Growth and Development Problem Set - IB Economics exam questions and answers.

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Economic Growth and Development Problem Set

120 marks

Complete the following questions using a word processor by Monday Feb. 28th.  Remember to carefully REASEARCH your answers CAREFULLY, and provide examples and diagrams when possible.  REMEMBER TO LOOK AT THE POINT VALUES!  A COUPLE OF THE QUESTIONS ARE LONG QUESTIONS THAT YOU WOULD BE GIVEN 60 MINUTES TO ANSWER BY THE IB!  Good Luck!

1.        (a) Economic growth is a complex interaction of numerous factors, such as quality of governance, technological progress, population growth, physical capital, human capital, industrial structure, religious beliefs, geographic location, quality of land, stock market, inflation, etc. Economic growth is conventionally measured with the percentage of increase in Gross Domestic Product (GDP). According to statistics from OECD, the GDP annual growth rates between countries from 1998 to 2002 differ greatly. The top GDP growth rate of Ireland is 8.1% while the bottom GDP growth rate of Japan is only 0.2%.

However, it does not mean that the greater rate is much better than the lower one because different countries have specific economic background and development speed. Considering the general trend in 21st century, the worldwide economic growth has slowed down than before, only about 2% on average. Most surprisingly it appears significant difference among countries. In 2003, the annual economic growth rate of USA is about 2.5%, compared to 0.5% of Japan and 8.1% of Ireland.

The quality of governance is a very important factor in driving economic growth. According to World Bank Institute, governance is the process and institutions through which decisions are made and authority in a country is exercised. The governance is responsible for providing necessary infrastructure and social environment for economic development of the whole society. In many developing and developed countries, the main purpose of governance has always been set to stimulate economic development. Stable political environment and lack of violence are also necessary for continuous economic development. Good governance also insists on transparency, control of corruption and consultative process between government and private interests. Let us provide an example to show the distinctive influence of different governances to economic growth. North and South Korea were both extremely poor in 1950. Between the end of the Korean War and 1980, both countries were dictatorships. Yet South Korean dictators chose capitalism and secured property rights and the economy grew rapidly, reaching per capita income level of US$ 1589 in 1980. In contrast, the North Korean dictator chose socialism and the country only reached the level of income of US$ 768 in 1980. Clearly different types of governance can lead to significant diversity of economic growth. Which one is more suitable to domestic development and whether it is really satisfied by national people will eventually determine the economic growth rates.

The technological progress is a primary factor in stimulating the economic growth. With the rapid technological progress, it is easy to create new jobs, build large industries, and improve living standard. Furthermore, technology is also a powerful tool for making government more efficient and effective, harmonizing economic growth and environmental objectives, providing foundation for economic and military durable development. There are three basic classifications of technological progress: Neutral, Labor-saving and Capital-saving. The different speeds of adopting advanced technology and transferring it into real productivity will eventually influence economic growth rates between countries. Different countries adopting these different strategies would eventually have different growth rates.

The population growth is a significant factor to influence economic growth. In my opinion, the rapid population growth in LDCs is an objective reflection of economic growth. Otherwise we cannot afford to raise children with limited resource and poor living standard. Modern population growth has both positive and negative influences to contemporary economic growth. For example, China has implemented strict one-child policy for nearly 20 years, and on the other hand, India has not pursued population limitation. Therefore, per capita GDP is rising in China while India shows no similar rise. On the contrary, some economists insist that population growth was not definitely associated with slower economic growth. It had been indicated that a moderate population growth would produce considerably better economic performance in the long run than a slower growing population would in the short run. So, clearly population growth does not definitely hamper the economic growth, if maintaining a moderate growth rate, it can encourage the economic growth as well. Moreover, different population policy, age structure and growth speed will eventually influence economic growth rates between countries.

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(b) Institutions providing banking services and access to credit are increasingly recognized as being very important to economic growth and broad-based economic development. Yet the banking system in developing countries is not well developed. Partly due to underdeveloped institutions and partly due to relatively low levels of savings, the total amount of funds in bank deposits on average is about 15% of national income, compared to 30% or more in developed countries. The number of banks and their branches in relation to the population in developing countries is far smaller than in developed ones, indicating that businesses and the population at large, especially in rural areas, do not have easy access to banking services. Thus, lack of access to banking services, to some extent, do not allow the participation of people living in rural areas in economic growth.

The availability of infrastructure and broad access to the services it offers make major contributions to economic growth. However, the lack of infrastructure is an obstacle to growth and development for developing countries in attempting to increase their growth rates. Most developing countries perform poorly with respect to infrastructure development and provision, and that the contributions of investments in infrastructure to growth and development have fallen short of expectations.

Developing countries often have inadequate taxation institutions and tax structures, resulting in collection of low levels of revenues, often with negative impacts on equity and resource allocation. Inequities in the tax system accentuate income inequalities: to the extent that tax systems are not progressive, there is limited, if any, redistribution from higher income to lower income groups; with regressive taxation, inequalities become more pronounced, with serious consequences for both growth and development efforts.

Property rights refer to the laws and regulations that define rights to ownership, use and transfer of property. A market economy cannot function in the absence of secure property rights, as there is uncertainty and risk associated with undertaking investments relating to the ‘property’. It is risky to build a factory, or make improvements on a farm, if these are located on a piece of land whose ownership has not been legally secured. Secure property rights encourage investment, property maintenance and economic growth. The less secure the property rights, the lower access to credit, the worse the terms (i.e. the higher the rate of interest), and so the fewer the investments financed by credit, and the lower economic growth.

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The presence of high inequalities in income distribution and the persistence of extreme poverty (defined as living on less than US$1 a day) are not only contrary to economic and human development, but can also work against the achievement of economic growth.

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(Total 25 marks)

2.        (a) Measurement of national income in an economy is very important because it gives an estimation of the welfare of the economy. National income is the total of the value of the goods and the services which are produced in an economy during a given time period (usually 1 year). The basic measures ...

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