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Measuring development Paper 2

IBDP Economics  HL – The global economy – Measuring development -Paper 2 Exam Style Practice Questions

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Measuring development Paper 2? 

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Exam Style Question for IBDP Economics HL- Measuring development -Paper 2

Economic development in Honduras and Guatemala

Honduras

  1. Honduras is a developing country in Central America. While historically dependent on the export of primary products, Honduras has more recently diversified its exports to include clothing and automobile components. Honduras’ economy depends heavily on exports to the United States (US) and, to a lesser extent, on remittances (money sent by a foreign worker to their home country).

  2. In rural areas, approximately one out of five Hondurans lives in absolute poverty. The country is also vulnerable to external shocks and has experienced worsening terms of trade. Revenue earned by the agricultural sector has decreased by one-third over the past two decades. This is partially due to the declining prices of the country’s export crops, especially bananas and coffee beans.

  3. The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) has helped attract foreign direct investment (FDI). However, a threat to future FDI inflows is Honduras’ high level of crime and violence. It has one of the highest murder rates in the world.

    Guatemala

  4. Guatemala shares a border with Honduras. Guatemala has the largest population and the biggest economy in Central America. Guatemala is the top remittance recipient in Central America as a result of large numbers of Guatemalans living and working in the US. These inflows on the current account are equivalent to two-thirds of the country’s export revenue and about 10 % of its gross domestic product (GDP).

  5. The agricultural sector employs 31 % of Guatemala’s labour force. Key agricultural exports include sugar, coffee, bananas and vegetables. The CAFTA-DR has reduced the barriers to FDI, resulting in increased investment and diversification of exports, particularly in iron, steel and non-traditional agricultural exports (such as high-priced fruits and vegetables). While the free trade agreement has improved the conditions for investment, FDI continues to be limited by concerns over security, the lack of skilled workers and poor infrastructure.

  6. With some of the worst poverty, malnutrition and infant mortality rates in the region, Guatemala’s economic development is slowing. Those worst affected live in rural areas. Faster economic growth is crucial to achieving the country’s medium- and long-term poverty reduction objectives.

Question

Using information from the text/data and your knowledge of economics, contrast the potential for economic development in Guatemala and Honduras.

▶️Answer/Explanation

Economic analysis may include:

  • poverty cycle
  • Lorenz curve / Gini
  • primary products PED YED
  • terms of trade
  • FDI
  • growth.

Responses may include:

  • a definition of economic development
  • a comparison of the HDI ranking, noting that Guatemala’s ranking is marginally better than Honduras’ (Table 2)
  • GNI per capita is notably higher in Guatemala, but education and health indices are similar for both countries (Table 2)
  • the difference in GNI per capita may be exaggerated for Guatemala as it seems to be more dependent on inflows of remittances which would inflate GNI (paragraph [4])
  • Honduras’ better access to sanitation (Table 2) may contribute to higher economic development and may result in a similar life expectancy despite its significantly lower GNI per capita
  • Honduras’ larger expenditure on education and health care as a percentage of GDP may contribute to higher economic development (Table 2)
  • in the long run, greater expenditure on health care and education may result in a healthier and more productive work force, contributing to greater economic growth and development
  • Honduras collects more tax revenue (as a percentage of GDP), which may explain its capacity to spend more on merit goods (as a percentage of GDP) (Table 2)
  • PPC curve or LRAS curve to show effect of improvement in quality of labour for Honduras
  • Honduras’ lower Gini coefficient suggests a more equal distribution of income (Table 2) even though Honduras’ GNI per capita income is lower than Guatemala, income is more equally distributed
  • Guatemala probably has more people living in absolute poverty, particularly in rural areas (paragraph [6])
  • while Guatemala has a larger population and economy (paragraph [4]), it may be over-reliant on remittances and agricultural exports as a source of economic growth (paragraph [4] and [5]) when compared to Honduras (paragraph [1])
  • it takes less time in Honduras to start a business, which encourages entrepreneurship and increases SRAS (Table 2)
  • Honduras’ economy is becoming more diversified (paragraph [1]), meaning that it may be more able than Guatemala to withstand global fluctuations in commodity prices in the future
  • concerns about poor security in both countries that may discourage FDI
  • poor infrastructure in Guatemala (paragraph [5]) may discourage FDI which is needed to diversify the economy and increase economic growth
  • use of data to make predictions of future economic development.

The World Bank reports on economic growth in Kenya

  1. The World Bank’s recent overview of Kenya has given a positive assessment of Kenya’s growth prospects, based on domestic and international factors. The East African nation of Kenya has a population of approximately 46.1 million, which increases by an estimated one million per year. The World Bank projected 5.9 % economic growth in 2016, rising to 6 % in 2017. This positive outlook is based on continued low oil prices, growth in the agricultural sector, expansionary monetary policy and ongoing infrastructure investments.

  2. The World Bank has identified other key contributing factors to Kenya’s short-term growth. These include an expanding services sector, higher levels of construction, currency stability, low inflation, a growing middle-class and rising incomes, a surge in remittances (money sent by a foreign worker to their home country) and increased public investment in energy and transportation.

  3. Tourism, information and communications and public administration are among the sectors that have registered the highest growth. Inflation has been at an average of 6.3 %, which is within the Kenyan central bank’s target range.

  4. The World Bank also predicted that, of 82 countries investigated, Kenya would have the highest long-term growth and that its real gross domestic product (GDP) in 2050 should be seven times larger than it is today. Fast population growth, a modest improvement in the business environment, urbanization and fast-growing neighbouring countries are all contributing factors to the positive prediction.

  5. While the growing Kenyan economy is creating more jobs now than in the past, these are mainly in the informal services sector and are low productivity jobs. 9 million young people will join the labour market in the next 10 years. Given the scarcity of formal sector jobs, they will continue to find jobs in the informal sector. These jobs are usually in very small businesses, often run from homes.

  6. The World Bank suggests that there is a need to increase the productivity of jobs in the informal sector. It says that this could be achieved by increasing work-related skills through training schemes, increasing communication and learning between formal and informal firms, and helping small-scale firms to become suppliers for firms in the formal sector. To create more and higher-skilled jobs, it is also essential to reduce the cost of doing business.

  7. According to the World Bank, Kenya has made significant structural and economic reforms that have contributed to sustained economic growth in the past decade. However, economic growth does not always mean economic development. The main development challenges facing Kenya include poverty, inequality, climate change, low commodity prices and the vulnerability of the economy to internal and external shocks.

Question

Using information from the text/data and your knowledge of economics, discuss the extent to which continued economic growth may lead to economic development in Kenya.

▶️Answer/Explanation

Responses may include:

  • definition of economic growth
  • definition of economic development.

Economic growth and economic development:

  • good agricultural performance (paragraph [1]) may increase growth through exports, however dependence on primary products is dangerous because of fluctuating commodity prices (paragraph [7])
  • expansionary monetary policy (paragraph [1]) leads to growth but might be difficult to maintain if it causes inflation, however, Kenya is within the central bank’s inflation targets at the moment (paragraph [3])
  • infrastructure developments (paragraph [1]), enhanced construction (paragraph [2]) and investment in energy and transportation (paragraph [2]) will all lead to long-term growth, however, there are cost considerations for any developing country
  • low inflation (paragraph [2]) enables expansionary policies to continue to be implemented (paragraph [1])
  • moderate improvement in the business environment (paragraph [4]) but need to reduce the cost of doing business (paragraph [6])
  • low oil prices (paragraph [1]) reduce costs in the economy, thus leading to increased SRAS and growth, however, these may not be sustained and are out of Kenya’s control (external shocks) (paragraph [7])
  • currency stability (paragraph [2]) is a factor, but often beyond the control of developing countries (external shocks) (paragraph [7])
  • fast-growing neighbouring countries (paragraph [4]) is beyond the control of Kenya (external shocks) (paragraph [7])
  • surge in remittances (paragraph [2]) allows increased consumption on necessities and merit goods which support development, but this will be dependent upon continued world economy growth (external shocks) (paragraph [7])
  • “a growing middle-class and rising incomes” (paragraph [2]) are signs that economic development is occurring
  • PPF to show how economic growth can lead to development (development goods such as merit goods on one axis with PPF increasing)
  • Kenya faces development challenges in spite of strong economic growth (inequality, climate change, poverty) that may compromise economic development (paragraph [7]).

Can the Democratic Republic of the Congo achieve its economic potential?

  1. The Democratic Republic of the Congo (DRC) is a nation of great potential. It has large mineral resources and an abundance of fertile land. The mining and export of cobalt, copper and gold are the main source of government revenue. However, the abundance of natural resources causes devastating conflicts as rebel groups fight for control of the DRC’s resources. With a population of 80 million and gross domestic product (GDP) per capita of only US\($\)457, the DRC is one of the world’s poorest nations. It is ranked 176 in the world in terms of the Human Development Index (HDI).

  2. The government has been accused of relying too much on tariffs, but to improve living standards, the government needs revenue to spend on agriculture, electricity and roads. Furthermore, business owners in the DRC complain of corruption and increasing “red tape” (excessive regulations).

  3. The government believes that a strong agricultural sector could boost economic growth but only 10 % of the land is used for farming. Rice, maize and other crops grow well in the tropical climate and yet the government spends US\($\)1 billion per year importing basic foods. According to a government spokesperson, the lack of infrastructure is a major barrier to the processing and transporting of agricultural products. The DRC’s road network is so bad that farmers and traders often make a two-week trip in small boats down the Congo River to sell their produce. The DRC has just 27 877 kilometres (km) of roads. It is estimated that 90 000 km of national roads and 150 000 km of rural roads must be built.

  4. In addition, the World Bank reports that only 17 % of the DRC’s population has access to electricity, despite the capacity of the Congo River to generate enough electricity to satisfy the needs of the region.

  5. To make matters worse, the regional conflicts have affected the availability of healthcare services. It is estimated that half of the health centres have been looted*, burnt or destroyed. Government expenditure on healthcare per capita remains one of the lowest in the world. Non-governmental organizations (NGOs) are relied on to protect the health and wellbeing of citizens. NGOs help to achieve this by distributing medicine and teaching families about hygiene and proper sanitation.

Question

List two components of the Human Development Index (HDI) (paragraph [1]).

▶️Answer/Explanation
Any two of the following measures:
  • life expectancy (at birth)
  • mean years of schooling (for those aged 25 years and above)
  • expected years of schooling (for a child of school entrance age, capped at 18 years of age)
  • GNI per capita (or GDP per capita).

New policies for Brazil

  1. From 2010 to 2014, Brazil experienced an economic boom with annual gross domestic product (GDP) growth of 8 %. During this time, the government spent heavily on social programmes (including cash transfers and pensions) that helped millions to get out of the poverty cycle. The poverty rate decreased from 22 % to 9 % and the Gini coefficient dropped from 0.581 to 0.515. However, the spending on social programmes resulted in fiscal deficits and a large public debt, which is currently 80 % of GDP.

  2. In 2015, Brazil entered a recession that lasted until 2017. During the recession GDP declined by an average of 3 % per year. By 2017, the number of Brazilians living in absolute poverty climbed by 13 %, inequality worsened, and unemployment was 12 %. From late 2017 to 2019, Brazil struggled to recover, with only approximately 1 % annual economic growth.

  3. Some economists blamed the slow recovery on the lack of investment in education and technology during the economic boom. According to those economists, investment in human and physical capital was necessary to improve productivity and decrease the reliance on the production of primary commodities. Historically, spending on education has not been effective in reaching the very poor.

  4. In 2018, a newly elected government, aiming to stimulate economic growth, introduced market-oriented policies. Since Brazil has a large economy, the new government believed that Brazil should take advantage of world trade and foreign investment to boost economic growth and achieve economic development.

  5. The new government aimed to increase the number of multinational corporations (MNCs) investing in Brazil through deregulation and trade liberalization. Furthermore, in 2020 several state-owned enterprises were privatized.

  6. Additionally, new labour market and tax reforms were introduced to create jobs, increase labour force participation and make it easier for firms to hire and fire workers. The reforms included increasing the retirement age and reducing transfer payments. However, trade unions claim that the reforms are unfair and will lead to the exploitation of workers.

  7. There is concern that deregulation, privatization and market liberalization will put pressure on Brazil’s environment, threaten sustainable development, and benefit only urban areas. In 2017, the government introduced “green GDP” as an official measure and committed to environmental protection goals. This is necessary because, for example, over 40 % of the population live in areas without access to a sewage system and manufacturing companies are dumping untreated wastewater in rivers, contributing to water pollution.

Question

Define the term green GDP indicated in bold in the text (paragraph [7]).

▶️Answer/Explanation

An understanding that it is the market value of all final goods and services produced in an economy adjusted/accounting for environmental destruction/degradation/costs.
OR
GDP- the value of environmental destruction/degradation/costs.

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