1.

Structure of an economy:

- Primary: extracting raw materials directly from nature. E.g. agriculture, fishery,
forestry, mining

- Secondary: turning raw materials into finished goods. E.g. construction, furniture,
TVs etc.

- Tertiary: usually involve the creation and delivery of intangible goods directly to
the consumers. E.g. education, banks etc.

- In the UK, the structure of the economy changed so that Manufacturing declined and
Services grew from 1950 to 2016.
- Advantages: Service sector tends to be more profitable, so workers enjoy better pay and
better living standards.
- Disadvantages: Dependence on imports of agricultural and manufacturing products that
worsen the current account on the BoP, not meeting macro objectives.

2. Policy objective of sustainable development

- meeting the needs of the present without compromising the ability of future
generations to meet their own needs.
- Sustainable development issues include climate change, biodiversity loss,
conflict and resource scarcity.
- GOAL 1: No Poverty
 - GOAL 2: Zero Hunger
- GOAL 3: Good Health and Well-being
- GOAL 4: Quality Education
- GOAL 5: Gender Equality
- GOAL 6: Clean Water and Sanitation
- GOAL 7: Affordable and Clean Energy
- GOAL 8: Decent Work and Economic Growth

3. Relationship between economic growth and sustainable development

● Correlate - If economic growth occurs in green technology, or clean energy then
increases in GDP can be achieved without compromising future development.
● Conflict - Maximising the use of resources in present times means economic
growth will be maximised, but sustainable development may not be reached. This
is due to depletion of resources and a high level of economic activity will
accelerate climate change, affecting development. Whereas, if economic growth
was held to a certain extent, sustainable development could occur.

4. macro measures
- GDP: value of all goods and services produced within a country. C + I + G + X -
M.
- Does not take into account population
- Distribution of income (equality): e.g. Saudi Arabia
- Material aspect (how much money one has to buy goods & services) of
well-being but not others: education, healthcare, environment, social &
political freedom...
- Other indicators: infant mortality rate, access to clean water (%), hospital
(number of hospital per a thousand of the population), literacy rate (%),
happiness/wellbeing of citizen (survey/questionnaire)
- HDI: GDP per capita, infant mortality rate, adult literacy rate, life expectancy at
birth, enrollment in 2ndary & tertiary education. These are chosen to allow for
easy comparison among countries.
- There tends to be a positive correlation between GDP and HDI.
 Evaluation of usefulness:
- HDI goes beyond economic growth, and shows general indicators in society,
such as expected years of school.
- GDP and GNI explain the current situations, economically in terms of per capita
too. Quite limited, does not take into account other aspects of social well being.
- GPI goes beyond economic success, and shows through figures the negative
aspects of it too, it is a fairer conclusion. Still doesn't show other non-economic
aspects of society, such as infant mortality rates, access to clean water etc -
which other indicators do.
- GDP and GNI are still widely used because they are easy to calculate, the data is
relatively easy to collect. Additionally, there is some correlation between GDP
figures and other indices.

http://hdr.undp.org/en/content/table-1-human-development-index-and-its-components-1

Factors influencing growth & development

1. Primary Product Dependency
Relies heavily on one/a few primary products to achieve economic growth
Pros: some countries are rich in primary products that are in high demand, may not
require significant investment to extract and then export these products (copper, oil,
minerals...etc)

Cons: finite resources, environmental problems (pollution, changing the landscapes,

destroying natural habitats); the terms of trade for primary products tend to worsen over
time, compared to secondary & tertiary products. (Prebisch-Singer hypothesis)
𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑋 𝑝𝑟𝑖𝑐𝑒𝑠
𝑇𝑜𝑇 = 𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑀 𝑝𝑟𝑖𝑐𝑒𝑠

Primary product: coffee beans

Secondary product: instant coffee powder (supermarkets)
Tertiary product: a coffee shop (Starbucks)
2. Volatility
Primary products tend to have fluctuating prices on global markets. Also usually
vulnerable to weather conditions (which are getting more extreme), supply chain
disruptions, global pandemics.
Makes it hard to plan and to invest.

3. Savings gap
People in poor countries have lower income, so they must spend most of it on
necessities such as ... This means that the level of savings in these countries is lower.
Lower savings lead to lower investment; which leads to lower capital level, which leads
to lower economic growth.

Harrod-Domar: investment is the most important factor in facilitating economic growth.

4. Foreign currency gap

Less Economically Developed Countries tend to have weak and volatile currencies. This
means that it may cost them a lot in their domestic currency to buy important imports
such as capital, or medicine, or vehicles. Having a foreign currency reserve in a strong
currency such as $ or £ will help with this situation.
E.g. Kenya’s shilling is a relatively weak and volatile currency. When foreign investors
make an investment in Kenya, they will buy the Kenya’s shilling with the $. This will
boost Kenya’s reserve of $, which they can use to buy imports such as capital or
medicine.
5. Capital flight
When there are few economic/investment opportunities in an economy, people/investors
prefer to invest money in other countries instead.
E.g. Many rich Russians investors spend money buying properties in the UK, especially
in London because these are seen as better investment opportunities than investing in
Russia.

6. Demographic factors
● Young population: requires spending on education; mass unemployment if not
enough jobs are created.
● Aging population: requires spending on healthcare and pension
● Health: Ebola, HIV/AIDS in some African countries

7. Infrastructure
● Roads, railways, bridges, ports, airports, electricity, internet...
● Productivity
● Attracting FDI by TNCs (trans-national companies)

8. Education/skills
-
9. Access to banking
● Savings, loans, investment
● Facilitate payments and exchange

10. Absence of property rights: (private ownership) aka “tragedy of the commons”
● When there are no property rights, there is usually also no incentive to protect the
property. Instead there is usually incentive to exploit the property to depletion.
● E.g. overfishing. Fish in the river are not owned by anyone, therefore everyone is
likely to have the incentive to fish as much as possible, assuming that others will
do the same. This is likely to lead to overfishing and depletion of fish stock as a
result.
● Deforestation of the Amazon in Brazil and other South American countries

11. Debt
● Debt-servicing: paying interest on debts --> opportunity cost
● Debt write-off/ debt forgiveness: --> dependency culture where gov’t do not focus
on making sound economic policy, but rely on borrowing and expect to be
“forgiven” when the debt is too high (moral hazard).
● Corruption
It would be cheaper to build and run a restaurant that seats 40 people, than to build and run 4
restaurants that seats 10 people each.

Strategies influencing growth & development

a) Market oriented / market liberalisation : the gov’t only intervene to remove barriers to
entry/exit and to promote competition

● Trade liberalisation: the removal of trade barriers such as tariffs, quotas,

domestic subsidies...etc. This is the opposite of _____. This incentivises
domestic firms to become productive/efficient/internationally competitive, in order
to survive foreign competition; learn from foreign competition re production
process or management methods; foreign firms which employ domestic workers
can provide them with skills & experience. E.g. Tesla opened factories in China
and trained Chinese workers & managers; who now work for its rival, BYD.

However: Domestic firms may shift their resources to the production of goods &
services for exports, where they can earn higher revenue. This may leave
domestic customers’ needs unmet.

Domestic firms may NOT be internationally competitive and may not survive the
exposure to foreign competition.

● Encourage more FDI: AD component, multiplier effect, Harrod-Domar model, FDI

can plug the savings gap. The gov’t can deregulate or lower corporation tax rate
for TNCs
However: TNCs who make the FDIs usually repatriate their profits back to their
home country, and may not pay the full amount of tax in the host country.
 ● Removal of gov’t subsidies: this incentivises domestic firms to become
productive/efficient/internationally competitive. Reduce gov’t spending, which can
then be put to another purpose.

● Floating exchange rate system: the currency can depreciate or appreciate

according to demand and supply, reducing the need to maintain currency
reserves.
However: instability, uncertainty, makes it difficult for firms to invest and to plan
for the future.

● Microfinance: banking services provided to low-income people who do not have

access to “traditional” banking services. In particular, the banks provide “micro
loans” which are small lendings which a traditional bank may not find profitable to
provide.

However: some micro loans carry very high interest rates.

● Privatisation: the sale of stated owned assets to the private sector. More
incentive to be efficient; more competition created in the market.
However: The profit motive means prices can be higher and choices may be
limited. E.g. railway
.

b) Interventionist: the government intervene strongly into individual markets or several

markets

○ Education & training and healthcare

However: opportunity cost

○ Protectionism
However: retaliation; firms lack incentive to become more efficient/internationally
competitive.

○ Managed/fixed exchange rate system: to create stability in the domestic currency,

to encourage investment and trade.
However: costs associated with maintaining currency reserves in order to
maintain the exchange rate.

○ Infrastructure development (gov’t spending): roads, railways, ports, airports,

electricity, water, heating, broadband...etc. Improve living standard
 However: opp cost; wasteful gov’t “vanity projects” that cost a lot of money but do
not serve the population, e.g. Qatar spending $220 billion on the World Cup.

○ Legislate to promote joint ventures with TNCs. A 50:50 partnership between a

domestic firm (finance, branding, expertise in management, operations,
technology) and a TNC (local knowledge, overcoming language, cultural and
legal barriers) where both sides can benefit.
However: TNC due to greater finance and expertise are able to take over in
terms of decision making and may be able to claim a greater share of profit.

○ Buffer stock schemes: gov’t intervene in certain commodity (primary product)

markets to ensure price stability. The gov’t commit to buy excess supply from
suppliers and put this in a “buffer stock”. If shortage occurs, the gov’t will sell from
the “buffer stock” to bring down prices. This helps ensure income stability for
producers (e.g. rice farmers) so that they will stay in the market.

However: costs associated with maintaining the buffer stock, distorts the
functions of the price mechanism (signaling, incentivising, rationing): producers
are encouraged to continue to supply the good in high quantities as long as the
gov’t guarantees to buy it at a high price. This will cost the gov’t even more over
the years as they keep having to buy the excess supply.

c) Others
● Industrialisation : transition of the economy from a focus on the primary sector to
the secondary sector. The Lewis two sector model suggests that productivity in
the primary sector is low while productivity in the secondary sector is higher.
Therefore, a transition from one to the other will lead to higher productivity,
growth and income.
However: required a skilled workforce, required investment in machinery and
technology that the country may not be able to produce themselves; required
infrastructure in place

● Tourism: Exports (AD), depend to a large extent on natural endowments

(beaches, weather, etc...) and does not cost a lot of money to start up; brings in a
source of foreign currency;
However: environmental damage, demand for tourism is likely to be highly
income elastic (in a global downturn, average income decreases and most
consumers will likely cut down on spending on tourism; this means a country that
relies heavily on tourism also depends on the economic performance of other
countries for their export income)