Economic Development Overview

Questions and Answers

What does economic development generally refer to?

An increase in population density

A transformation of low-income economies into modern industrial economies (correct)

A decrease in unemployment rates

A reduction in international trade barriers

What term is often used to describe economies with low living standards previously known as underdeveloped countries?

Transitional economies

Third-world countries

Developing countries (correct)

Emerging markets

What is the primary criterion used to categorize developing countries?

Geographic size

Political stability

Cultural heritage

Per capita income (correct)

When did economic development become a major concern?

After World War II Signup and view all the answers

What is synonymous with per capita income in the context of economic development?

Per capita output Signup and view all the answers

How is economic development typically understood in terms of improvements?

Qualitative and quantitative improvements Signup and view all the answers

Which of the following defines the process of economic development?

The evolution of economies from primitive to prosperous Signup and view all the answers

What characterizes the economies termed as developed countries?

High per capita income and standards of living Signup and view all the answers

What was believed to follow once the missing component of economic development was supplied?

Predictable economic development Signup and view all the answers

What is the most well-known fixed technical coefficient mentioned in the context of economic development?

Capital-output ratio Signup and view all the answers

According to growth theory, what primarily held back developing countries?

Shortage of capital supply Signup and view all the answers

What was the typical savings percentage in developing countries as noted in the passage?

5–7 percent Signup and view all the answers

What savings ratio was thought to be central to improving economic growth in developing countries?

10–12 percent Signup and view all the answers

What was one reason growth rates failed to match increased savings ratios in developing countries?

Inadequate investment projects Signup and view all the answers

What led theorists to search for other explanations of growth rate differences?

Failure to match savings with growth Signup and view all the answers

Which of the following was NOT mentioned as a reason for capital wastage in developing countries?

Insufficient foreign aid Signup and view all the answers

What is the primary focus of growth economics?

Long-run growth paths of developed economies Signup and view all the answers

What does growth theory assume about the economy?

It is a fully developed modern capitalist economy Signup and view all the answers

In the Harrod-Domar growth equation, how is growth in total output (g) calculated?

By dividing savings ratio (s) by capital-output ratio (k) Signup and view all the answers

What savings ratio is required to achieve a growth target rate of 4% given a capital-output ratio of 3?

12 percent Signup and view all the answers

Which aspect is NOT typically concentrated on in growth theory?

Government intervention in markets Signup and view all the answers

What is the main assumption about savings in growth theory?

Saved money will be invested and increase output Signup and view all the answers

Which factor is essential according to the Harrod-Domar growth equation?

Capital-output ratio Signup and view all the answers

What is a possible consequence of misapplying growth theory in developing countries?

Improper economic planning and unrealistic growth expectations Signup and view all the answers

What adverse effect can inappropriate incentives have on economic behavior?

They can divert economic activity from efficient allocation. Signup and view all the answers

Why did students in developing countries pursue university degrees, despite potential unemployment?

The prospect of high wages after graduation. Signup and view all the answers

What is indicated as a significant factor supporting the development of countries?

A healthy growth in the international economy. Signup and view all the answers

What is a consequence of inflated wages for university graduates in the public sector?

Overinvestment in higher education. Signup and view all the answers

What is a potential outcome of the resources wasted due to inappropriate educational incentives?

A surplus of university graduates. Signup and view all the answers

What can enhance the effectiveness of foreign aid in developing countries?

Policies that are conducive to development. Signup and view all the answers

Which of the following did the lesson about economic activity indicate?

Incentives play a crucial role in shaping economic behaviors. Signup and view all the answers

What is suggested as equally important as foreign aid in fostering development?

Removal of trade barriers by developed countries. Signup and view all the answers

How does technical progress affect capital formation?

It enhances the demand for capital investment. Signup and view all the answers

What does the conventional marginal productivity doctrine imply about capital utilization?

Additional outputs from capital will eventually decrease with more units used. Signup and view all the answers

What can improve the productivity of new machines over older ones?

Improvements in the quality of capital goods. Signup and view all the answers

How does education relate to labor force adaptability?

A better-educated labor force is more adaptable. Signup and view all the answers

What is essential for capital investment in developing new production lines?

Technological progress in relevant areas. Signup and view all the answers

What typically happens to the marginal product of capital as more units are employed?

It starts to decline with increasing units of capital. Signup and view all the answers

What characterizes the interaction between technical progress and capital growth?

It often varies and can lead to increased income. Signup and view all the answers

Which of the following describes how resource transfer affects economic growth?

It positively associates with the growth of capital stock. Signup and view all the answers

Study Notes

Introduction to Economic Development

Economic development transforms low-income economies into modern industrial economies, emphasizing qualitative and quantitative improvements.
Gained prominence post-World War II as former colonies evolved from "underdeveloped" to "developing" countries.
No universally accepted definition exists for developing countries or the process of economic development.
Per capita income is a common criterion used to categorize developing countries, correlating economic development to rising incomes.

Growth Economics vs. Development Economics

Growth economics studies established economies' long-term growth, while development economics focuses on initiating growth in developing countries.
Growth theory operates under the assumption of a modern capitalist economy with sufficient entrepreneurs responding to economic incentives.
Harrod-Domar growth equation expresses growth as a function of savings ratio and capital-output ratio: ( g = \frac{s}{k} ).
An example calculation shows a 12% savings ratio with a 3 capital-output ratio results in a 4% growth rate.

Savings and Investment

Initially, viewed capital shortage as a primary barrier to growth in developing countries, which saved only 5-7% of their product.
Policy aimed to raise investment resources, successfully increasing savings ratios to 15-25%.
Despite higher savings, growth rates did not match expectations, leading to reevaluation of capital resource utilization efficiency.

Importance of Incentives

Economic controls can misallocate resources and weaken growth.
Incentives significantly influence agricultural supply responses and individual educational pursuits.
Overinvestment in education occurred due to artificially high wages for graduates, leading to inefficient resource use.

Role of the International Economy

An open international economy supports development more than foreign aid alone.
Addressing developed countries' trade barriers against developing nations is crucial.
Encouraging health in the international economy accelerates development efforts.

Interdependence of Inputs in Economic Growth

Improvements in capital good quality impact production efficiency, linking technical progress with capital growth.
Educational advancements correlate with capital growth, as a better-educated workforce can adapt to new technologies.
The transfer of resources enhances technical progress, and higher capital growth results in increased income and educational demand.
The marginal productivity doctrine suggests diminishing returns on input as additional units of capital are utilized.

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Description

This quiz explores the concept of economic development, focusing on the transformation of low-income national economies into modern industrial economies. It covers various factors influencing this process and the implications for nations undergoing economic changes.