CHAPTER 17
(MACRO CHAPTER 17)
Development Economics
FUNDAMENTAL QUESTIONS
1. How is poverty measured?
2. Why are some countries poorer than others?
OVERVIEW AND OBJECTIVES
The primary purpose of this chapter is to discuss the plight of developing countries.
The unique features of the chapter include a presentation of the concepts of absolute and relative
should be able to:
1. Describe how poverty is measured.
2. Explain the Human Development Index.
KEY TERM REVIEW
expropriation
primary product
import substitution
118 Chapter 17: Development Economics
commercial bank loan
LECTURE OUTLINE AND TEACHING STRATEGIES
I. The Developing World
A. Measuring poverty: Poverty is sometimes measured as an absolute concept, with income
compared to some minimum criterion. Poverty is also measured in relative terms, with one
II. Obstacles to Growth
Given similar resources, different economies may have different rates of growth because of social
and political obstacles.
A. Political obstacles
Teaching Strategy: Emphasize the importance of politics in the economics of
development.
1. Lack of administrative skills: This occurs particularly in countries with a long history
of colonization.
2. Political instability and risk: To foster development, foreign investors must be able to
Chapter 17: Development Economics 119
.
B. Social obstacles
1. Lack of entrepreneurs: Entrepreneurs tend to be immigrants in developing countries.
III. Development Strategies
A. Inward-oriented strategies: Countries often attempt to substitute domestic production for
imported goods, or they adopt protectionist policies against foreign goods.
B. Outward-oriented strategies: Such strategies focus on developing export markets for a
IV. Foreign Investment and Aid
A. Foreign savings flows: For developing countries, capital does not often come from internal
savings. Rather, foreign savings flow into developing countries in the form of direct private
investment or foreign government grants and loans.
B. Benefits of foreign investment
1. New jobs: Foreign investment stimulates new employment.
2. Technology transfer: Technology is usually transferred to developing countries through
OPPORTUNITIES FOR DISCUSSION
1. List the basic needs of a family. Estimate from this list the costs and calculate a poverty line.
Compare your calculated poverty line to the official poverty line.
2. Which approach to measuring poverty seems most useful and appropriate?
ANSWERS TO EXERCISES
1. The basic human needs are a minimum caloric intake, shelter, clothing, and health care.
2.
a. The data are limited, especially for developing countries. Per capita income is an absolute
measure of poverty, but poverty is a relative concept. The definition of the poverty line is
120 Chapter 17: Development Economics
4.
a. I would promise to enforce property rights. To show my good intentions, I could give back
the factories that were expropriated.
5. Rapid population growth has three effects on economic development. First, it leads to less capital
per worker, which is called capital shallowing. Second, a large number of children skew a
country’s production from investment goods to consumption goods. Third, rapid population
growth diverts public investment from infrastructure to education and health care.
7. An outward-oriented strategy allows an economy to specialize in areas where it possesses a
8. Protected domestic industries benefit from an import-substitution strategy. Foreign producers who
are blocked from the market and consumers are hurt by such a strategy.
10. Yes. The poor will always be with us if we define poverty in relative terms. But in principle, the
poor need not always be with us if we define poverty in absolute terms.
11. Tradition—the way things were done by previous generations.
12. The most important sources of saving for developing countries are foreign savings (through direct
13. Food aid to developing countries increases the supply of food in those countries and lowers its
price. This reduces the income of farmers in developing economies and has led to a reduction in
Chapter 17: Development Economics 121
.
14. Immigrants bring skills acquired in their home countries and often have different cultural
backgrounds that are supportive of entrepreneurial activities.
15. Because the goal is to replace imported manufactured goods with domestic goods, tariffs and
ANSWERS TO STUDY GUIDE HOMEWORK
1.
2. Lack of administrative skills on the part of government officials. Political instability (the
3. Cultural attitudes that discourage business and entrepreneurship; rapid population growth; rapid
population growth
4. The minivan plant seems to fit in well with the outward-oriented development strategy followed
by the successful newly industrialized countries like Hong Kong, Singapore, South Korea and
5. Under a socialist form of government, prices were determined by the government and did not
necessarily reflect economic cost or scarcity. In a capitalistic society, prices are determined by the
122 Chapter 17: Development Economics
6. Under socialism, consumers typically have accumulated huge sums of money because goods were
not available for them to buy. Inflation could result once goods and services become available to
buy. During the transition from socialism, monetary policy should be aimed at achieving a low
and stable inflation rate.
ACTIVE LEARNING EXERCISE
This exercise allows students to explore the concepts of socialist versus capitalist systems in terms of
small “societies” of students. By considering situations that personally involve students, they should be
able to relate to recent worldwide events in other economies on a much smaller scale. Questions are
open-ended and student response will vary.
Split the class into groups of four. Each group is to consider the following scenarios:
1. A major report is due at the end of the term from each group. All members of the group will
receive the same grade, regardless of their individual contributions.