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Chapter 22W The Economics of Developing Countries
QUESTIONS
1. What are the three categories used by the World Bank to classify nations on the basis of
national income per capita? Identify any two nations of your choice for each of the three
categories. LO1
Answer: The World Bank classifies countries into high-income, medium-income, and
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.
But it is not as easy to augment the natural resource base. Without access to natural
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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
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 39W.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)
necessary to invest in the factors required for sustained economic growth. These factors
could be education (human capital), physical capital, physical infrastructure, or social
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
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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
equal. Advanced factories filled with specialized equipment require a productive work
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)
Establishing the rule of law: Some of the poorest countries of the world are plagued by
banditry and intertribal warfare that divert attention and resources from the task of
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
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Answer: Positive government contributions to development are evident in Japan, South
Korea, and Taiwan. In contrast, Mobutu’s Zaire, Somoza’s Nicaragua, Marcos’
9. Why do you think there is so much government corruption in some developing countries? LO4
Answer: There are a number of potential reasons why there is so much government
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
for imported manufactured goods and services. This pattern of trade follows from the
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
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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
DVCs. Temporary migration is not only an outlet for surplus DVC labor, but also a
13. LAST WORD Explain how civil wars, population growth, and public policy decisions have
contributed to periodic famines in Africa.
Answer: Civil conflicts divert resources from civilian uses, destroy institutions, and
complicate the distribution of famine and developmental aid. They also discourage
investment in the productive sector due to the uncertain political and economic base.
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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
Answer: $135
Feedback: Consider the following example. 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?
First we need to calculate the new levels of real per capita output for each county.
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 in some
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
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Answers: 10,000; $303; $309.
Feedback: Consider the following example. 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 in some 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?
To find the population divide the country’s total national income by the country’s per
capita income.