Economic development and population
Key terms
Define each term.
Multiple choice
Circle the correct answer.
A country's GDP per capita rises by 5% while its Human Development Index is unchanged. The most likely explanation is:
Which is the main economic concern created by an ageing population?
A developing country's GDP grows strongly while its GNI grows far more slowly. The most likely explanation is:
Worked problems
Show your working.
Comparing two countries on income and on development. Country P has GDP per capita of $9,000, life expectancy of 62 years and a literacy rate of 58%. Country Q has GDP per capita of $8,000, life expectancy of 76 years and a literacy rate of 94%. Compare them, and suggest what might explain the pattern.
Calculating population change and the dependency ratio. A country of 50 million has a birth rate of 28 per thousand, a death rate of 9 per thousand, and net emigration of 100,000 a year. Of its population, 19 million are under 15, 2 million are over 64 and 29 million are aged 15 to 64. Calculate the natural increase, the total population change and the dependency ratio.
Chains of reasoning
The steps are in the wrong order. Write the letters in the order that makes a linked chain.
How the savings gap perpetuates itself
- A The marginal propensity to save is therefore very low and domestic saving is small relative to national income.
- B Low investment means the capital stock per worker grows slowly or not at all, and may fall if depreciation exceeds new investment.
- C Labour productivity therefore stagnates, since workers have little equipment and outdated technology.
- D The cycle is self-sustaining, which is why breaking it generally requires an external injection through foreign investment, aid or borrowing, each of which brings its own costs.
- E Average incomes are close to subsistence, so households must spend almost all of what they earn on immediate needs.
- F Low productivity means low output per worker and therefore low incomes, returning the economy to where it started.
- G With little saving, the banking system has few funds to lend, so domestic investment is constrained regardless of the returns available.
Diagrams
Draw two population pyramids side by side, with age bands on the vertical axis and population on the horizontal. Draw one with a wide base narrowing sharply, typical of a country with a high birth rate and lower life expectancy, and one with a narrow base and thick upper bands, typical of an ageing developed economy. Label the dependent groups on each.
Extended answer
Plan your answer: list the points you would make in each paragraph.
Discuss the extent to which gross domestic product per capita is a useful indicator when comparing living standards between developed and developing countries. (25 marks)
Answers
Economic development: An improvement in living standards and the quality of life, including health, education and freedom of choice, rather than an increase in output alone.
B. HDI does include income, but combined with health and education. If growth is concentrated among a wealthy minority and is not translated into better healthcare or schooling for the population, the health and education components do not move and the small income improvement is diluted. This is growth without development.
B. Ageing raises the old-age dependency ratio, so fewer workers fund pensions and healthcare for more retired people, putting pressure on the tax base and on public spending. School places are the concern of a young population, which is the opposite structure.
B. GDP measures output produced within the borders regardless of ownership; GNI measures income accruing to residents. Where multinationals produce domestically and send profits to foreign owners, net primary income is strongly negative and GNI falls below GDP. Population growth would affect per capita figures rather than the gap between the two totals.
Step 1. Compare on income. Country P has GDP per capita $1,000 higher, which is about 12.5% more. On income alone, P is the richer country.
Step 2. Compare on health and education. Country Q has life expectancy 14 years higher and literacy 36 percentage points higher. On both non-income dimensions Q is far ahead, and by margins much larger than the income gap.
Step 3. Reach a judgement on development. Q is the more developed country despite being poorer. Its people live longer and are far more likely to be educated, which is what development means. An HDI calculation would place Q above P because the health and education components outweigh the small income advantage.
Step 4. Suggest explanations. Q may spend a larger share of its income on public healthcare and education, and distribute income more evenly so that services reach most of the population. P's higher average may conceal severe inequality, so a small wealthy group raises the mean while most people have little. P's income may also come from a resource industry that employs few people and funds few services.
Step 5. Draw the general lesson. What a country does with its income matters as much as how much it has. This is why development economists look at outcomes such as life expectancy and literacy rather than relying on GDP per capita, which is a mean and says nothing about distribution or public provision.
Questions of this kind reward candidates who reach a clear judgement and justify it, rather than listing the figures. Say which country is more developed and why, then explain the mechanism that could produce the pattern.
Step 1. Calculate the rate of natural increase. 28 - 9 = 19 per thousand, which is 1.9% a year.
Step 2. Convert to a number of people. 1.9% of 50 million = 950,000 additional people from natural increase.
Step 3. Adjust for migration. Net emigration of 100,000 reduces the total. 950,000 - 100,000 = 850,000, so the population grows by 850,000, or 1.7%.
Step 4. Calculate the dependency ratio. Dependants = 19m + 2m = 21m. Working age = 29m. Ratio = (21 / 29) x 100 = 72.4.
Step 5. Interpret the figures together. About 72 dependants per 100 workers, and the dependency is overwhelmingly young: 19 million children against 2 million elderly. Combined with 1.7% population growth, real GDP must grow by at least 1.7% just to hold income per head constant. The pressure is on school places and child healthcare now, and on job creation in fifteen years when this cohort reaches working age.
Step 5 is the point of the question. A young dependency structure is a burden now and a potential demographic dividend later, but only if the economy generates enough jobs when that cohort matures. If it does not, the result is high youth unemployment rather than faster growth.
E, A, G, B, C, F, D
- Average incomes are close to subsistence, so households must spend almost all of what they earn on immediate needs.
- The marginal propensity to save is therefore very low and domestic saving is small relative to national income.
- With little saving, the banking system has few funds to lend, so domestic investment is constrained regardless of the returns available.
- Low investment means the capital stock per worker grows slowly or not at all, and may fall if depreciation exceeds new investment.
- Labour productivity therefore stagnates, since workers have little equipment and outdated technology.
- Low productivity means low output per worker and therefore low incomes, returning the economy to where it started.
- The cycle is self-sustaining, which is why breaking it generally requires an external injection through foreign investment, aid or borrowing, each of which brings its own costs.
This is the Harrod-Domar logic in narrative form, and it is the standard justification for foreign capital in development. The honest qualification is that it treats capital as the binding constraint, whereas institutions and human capital may bind first, which is why capital injections into countries with weak institutions have often disappointed.
The shapes make the policy difference visible. The wide-based pyramid needs schools, child health services and, in fifteen years, a great many new jobs. The top-heavy one needs pensions, elderly care and either higher productivity, later retirement or immigration to sustain its workforce. Same measure, opposite problems.
Define and frame: Define GDP per capita and living standards, separating material from non-material dimensions. State that GDP was designed to measure production and is being asked to proxy welfare, and that the comparison across very different countries stresses the proxy hardest. Signal that you will assess it against alternatives rather than merely listing faults.
Analysis: the case for GDP per capita: Take this seriously. It correlates strongly with almost every welfare indicator across the development range, so it is informative rather than arbitrary. It is calculated on an internationally agreed basis, available for nearly every country, published frequently and comparable over time. Higher output genuinely funds the healthcare, education and infrastructure that development requires.
Analysis: why it misleads in this comparison specifically: Organise by type rather than listing. Conversion: market exchange rates understate real incomes in poorer countries because non-traded goods are cheap, so PPP adjustment is essential and changes the ranking. Coverage: the informal economy and subsistence production are large in developing countries and largely unrecorded, so output is understated. Distribution: per capita is a mean and inequality is typically higher in developing economies, so the median household is further below it. Composition: GDP counts remediation and defensive spending, and omits environmental depletion, which matters most where resources are being extracted for export. And GDP against GNI diverges sharply where foreign-owned firms repatriate profits.
Analysis: the alternatives: Assess rather than describe. HDI adds life expectancy and education to PPP-adjusted income, captures outcomes, and is available almost everywhere, but weights its three components arbitrarily and ignores inequality and sustainability. Inequality-adjusted measures address the last of those. Direct indicators such as infant mortality, literacy and access to clean water are unambiguous and hard to manipulate, but are single dimensions rather than summaries.
Evaluation and judgement: Distinguish the purposes. For tracking one country's material progress over time, GDP per capita is serviceable. For comparing living standards between a developed and a developing economy, it is weak without PPP adjustment and misleading without distributional and non-income indicators alongside it. Conclude that it is necessary but not sufficient, and that the defensible practice is a dashboard rather than any single number. As a 25-mark question, allocate roughly forty minutes and keep the analysis sections substantial.