Chapter 42 – The Economics of Developing Countries
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Chapter 42 – The Economics of Developing Countries
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. What are the four categories used by the World Bank to classify nations on the basis of
national income per capita? Identify two nations for each of the four categories. LO1
2. Explain how the absolute per capita income gap between rich and poor nations might increase,
even though per capita income (or output) is growing faster in DVCs than in IACs. LO1
Answer: Because base incomes are so much higher in IACs than in DVCs, slower
growth as a proportion of GDP in these countries can still translate into higher absolute
3. Explain how each of the following can be obstacles to the growth of income per capita in the
DVCs: lack of natural resources, large populations, low labor productivity, poor infrastructure,
and capital flight. LO2
Answer: A weak resource base can be a serious obstacle to growth. Real capital can be
accumulated and the quality of the labor force improved through education and training.
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4. What is the demographic transition? Contrast the demographic transition view of population
growth with the traditional view that slower population growth is a prerequisite for rising living
standards in the DVCs. LO2
Answer: The demographic transition is the process that a country’s population goes
through as the economy develops. The typical pattern is one where initial growth is
followed by a reduction in the mortality rate (better nutrition, sanitation, etc…). This
reduction in the mortality rate results in an increase in population size and population
5. As it relates to the vicious circle of poverty, what is meant by the saying “Some DVCs stay
poor because they are poor”? Change the box labels as necessary in Figure 42.3 to explain rapid
economic growth in countries such as South Korea and Chile. What factors other than those
contained in the figure might contribute to that growth? LO3
Answer: The vicious circle of poverty concept implies that the poor countries of the
world will remain poor because they do not have the resources (per capita income)
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6. Because real capital is supposed to earn a higher return where it is scarce, how do you explain
the fact that most international investment flows to the IACs (where capital is relatively
abundant) rather than to the DVCs (where capital is very scarce)? LO3
Answer: Capital earns a higher return where it is scarce, other things equal. However,
when comparing investment opportunities between IACs and DVCs, other things are not
7. List and discuss five policies that DVC governments might undertake to promote economic
development and expansion of income per capita in their countries? LO4
Answer: (Any five from the list below will suffice)
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8. Do you think that the nature of the problems the DVCs face requires a government-directed or
a private-sector directed development process? Explain your reasoning. LO4
Answer: Positive government contributions to development are evident in Japan, South
9. Why do you think there is so much government corruption in some developing countries? LO4
10. What types of products do the DVCs typically export? How do those exports relate to the law
of comparative advantage? How do tariffs by IACs reduce the standard of living of DVCs? LO5
Answer: DVCs export primarily raw materials and agricultural goods to IACs in return
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11. Do you favor debt forgiveness to all DVCs, just the poorest ones, or none at all? What
incentive problem might debt relief create? Would you be willing to pay $20 a year more in
personal income taxes for debt forgiveness? How about $200? How about $2000? LO5
Answer: Debt forgiveness to the poorest nations may allow them to devote these interest
payments to needed social programs – especially investment in human capital programs
12. Do you think that IACs such as the United States should open their doors wider to the
immigration of low-skilled DVC workers as a way to help the DVCs develop? Do you think that
it is appropriate for students from DVC nations to stay in IAC nations to work and build careers?
LO5
Answer: IACs could help the DVCs by accepting more temporary workers from the
13. LAST WORD Explain the differences among microcredit, conditional cash transfers, and
unconditional cash transfers. Then explain how effective each policy has been.
Answer: Microcredit provides small loans directly to individuals to invest in items to
help them improve their ability to earn income. Conditional cash transfers provide poor
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relieving poverty is limited by other factors in developing countries. As just one example,
school enrollment goes up but test scores stay the same—probably because the schools
themselves are poorly funded and often ineffective. Similarly, the wages earned by the
students who stay in school longer don’t seem to be much higher than those of the
students who dropped out earlier.
Early testing of unconditional cash transfers has shown some promise. However, because
unconditional cash transfer programs are quite new, it is not clear yet whether their early
promise can be replicated in other places or even why granting cash unconditionally to
the poor seems to work better than either conditional cash transfers or microfinance.
Experiments are underway to find out.
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REVIEW QUESTIONS
1. True or False: The term developing country (DVC) is applied to rich nations like the United
States and Germany because their economies are always growing quickly by developing new
technologies. LO1
2. True or False: A DVC that has little in the way of natural resources is destined to remain poor.
LO2
3. Suppose a country’s total output is growing 10 percent per year but its population is growing
11 percent per year. What will happen to living standards? LO2
a. Remain the same.
b. Fall.
c. Rise.
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4. A DVC’s population is growing 2 percent per year and output is growing 3 percent per year. If
the government wants to improve living standards over coming decades, which of the following
would probably be the best savings rate for the economy? LO2
a. 2 percent.
b. 0 percent.
c. 10 percent.
d. 5 percent.
5. Compare a hypothetical DVC with a hypothetical IAC. In the DVC, average per capita income
is $500 per year. In the IAC, average per capita income is $40,000 per year. If both countries
have a savings rate of 10 percent per year, the amount of savings per capita in the DVC will be
_____ per person per year while in the IAC it will be _______ per person per year. LO3
a. $50; $4000.
b. $5; $400.
c. $450; $36,000.
d. None of the above.
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6. Which of the following policies would economists consider to be actions that a DVC
government might take that would improve growth prospects?
Select one or more of the following:
a. Helping to extend the banking system to the rural poor.
b. Passing high tariffs against foreign products.
c. Charging high fees for public elementary schools.
d. Constructing better ports, roads, and Internet networks.
Feedback: The two policies that economists would consider to be likely to improve a
DVC’s growth prospects are helping to extend the banking system to the rural poor, and
constructing better ports, roads, and Internet networks.
By contrast, passing high tariffs against foreign products will reduce international trade
and typically lessen economic growth by preventing the adoption of good ideas from
abroad and by allowing inefficient local firms to keep on being inefficient without any
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7. True or False: Economists are unanimous that foreign aid greatly helps DVCs. LO5
8. True or False: Some economists argue that the single best thing that IACs could do for DVCs
in terms of economic growth would be to eliminate trade barriers between IACs and DVCs. LO5
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PROBLEMS
1. Assume a DVC and an IAC presently have real per capita outputs of $500 and $5000,
respectively. If both nations have a 3 percent increase in their real per capita outputs, by how
much will the per capita output gap change? LO1
2. Assume that a very tiny and very poor DVC has income per capita of $300 and total national
income of $3 million. How large is its population? If its population grows by 2 percent next year
while its total income grows by 3 percent, what will be its new income per capita rounded to full
dollars? If population had not grown during the year, what would have been its income per
capita? LO2
Feedback: To find the population divide the country’s total national income by the
The country’s new per capita income equals total national income divided by the