Unit 4: Population Growth

Great infographic on population growth since time began!!!

Useful for living standards and resource issues...

Unit 4: GDP, PPP and living standards

Gross domestic product (GDP) is the total value of output in an economy and is used to measure change in economic activity. GDP per capita is the standard measure when looking at living standards. However, there are several problems with this......


GDP for different countries is usually measured in a common currency – normally we use the US dollar. But there are two problems in using exchange rates to measure GDP

1. Exchange rates can be volatile from month to month and from year to year. For example a large depreciation in the value of the Argentinean peso against the US dollar might imply that Argentinean living standards have fallen even though their economy might actually be growing quite quickly

2. Exchange rates are more relevant to products that are traded between countries rather than non-traded products. Manufactured goods tend to sell for similar prices in most parts of the world – this is because international competition tends to reduce the differentials in prices for similar products. Non-traded service such as domestic cleaners, haircuts and academic tutors tend to have bigger differences in prices.

Calculations of GDP based on market exchange rates tend to over-estimate the cost of living in poorer developing countries. This is called the Balassa-Samuelson effect.

To make a PPP adjustment for comparing GDP we build a basket of comparable goods and services and look at the prices of that basket in different countries. Purchasing Power Parity is the exchange rate needed for say $100 to buy the same quantity of products in each country.

The Big Mac Index looks at the implied PPP exchange rates between countries and the actual exchange
valued against the US dollar.



The data above is taken from Big Mac Index data for January 2012. The baseline data finds that a Big Mac costs an average of $4.20 in the United States and 3,700 South Korean won. If actual exchange rates were at their implied PPP levels, then the South Korean – US dollar exchange rate would be $1 = Won 882. In fact the Won is weaker than that against the dollar ($1 buys Won1159) which suggests that the Won is under-valued against the US dollar. So too – using the data above – is the Chinese Yuan and also the India Rupee whereas currencies such as the Brazilian Real and the Australian Dollar are over-valued on a PPP basis.

Data from the World Bank uses a huge amount of price data for different countries in order to calculate a PPP-adjusted level of GDP. But there are problems in making international comparisons across countries:

Types of product – rice seems to be homogeneous but it isn’t!

Differences in the quality of a good or service are reflected in price variations

Differences in consumption weights – for example average per capita consumption of cheese or popcorn or chocolate reflects household preferences between countries - these can vary by large amounts

Many goods and services are not bought and sold in markets and therefore do not have official prices – in many countries there is a large informal and/or subsistence sector

The quality of economic data varies across countries – many nations do not have sophisticated methods of collecting information

Despite these problems, PPP-adjusted real GDP will continue to be the key way in which we measure the total value of a nation’s output of goods and services, and to guide understanding of what is happening to average living standards between countries.

Unit 4: The issues of economic growth.

Government and business in India's capital are struggling to cope with the environmental consequences of the city's economic growth. The dirty air has returned to Delhi, making it once again one of the most polluted cities in the world.

A great example of the problems of economic growth. Do you think living standards have improved for the majority of Delhi (it is likely the GDP/capita has)


In this short video, the FT's Victor Mallet examines the cost to human health.

Unit 4: Is the UK better off outside the Eurozone?

Mark Austen considers whether the UK economy has on balance benefited from being outside of the Euro Area in recent years.

The current crisis the Euro area is in suggests that it was prudent for the UK to remain outside the single currency for two main reasons. 

Firstly, Britain has reaped the benefits of having a floating currency free of the euro. In 2007 and 2008 the pound fell sharply against the euro, as a result of the weakening of the economy leading to a decrease in demand for the currency. 

While this was a sign that Britain’s economy was in a bad state, it did have a number of benefits – the fall in the pound limited the effect of the recession on the trade deficit, thus reducing the scale of the crisis. Having a floating currency reduced the extent of the crisis, because as the economy shrank, the pound fell further, thus reducing the impact on trade and so lessening the rate of decline. 

The situation in Europe was very different. Bubbles created by the introduction of the single currency led to higher costs and hence uncompetitive manufacturing in fringe countries (particularly Greece, Portugal, Italy, Ireland and Spain); when the recession hit and these bubbles burst, these countries saw large increases to their trade deficits. 

If they were not attached to the single currency, a devaluation could have occurred which would have enabled this trade deficit to be reduced, easing the external shock of the crisis.

Secondly, because it is not governed by the European Central Bank (ECB), Britain is free to set its own interest rates. 

The advantage here is again made clear by the contrast with the situation in Europe. Seventeen countries use the euro. Optimal currency area theory holds that for a single currency to work, responses to policy must be similar; otherwise, the benefits from policy decisions will be asymmetric, meaning any policy is a compromise. 

Given the major differences in the composition of economies such as Germany and Slovakia, it is evident that the latter is true. As a result, the Euro zone is limited by the fact that it is unable to set an interest rate that benefits all countries. 

Ideally, for example, one country might wish to raise interest rates to curb inflation (provided it has achieved a reasonable level of growth), while a country such as Greece might wish to cut interest rates in order to promote growth. Given the single base rate, neither can adequately achieve its goal. Instead, a compromise must be reached that is unable to maximise the benefit to either. 

Differences in housing patterns, for example, can have a major impact on the effects of interest rates – home ownership in Germany is nearly half that of Greece, as a percentage of the population. This means the nature of people’s wealth is different, and so changes to interest rates will have an asymmetric effect. Britain, being one nation with an independent interest rate, can avoid these considerable issues.

Despite these potential benefits, being outside the single currency area is not without its costs. Having a separate currency potentially harms producers for two reasons. 

Firstly, the floating exchange rate creates considerable uncertainty. If the only thing that is certain is that the exchange rate will vary, exporting firms have no way of predicting future revenues. This can harm trade, because it makes expansion risky: a producer might believe revenues will stay constant and so invests in order to expand production, but if the exchange rates rise and his goods appear more expensive overseas, revenues may fall, making it harder to earn enough to continue pay back the costs of investing. 

Given this volatility, producers might be cautious about expanding. 

Secondly, the exchange rate reduces price transparency. This affects both producers and consumers. Because prices must be converted, producers and consumers must spend more time if they wish to look abroad for better prices. As such, there is likely to be a proportion of the population who do not receive the best prices, because they value this time above the potential price saving. This reduces economic welfare.

However, the effects of both these factors are limited. Currency volatility, while existent, is a factor that must be considered for all trade – Europe is not the only destination for British exports (though it is one of the main ones). 

Further, the pound is not currently proving to be particularly volatile against the euro: it is rising, but in a fairly predictable fashion. Given the sudden and largely unforeseen weakening that occurred in 2007, producers must be aware that an element of risk exists, but this awareness is unlikely to have a major effect on trade. 

Secondly, although the lack of price transparency does have some effect on welfare, this is not necessarily an issue that would be resolved if Britain were inside the single currency, because of the differing prices within euro countries. Even though it is much easier to compare these prices, there would still be a cost involved with comparison given the disparities – the welfare loss would reduce, but would not be eradicated.

Being outside the Euro zone is also potentially costly for Britain because of the expense of changing currencies. These transaction costs can be considerable, costing up to 0.4% of GDP (according to a 1990 study by the EU). 

The main disadvantage of this is that it deters foreign investment into Britain. If investors have to spend extra money converting euros to pounds in order to invest, this evidently reduces the likelihood of foreign direct investment entering the country. 

Furthermore, transactions costs are likely to reduce trade, because if the cost of buying foreign imports rises, fewer will be bought. This effect may also decrease investment into the UK because foreign investment from outside Europe is more likely to be directed towards the Euro zone, because the lack of internal transaction costs make this a more attractive area to produce in. A factory in Germany has access to resources from any of the sixteen other countries in that use the euro without having to deal with transaction costs, whereas a factory in Britain will see its costs rise if it must import from these countries. As such, significant transaction costs could harm both trade and investment.

However, the scale of transaction costs may be in reality quite small. Since the EU’s 1990 report, digital systems have become far more widespread – the cost of transferring between currencies digitally is zero, because no extra vendor must be employed. For this reason, Britain’s more developed banking sector had already reduced its transaction costs to well below the average in 1990. As a result, it seems likely that transaction costs between Britain and Europe are now minimal. This is supported by the fact that the net inflows of foreign investment the UK receives exceed that of many countries using the euro, particularly since 2007. As such, it seems that the effect of transaction costs is minimal.

Overall, the United Kingdom seems to have benefited from remaining outside the Single Currency Area. Initially, the government’s fears about the euro were not realised, but the advantages of having a free and independent policy system – both fiscal and monetary – as well as a floating exchange rate have been seen particularly in the last five years since the economic crisis. Britain has gained considerably from these attributes, and these benefits do seem to outweigh the costs.

Mark Austen

Below is data taken from 2003, when the UK decided to opt out of becoming a full Eorozone member....

Evaluating the UK’s macro performance outside of the Euro Zone

• Decision made in 2003 that the UK would remain outside of the single currency
• UK remains a full member of the single market
• Supportive of further EU enlargement but distanced from deeper fiscal / banking intregration

Crucial question both in the short and medium term is whether non-participation in the Euro makes a significant difference to key macro outcomes

• Real GDP growth, estimated Trend growth (LRAS)
• Core CPI inflation and inflation expectations
• Employment and unemployment rates
• Trade balances (with EU and beyond)
• Trends in relative productivity and per capita incomes

Life Outside of the Euro – Evaluation

1. Economy boosted by depreciation of sterling 2007-09 – benefit of having a floating exchange rate, improvement in competitiveness, possible re-balancing of C+I+G+X-M.  Struggling countries inside Euro Area do not have this option, rely more on structural reforms and internal devaluation (e.g. lower wages) to improve competitiveness.

• a. But impact of weaker sterling limited by external factors and financial fragility
• b. UK growth has been weak, output well below the 2008 peak, triple-dip
• c. Cost too of higher inflation in the UK – has averaged 3% since 2008 – cutting real incomes
• d. Floating exchange rate might be a factor limiting FDI in the medium term e.g. non-EU TNCs choosing Euro members as base for their EU FDI projects

2. Autonomy for the Bank of England to set policy rates at levels appropriate to domestic problems e.g. quicker reaction than the ECB to the financial crisis, freedom to introduce and expand the QE programme, and latterly the Funding for Lending scheme. Real interest rates negative, helping to avoid a depression. Flexible interpretation of the inflation target

• a. Criticisms of the Bank’s record, too lax on CPI inflation, QE storing up problems, unintended consequences of ultra-low interest rates including rising inequality
• b. ECB cut policy rates too, monetary policy environment similar to the UK

3. UK government able to ignore fiscal stability rules of being inside the Euro – has run larger budget deficits – Keynesian fiscal stimulus to boost demand. 10 year bond yields remain at historic lows, FP has helped to stabilise demand. UK less exposed to covering the cost of bail-outs. Emergency funding for countries such as Greece and Ireland.

• a. AAA bond rating has little to do with being outside of the Euro
• b. UK unable to avoid fiscal austerity, damaging to growth – may last longer than members of Euro Area
• c. UK banks and trading sector remains heavily exposed to Euro crisis even if outside of the currency bloc – there are mutual benefits from the Euro project working – risks of disorderly default are hug

Longer term issues

1. UK perhaps missing out on some FDI inflows into the EU (strong competition from new EU entrants including some who have joined the Euro), gains from a single currency (lower transactions costs accrue every year – they are not one-offs).
2. Being outside the Euro did not prevent the asset price bubble and bust in 2007-2010
3. It is possible to be a member of the Euro and enjoy sustained growth and rising prosperity – Germany, Holland etc
4. Easy to make contrasts with struggling countries such as Greece, Spain - but the UK is a different economy in many ways
5. The Euro Area is far from being an optimal currency area – the risks of Euro participation rise because of the lack of real convergence between participating nations

Unit 4: EU Enlargement 2011

Notes on EU enlargement....possible essay question at end.

EU Enlargement - 2011 from mattbentley34

Possible essay question:

a) Assess the economic effects of the growth of trading blocs on the global economy.(20)

b) The UK is a member of the European Union but has not adopted the euro as its currency. To what extent do the benefits of membership of a monetary union such as the Eurozone outweigh the costs? (30)

Unit 4: EU - The Euro Debate

Useful powerpoint on all aspect of the Euro. Essential for questions on exchange rates, trading blocs and interdependency between states.

European union euro_debate from mattbentley34

Possible essay question.

The value of the pound fell from £1 = €1.47 in May 2007 to £1 = €1.18 in November 2008. Examine the factors which might explain this depreciation of sterling against the euro. (20 Marks)

b) The UK is a member of the European Union but has not adopted the euro as its currency. To what extent do the benefits of membership of a monetary union such as the Eurozone outweigh the costs? (30)

Unit 2: Monetary Policy: Quantitative Easing

If a new diamond mind was  to be discovered the price of diamonds would fall. Basic supply and demand. There would be an outward shift in the supply curve. Price would fall. This is true for money. Increase the 'supply of money' and the price or value will fall.

Have a look at this video HERE by the Bank of England which explains how Quantitative Easing works. And another one below.




In total 375 million GBP has been pumped in to the UK economy since March 2009. Has it been effective? Some people argue that it is not working, economic growth has not recovered and confidence, both business and consumer is at all times low. Furthermore, quantitative easing increases the money supply. The value of peoples savings has been eroded - the purchasing power of money has fallen.

However, if there hadn't been this injection what sort of position would the UK economy be in now?

An interesting video for you to look at which discuss the impact of the UK's quantitative easing programme and discuss its effectiveness. Lots of excellent evaluation points which you could use in an exam.




Further reading on the impact of quantitative easing HERE  and HERE. Remember Zimbabwe?

Unit 4: Economic Development - 200 years in 5 minutes!

An excellent introductory clip showing economic development for 200 countries over the last 200 years.

Enjoy!



Question for discussion:

How much has this development to do with globalisation?
Who are the winners and losers?

Unit 4: Overseas Aid & Economic Development

Does Aid help or hinder economic growth and development? This is the subject of a fierce debate in the development economics literature.

 

• Aid has a range of economic, social, environmental and political objectives.
• Economic development can take place without aid - China and Vietnam have both experienced sustained and rapid growth over nearly two decades without receiving much in the way of international aid payments measured as a share of their GDP.
• Well directed and targeted aid can enhance a country's growth potential but the effects may not be seen for many years.
• Aid that might help finance the building of a power station contributes directly to aggregate demand and increases supply potential.
• Aid that is designed to put more children through school or humanitarian aid to vaccinate kids and prevent them dying will have an impact over a longer time horizon.
• Different kinds of aid projects can affect growth at different times and to different degrees.

 Building the Case for Overseas Aid

 

1. Overcoming the savings gap: Aid provides a financial inflow for low income countries - it helps to overcome the savings gap. Also important in stabilising post-conflict environments - e.g. generate jobs to keep fighters away from conflict
2. Building the Capital Stock: Project aid can fast forward investment in critical infrastructure projects - an increase in the capital stock lifts a country's growth potential.
3. Human Capital and Post Conflict Help: Long term aid for health and education projects - builds human capital and raises productivity. Aid combined with good policy can have lasting positive effects
4. Higher Growth and Trade Spillovers: Well targeted aid might add around 0.5% to growth rate of poorest countries - this benefits donor countries too as trade grows

 Counter arguments – Limits / Disadvantages of Overseas Aid

 

1. Corruption: In poorly governed countries much of the aid is expropriated and leaves the recipient country.
2. Ruling Elites: Aid can act as a barrier to true democracy - politicians pay more attention to aid donors than to their citizens 
3. Aid dependency: A dependency culture on aid might be generated - the aid paradox is that aid tends to be most effective where it is needed least.
4. Market distortions: Aid for example in the form of food aid in emergencies may lead to a distortion of market forces and a loss of economic efficiency.

In the "The Bottom Billion" Professor Paul Collier from Oxford University suggests that, ceteris paribus, overseas aid may have added around 1% per year to the growth rate of the poorest countries of the world during the past 30 years. There are few economists who argue that aid has led to a reduction in economic growth of donor countries. Most of those who are critical of overseas aid focus instead on dependency and corruption. It is possible for countries to grow quickly without aid – but equally there are countries who were initially heavy aid recipients who have grown and developed and are now aid donors themselves for example South Korea.

 

The ceteris paribus assumption is important. Aid can provide a much needed injection of funds for some of the world's poorest countries and communities - but everything else is not equal. Many external factors may reduce or enhance the impact of aid on economic growth, for example the quality of government, the efficiency of financial systems and also the absence of conflict.

 

Key point: The contribution aid makes to growth differs sharply in countries at peace and countries in conflict.

 

Aid Graduates – Countries whose overseas aid as a share of GDP has declined over the years.

 

Critics of much of the aid that has gone to Africa in recent decades argue that a high proportion of aid has gone to low-income countries with poor institutional regimes. The UK Coalition government has a target of allocating 0.7% of GDP to overseas development assistance (ODA) - this target came into being in 1970 and has never been revised! But is it right to stick rigidly to such a target independent of what else is happening in both the domestic and the global economy? 0.7% of UK GDP is forecast to equate to around £15 billion in 2015. The government is also eliminating financial aid to India.

 

In a world of increasing resource scarcity, aid can also help achieve three important aims:

• Helping to overcome skills shortages
• Funding to relieve infrastructure shortages
• Aid funded projects to help the poorest countries become more resilient to climate change 

Extra Resources: Millennium Villages Project

 

 

 

 

 

Unit 2: Monetary Policy: Interest Rates

Revision/Study Guides in Library

The following Philip Allan Student Unit Guides are now in the library... Edexcel Economics AS Unit 1 Competitive markets - how they work and how they fail Edexcel Economics AS Unit 2 Managing the economy Edexcel Economics A2 Unit 3 Business economics and economic efficiency Edexcel Economicx A2 Unit 4 The global economy

Exam Papers: Examiners review

As promised here is the ppt straight from the examiner regarding the June 11 series of exams. (Unit 1-4)

Review of jun 11 exam from mattbentley34

Unit 4: Trade blocs, diversion and trade creation

Trade creation & diversion notes from mattbentley34

Unit 4: Trading Blocs - Notes

Trading blocs from mattbentley34

Unit 4: Bi-Lateral Trade Agreement - UK & India

David Cameron has said the UK can forge one of "the great partnerships of the 21st century" with India, as he arrives in Mumbai to begin a three-day visit.

Click here to access the article, including video clip.

Unit 2: Zimbabwe Hyperinflation

Read this link HERE for more information

Unit 4: The WTO

Click here to access a web site which has all you need to know about the World Trade Organisation.

Unit 2: Inflation and wages

In November 2011 CPI inflation was measured at 4.8% this was down from October where it was 5%. The downward pressures came from food, petrol and clothing falls. However, there were increases in the cost of domestic heating and. Whilst prices were rising, wages were not. This article HERE explains some of the pressures households faced.

Things to think about:

What would be the impact on consumer confidence? Business confidence and on Aggregate Demand?

Unit 2: Costs and Benefits of inflation

Inflation erodes the value of savings, effects international competitiveness, causes uncertainty and decreases purchasing power. Have a look HERE and HERE for more information.

When evaluating the effects of inflation there are always lots of negative consequences to discuss. But are there any benefits to inflation. Have a look HERE for more information. Use it to help you fill in your sheet.

Unit 4: Development Theories

Some theories on growth and development


I strongly suggest you print this out and put at the front of your development notes (a topic we have yet to start).

Economic theory seeks to explain behaviour and events by simplifying reality and developing logical sequences of ideas. There have been many different approaches to economic development, each of them adds something to our understanding but none is completely convincing in all circumstances.

Harrod-Domar

Roy Harrod initially studied the business cycle but he is best-known for ideas on economic development which were built on his earlier work. He suggested that it was possible to produce a mathematical model of development in which the savings ratio and the marginal efficiency of capital played a crucial role.

Many less developed countries struggle to save and to fund investment. The limited resources available are nearly all directed at consumption and survival. This makes it difficult for them to add to their capital stock. The Harrod-Domar model focuses on capital accumulation, which is undoubtedly one of the cornerstones of economic development. The least developed countries characteristically have very low levels of capital per person. This acts as a constraint on output and growth.

Two limitations are significant. The model assumes a constant marginal efficiency of capital though in the real world the return on investments is extremely variable. To put this simply, poor investment decisions might make little or no contribution to development if they do not result in the creation of productive assets. For example, building a luxury hotel where nobody wants to go could be a waste of available funding. By contrast, capital projects which improve power supply or transport links, for example, can sometimes stimulate rapid development. The model also works best with a closed economy, whereas foreign direct investment and international trade have been important in the development of many countries.

Rostow

The title of Rostow's main book is "The Stages of Growth: a non-Communist Manifesto". He identified five stages of economic development: traditional society, preconditions for take-off, take-off, drive to maturity, and age of high mass consumption. Whereas Karl Marx’s communist approach identified stages which entailed ‘progressive emisseration’ (worsening conditions) for the working class, Rostow saw the market system leading eventually to high mass consumption.

The stages identified by Karl Marx were flawed because he saw capitalism as a precursor to communist revolution, yet Russian and Chinese revolutions missed the capitalist stage. The stages identified by Rostow were also too rigid for complex real situations. They fitted better to western experience than recent examples of economic development in Asia, for example. Amongst other flaws, he underestimated the contribution that governments can make to development, though he did see value in aid.

Evidence from assorted countries suggests that Rostow's concept of ‘high mass consumption’ has more widespread validity than ‘progressive emisseration’. The evidence also suggests that real experience of development is sufficiently diverse to make any set sequence of stages inaccurate for many countries.

Lewis 2 sector

At the core of Lewis's work is the idea that agricultural economies often use labour inefficiently, with underemployment and/or unemployment. Transferring labour to secondary activity is seen as likely to lead to improvements in output and productivity, spurring development. This could be expected to entail rising wages and urbanisation.

Empirical evidence does suggest that the least developed countries tend to concentrate most activity on primary industries, also that development frequently entails expanding secondary (and tertiary) industries. However, there are striking examples such as Nairobi, where urbanisation has resulted in the growth of shanty towns in which many people are unemployed and living with less income and in worst circumstances than agricultural communities. Lewis, perhaps, underplays the significance of capital as stressed by Harrod-Domar. His model does not explain where new industries will come from to absorb newly urbanised labour.

The value of this approach is that it emphasises the need to bring changes to an economy which increase the productivity and output of the labour force.

Dependency theory

Some more recent theorists suggest that the growth and relative affluence of the richer economies is dependent upon other countries staying poorer. The poorer economies cannot produce many goods and services and therefore import them, providing a market for industries in the richer countries. The poorer countries also frequently find themselves supplying materials and commodities to the rich at disadvantageous terms of trade.

The poorer countries come to depend on richer countries which have an interest in staying dominant. Thus, failure of poorer countries to develop can be blamed on external pressures and not just internal failures. The long-term downward trend in the relative prices of commodities (identified in the Prebish-Singer hypothesis) suggests that there might be something in dependency theory [but see food and commodity prices recently]. Some agreements, such as the Kennedy round of trade negotiations (which brought significant gains to richer countries but entailed a net loss to sub-Saharan Africa), seem to support ideas of exploitation by richer countries.

There is plentiful evidence that richer countries generally act in their own best interests, but this does not necessarily entail others staying poor. Comparative advantage theory shows that both sides can gain from trade. The rapid development of China and India in recent years shows that the largest countries in the world have been able to ‘emerge’ fairly rapidly, reducing poverty for many of their citizens. Many other countries have also achieved sustained development. The evidence from the recession starting in 2008 is that when richer countries suffer a setback, this also disadvantages many poorer countries with which they trade, suggesting a relationship with mutual success at some times and mutual failure at others. Some advocates of dependency theory seem motivated as much by political inclination as by study of the evidence.

Neoclassical theory

Advocates of neoclassical theory claim that economic development depends on free, competitive markets and on entrepreneurs having maximum liberty to operate without government interference. The dominance of this way of thinking, once called ‘The Washington Consensus’, goes part way to explaining the ‘structural adjustment plans’ which were imposed as conditions of IMF support for many less developed countries in the 1990s, sometimes with very damaging results (see ‘Globalisation and its discontents’ by Joseph Stiglitz).

Minimising the role of government entails cutting public spending, perhaps even on basic welfare. Deregulation and privatisation open the door to multinationals; in some cases this has had disastrous results for local firms. An underlying problem here is that neoclassical theory depends on markets operating efficiently, yet many markets in less developed countries (as in developed countries too) are riddled with imperfections.

Absence of effective laws, for example to enforce contracts, deters enterprise. This identifies one essential role for government. Some regulation, even on simple things such as mainly driving on one side of the road, brings benefits which everyone can agree on. There is continuing disagreement between economists on the best extent of government involvement in an economy, but not on the need for the existence of government. Even within a mainly market system, market failures and imperfections create a regulatory role for government.

China, India and others have developed rapidly with governments taking a very active role in their economies. In China, for example, utilities, heavy industry and energy are dominated by 159 state owned enterprises. In contrast, some inefficient (and perhaps sometimes corrupt) governments, for example in some African countries, seem to have held back development. The challenge, seemingly, is to combine effective government action with an environment in which entrepreneurs are able to operate effectively. There clearly is a role in successful development for market forces, for individual initiative and risk-taking.

Synthesis

Each of these approaches sheds some light on development, but none of them offers a complete picture.

Harrod-Domar emphasises the importance of building up a stock of capital. Development entails more output per capita so more labour productivity. Having more and better capital equipment can make a major contribution to productivity.

Rostow’s stages approach is too rigid to be realistic, but ideas such as ‘take-off’ and ‘high mass consumption’ are useful. Broadly, stages can be linked to the idea of bottlenecks inhibiting development and key changes stimulating progress. Lewis captures the point that less developed economies tend to focus predominantly on primary industries and that growth is generally linked to a switch to more secondary and tertiary activity, together with more urbanisation. Dependency theory sounds a cautionary note that richer countries are more likely to prioritise their own interests than those of others. However, international trade has frequently been central to development, in China for example.

Prebish-Singer emphasises the danger in relying on commodities as a means to development; though it is not clear that the long term decline in the relative prices of commodities will continue.

Neoclassical theory stresses the role of free markets. This is contentious. There is a role for incentives and entrepreneurial spirit, but the approach to decision making is perhaps less important than the quality of decisions made. Governments make mistakes, but the global banking crisis came in a market which had grown increasingly free.

The relative significance of these approaches and ideas depends on the context. Information about a country or a particular situation, such as the evidence given for data response questions, will probably include points relevant to one or more of the above approaches. Development is a complex process and it is often useful to focus on key elements, such as those identified above.

Unit 4: 60 Second Videos

A great set of clips that help explain many of the topics in Unit 4.

Unit 2: Revision note on inflation

Look at this link HERE for a revision summary on inflation

Unit 2: Trends in inflation

Use the links  HERE, and HERE and HERE  and HERE to explain the trends in inflation - there are some massive highs and lows. What caused them?

HERE and HERE are some more interesting links!

Unit 2: Changes to the basket of goods

The basket of goods needs to be updated regulary to reflect changes in consumers spending habits. Recently tablet computers such as IPads have been added as show in this video HERE

The BBC also reports that lip gloss has replaced lipstick and disposable cameras have been dropped as more and more people switch to digital cameras!!

Have a look at this article HERE for the full list of changes!

Unit 2: Measuring Inflation

Inflation is defined as the sustained increase in the price level. There are two official measures of inflation used in the UK. The Retail Prices Index and the Consumer Prices Index.

How are the CPI and RPI calculated?

The Office for National Statistics (ONS) collects 120,000 prices each month from a wide range of shops across the UK (including those in shopping centres, out-of-town retail outlets, supermarkets and corner shops) and from the internet.

These prices represent the goods and services typically bought by households. Price collectors visit shops in 141 locations to collect over 100,000 prices. This ensures that variations in price across the UK are captured. For some goods and services, the same price is charged throughout the country, for example, TV licences and purchases from catalogues. These prices are collected centrally and account for over 12,000 prices.

The price collectors visit the same shops each month to collect the prices of identical products to ensure they are comparing like for like. As a large number of prices are collected for each item, the sample contains a broad representation of brands. For example, over 130 prices are collected for a box of 80 tea bags and these include all the main brands as well as supermarkets’ own brand tea bags.

Prices are collected for a representative basket of around 650 goods and services that households spend money on. Households spend different amounts of money on different items. For example, the spending pattern of a single pensioner may be different from that of a couple with two children. To reflect this, products are grouped together and a weight is allocated to represent the appropriate share of household expenditure.

The weights for the RPI are derived mainly from the Expenditure and Food Survey. The EFS samples over 6,000 households from all over the country. Households record every purchase they make over a fortnight. Details of major purchases are recorded over a longer period of time. The items in the basket and their weights are reviewed and updated annually so that changes in household spending patterns are reflected.