‘Both developed and developing economies can experience high levels of unemployment, high

rates of inflation and large current account deficits. Therefore there is now no real difference
between these two types of economy’.

How far would you agree with the view that this statement is misleading? [25]

INTRODUCTION:

• Description of a ‘developed economy’ and a ‘developing economy’.

DISCUSSION:

Compare the likely causes of high unemployment, high inflation rates and large current
account deficits in developed economies with that of developing economies:

The unemployment problem:

• In developed economies, unemployment arises due to:

o firms relocating to other countries. As firms invest in other countries, job opportunities in the
home country become less available.
o High level of capital usage → structural unemployment.
o Developed economies also participate in international trade and are vulnerable to economic
shocks which can be a major cause of unemployment.

• On the other hand, in developing countries, unemployment is caused by:

o rapid population growth but small job market where there is weak demand for labour and
hence limited job opportunities;
o high rural-urban migration (refer to page 4);
o multinational corporations (MNCs) in these countries tend to use more capital-intensive
production rather than labour-intensive;
o high dependence on primary sector → fall in global prices results in loss of export revenue,
profits → unemployment rises.

The inflation problem:

• In developed economies, inflation arises due to:

o the economy operating at or close to full capacity (demand-pull inflation). Strong consumer
spending results in increased demand for goods and services, which puts further pressure
on prices. Increased wealth results in property boom → raises property prices.
o Cost-push inflation also occurs due to fall in birth rates which results in a fall in supply of
skilled labour and thus wage rate rises; strong trade unions that are able to push for higher
wages; implementation of minimum wage; shortages of raw materials and supply-side
shocks (rise in global oil price and steel price.

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• However, in developing economies, inflation is likely caused by:

The CAD problem:

• In developed economies, CAD is due to:

o high propensity to import (consumer goods and raw materials); strong currency → imports
are cheaper;
o high economic growth → high income → able to afford imported goods.

• In developing countries, CAD is a result of:

EVALUATION:

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CONCLUSION: