in
a low-income developing country.
5. In terms of economic and social conditions, how do industrially advanced countries and developing
countries differ?
6. “If two countries are growing at the same rate, the income gap between the two countries should remain the
7. A breakdown of the shares of economic production for two different countries is listed below, along with
per capita income and growth rate. Use this information to calculate the growth rates per sector and answer
the following questions.
Country A
Country B
Growth
Rates A
Growth
Rates B
Services
10%
60%
____
____
Industry
15%
20%
____
____
Natural Resources
30%
15%
____
____
Agricultural
45%
5%
____
____
Per Capita Growth Rate
5%
5%
—
—
Per Capita Income
$400
$25,000
—
—
(a) What is the amount of per capita growth in countries A and B? Will the growth increase, decrease or
maintain the income gap?
(b) Suppose country A’s economy becomes more industrialized, increasing the productive share of
services and industry. What likely effect will this having on country A’s growth rate? Suppose as a
result of this change the growth rate of services and industry is now 3.5% and 2.5% respectively, while
the rates for natural resources and agriculture remain the same. What is the new total growth rate?
What is the new distribution of the economy? What is the effect of the new growth on the income
gap?
(c) What growth rate would country A have to maintain to reduce the income gap with country B by 10%,
assuming country B grew by 5%? If country B grew by 2%? If country B experienced no growth?
(d) What growth rate would country A have to maintain to reduce the income gap with country B
completely if country B experienced 3% growth?
(e) What do your answers in (a) through (d) tell you about the situation facing developing countries? How
does the element of time (growth over several years) change your answer?
8. What are the human realities of poverty in DVCs?
9. It is stated that “the avenues of economic growth are essentially the same for both industrially advanced
and developing nations.” What are the two basic avenues?
10. What is the natural resource problem in DVCs?
13. What is the human resource problem in DVCs?
14. Define fertility rates. How do they differ across DVCs and IACs?
16. Why might income gains in the poorest DVCs increase population growth, at least for a while?
17 . Discuss the “one child per family” policy implemented in China. Why did it need to be overturned?
19. Why do developing nations often have low labor productivity? Are the workers just lazy?
20. What is the capital accumulation problem in DVCs?
21. Economic development in DVCs often focuses on capital accumulation. Why?
22. What are the prospects for domestic capital formation in DVCs?
23. What is the technology problem in DVCs?
24. What is the difference between capital-using and capital-saving technological advances? Give examples.
25. Of what significance is the “will to develop”?
26. Why is land reform of significant concern for developing countries and what restricts its implementation?
27. Compare the problems in achieving growth in an advanced nation with those of a developing nation. Do
29. What positive role can government play in fostering economic growth in developing countries?
30. How can embracing globalization by governments in DVCs promote economic growth?
31. What are the problems with government actions in DVCs?
32. What can IACs do to expand trade with DVCs?
33. “In a recent recession the losses sustained by the developing countries through a decline in raw-material
34. If IACs admit more temporary workers from DVCs, will it help DVCs? Explain.
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35. Describe the main characteristics of direct foreign aid from IACs to DVCs.
36. Discuss the allocation of direct foreign aid from IACs to the lowest-income DVCs and its issues.
37. How can debt policies for DVCs create a moral hazard?
39. What are two affiliates of the World Bank? What do they do?
40. What are the three basic criticisms of foreign aid to DVCs?
41. Describe the characteristics of private capital flows to DVCs.
42. (Last Word) Describe the three foreign aid methods for delivering funds directly to poor individuals and
how effective they have been.
B. Answers to Short-Answer, Essays, and Problems
1. What is the extent of income inequality among nations? Explain, citing relevant data on incomes received
by populations and total GDP in the United States and developing nations.
2. How are countries classified based on income?
Countries can be classified into two main income groups: industrial advanced countries (IACs) and
3. What is the magnitude of the differences in GDP per capita between industrially advanced countries and
developing countries?
4. Assume real per capita income in an industrially advanced country is $37,665 per year and $523 per year in
a low-income developing country.
(a) What is the gap in the standards of living?
(b) If real per capita income were to grow at a rate of 2% during a year in both the industrially advanced
and the developing country, what would happen to the standard of living in each country and the gap in
the standard of living?
5. In terms of economic and social conditions, how do industrially advanced countries and developing
countries differ?
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6. “If two countries are growing at the same rate, the income gap between the two countries should remain the
same.” Evaluate this statement.
This statement is incorrect. In the case of a low income country (earning say, $300 per capita per year) and
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7. A breakdown of the shares of economic production for two different countries is listed below, along with
per capita income and growth rate. Use this information to calculate the growth rates per sector and answer
the following questions.
Country A
Country B
Growth
Rates A
Growth
Rates B
Services
10%
60%
____
____
Industry
15%
20%
____
____
Natural Resources
30%
15%
____
____
Agricultural
45%
5%
____
____
Per Capita Growth Rate
5%
5%
—
—
Per Capita Income
$400
$25,000
—
—
(a) What is the amount of per capita growth in countries A and B? Will the growth increase, decrease or
maintain the income gap?
(b) Suppose country A’s economy becomes more industrialized, increasing the productive share of
services and industry. What likely effect will this having on country A’s growth rate? Suppose as a
result of this change the growth rate of services and industry is now 3.5% and 2.5% respectively, while
the rates for natural resources and agriculture remain the same. What is the new total growth rate?
What is the new distribution of the economy? What is the effect of the new growth on the income
gap?
(c) What growth rate would country A have to maintain to reduce the income gap with country B by 10%,
assuming country B grew by 5%? If country B grew by 2%? If country B experienced no growth?
(d) What growth rate would country A have to maintain to reduce the income gap with country B
completely if country B experienced 3% growth?
(e) What do your answers in (a) through (d) tell you about the situation facing developing countries? How
does the element of time (growth over several years) change your answer?
Country A
Country B
Growth
Rates A
Services
10%
60%
0.50%
Industry
15%
20%
0.75
Natural Resources
30%
15%
1.50
Agricultural
45%
5%
2.25
Per Capita Growth Rate
5%
5%
—
Per Capita Income
$400
$25,000
—
(a) The per capita growth in country A is $20 and the per capita growth in country B is $1250. The
growth will increase the absolute income gap by $1230 from $24,600 to $25,830.
8. What are the human realities of poverty in DVCs?
9. It is stated that “the avenues of economic growth are essentially the same for both industrially advanced
and developing nations.” What are the two basic avenues?
10. What is the natural resource problem in DVCs?
11. Evaluate the statement: “No nation can grow without a large natural resource base.”
12. List the three major human resource problems in developing nations.
They have large populations relative to their national incomes. Unemployment and underemployment is
13. What is the human resource problem in DVCs?
14. Define fertility rates. How do they differ across DVCs and IACs?
15. Discuss the problem of population in developing nations using the rule of 70.
16. Why might income gains in the poorest DVCs increase population growth, at least for a while?
18. Explain the logic behind the demographic transition view.
19. Why do developing nations often have low labor productivity? Are the workers just lazy?
20. What is the capital accumulation problem in DVCs?
21. Economic development in DVCs often focuses on capital accumulation. Why?
22. What are the prospects for domestic capital formation in DVCs?
The prospects are bleak. Domestic capital formation requires a reallocation of some production from
consumer goods to investment goods, and it requires a reallocation of incomes from consumption to
savings. The reallocation of production from consumer goods to investment goods may not occur because
23. What is the technology problem in DVCs?
24. What is the difference between capital-using and capital-saving technological advances? Give examples.
25. Of what significance is the “will to develop”?
26. Why is land reform of significant concern for developing countries and what restricts its implementation?
27. Compare the problems in achieving growth in an advanced nation with those of a developing nation. Do
these problems differ in degree or in kind? Explain.
28. Draw and explain a diagram that illustrates the vicious circle of poverty in DVCs.
29. What positive role can government play in fostering economic growth in developing countries?
30. How can embracing globalization by governments in DVCs promote economic growth?
31. What are the problems with government actions in DVCs?
32. What can IACs do to expand trade with DVCs?
33. “In a recent recession the losses sustained by the developing countries through a decline in raw-material
prices by far outweighed any foreign aid given over several years.” Explain.
34. If IACs admit more temporary workers from DVCs, will it help DVCs? Explain.
35. Describe the main characteristics of direct foreign aid from IACs to DVCs.
Direct aid may come through programs or international institutions designed to stimulate economic
development. In the past ten years, U.S. loans and grants to DVCs averaged about $15 to $28 billion per
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36. Discuss the allocation of direct foreign aid from IACs to the lowest-income DVCs and its issues.
37. How can debt policies for DVCs create a moral hazard?
38. What is the World Bank? Explain its primary purpose.
39. What are two affiliates of the World Bank? What do they do?
The two affiliates are the International Finance Corporation (IFC) and the International Development
40. What are the three basic criticisms of foreign aid to DVCs?
41. Describe the characteristics of private capital flows to DVCs.
DVCs receive flows of private capital from IACs. In 2010 the total flow of private capital to DVCs was
$557 billion. These flows mainly come from corporations and private investors, and not commercial
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42. (Last Word) Describe the three foreign aid methods for delivering funds directly to poor individuals and
how effective they have been.
Microcredit are small loans that are provided to the poor in order to help them start businesses. The loans
are almost always paid back, but, on average, households and individuals receiving the funds do not report
better economic, health, or social outcomes.]