TOPIC 1: INTRODUCTION TO MICROECONOMICS

Focuses on how individual consumers and

ECONOMICS producers make their decisions. This includes a
single person, a household, a business, or a
ECONOMICS AS A SOCIAL SCIENCE governmental organization. Studies the implications
Social Science is, in its broadest sense, the study of of individual human action, specifically about how
society and the manner in which people behave and those decisions affect the utilization and distribution
influence the world around us. of scarce resources. It shows how and why different
goods have different values, how individuals make
a. Economics and Development Studies more efficient or more productive decisions, and how
b. Sociology and Anthropology
individuals best coordinate and cooperate with one
c. History
another.
d. Archaeology
MACROECONOMICS
e. Human Geography
Studies the overall economy. This can include a
f. Law and Criminology
distinct geographical region, a country, a continent or
g. Education
even the whole world. Topics studied include
h. Linguistics and Translation Studies
government fiscal and monetary policy,
i. Political Science unemployment rates, growth as reflected by changes
j. Media and Communication
in the Gross Domestic Product (GDP) and business
k. Cultural Studies
cycles that result in expansion, booms, recessions and
l. International Relations depressions.
m. Philosophy
n. Psychology
THE ECONOMIC PROBLEM
o. Business and Management
Adam Smith "Father of Modern Economics"
published "An Inquiry into the Nature and Causes
ECONOMICS
of the Wealth of the Nations" in 1776. This book is
• Economics is a social science concerned with the
one of the earliest known compilation of economic
production, distribution and consumption of goods
concepts, and is regarded as the "Bible of
and services. Capitalism."
• It talks about the theories, principles and models "Unlimited Wants, Limited Means."
that deal with how the market process works. It
The economic problem exists because, although the
attempts to explain how wealth is created and
needs and wants of people are endless, the resources
distributed in communities.
available to satisfy needs and wants are limited.
• Economics attempts to explain economic behavior,
Scarcity is one of the fundamental issues in
which arises when scarce resources are exchanged.
economics. The issue of scarcity means we have to
• Economic Methodology is the study of
decide how and what to produce from limited
- how economics functions,
resources. It means there is a constant opportunity
- how it could function, and cost involved in making economic decisions.
- how it should function, and
of the various presuppositions and WE CAN'T HAVE IT ALL!
conditions of all these. Economizing problem is all about choice. We must
• Economics assumes that human behavior reflects decide what we will have and what we will forego.
"Rational Self-Interest. Individuals look for and There is a need to make choices because economic
pursue opportunities to increase their utility. Utility is wants exceed economic means.
the pleasure, happiness, or satisfaction obtained from Trade-off is the concept wherein choosing more of
consuming a good or a service. one thing can only be achieved by giving up
something else in exchange.
CETERIS PARIBUS • Making an economic choice creates a sacrifice
Latin for "holding other things constant." because alternatives must be given up, which results
The assumption that all other things remain equal. A in the loss of benefit that the alternative would have
dominant assumption in mainstream economic provided. The loss of the next best option represents
thinking, it acts as a shorthand indication of the effect the real sacrifice and is referred to as Opportunity
of one economic variable on another, provided all Cost.
other variables remain the same.
SOLVING THE ECONOMIC PROBLEM
MICRO VS MACRO
According to Paul Samuelson, in order to help solve resources or other relevant economic segments.
the problem of scarcity all societies, no matter how Instead, the entire system is regulated by the
big or small, developed or not, we must endeavor to people and the law of supply and demand.
answer three basic questions... • The laissez-faire economic system is a
1. What to produce? theoretical concept. That means, there is no
2. How to produce? real example of a pure market economy in
3. For whom to produce? the real world. The reason for this is that all
Paul Samuelson (1915-2009) economies we know of show characteristics
First American to win the Nobel Prize in Economics of at least some kind of government
interference.
THE PRODUCTION POSSIBILITY FRONTIER 4. A mixed economic system refers to any kind of
(PPF) mixture of a market and a command economic
Represents the point at which a country’s economy is system. It is sometimes also referred to as a dual
most efficiently producing its goods and services economy. Although there is no clear-cut definition of
and, therefore, allocating its resources in the best way a mixed economic system, in most cases the term is
possible. If the economy is producing less than the used to describe market economies with a strong
quantities indicated by the PPF, this is a sign that regulatory oversight and government control in
resources are not being used to their full potential. specific areas (e.g. public goods and services).
• Most western economies nowadays are considered
THE MARKET SYSTEMS mixed economies. Most industries in those systems
1. TRADITIONAL are privately owned whereas a small number of
A traditional economic system focuses exclusively public utilities and services remain in government
on goods and services that are directly related to control. Thus, neither the private nor the
its beliefs, customs, and traditions. It relies heavily government sector alone can maintain the
on individuals and doesn’t usually show a significant economy, both play a critical part in the success of
degree of specialization and division of labor. In the system.
other words, traditional economic systems are the
most basic and ancient type of economies. THE LAW OF DEMAND
• Large parts of the world still qualify as The law of demand is a microeconomic law that
traditional economies. Especially rural areas states, ceteris paribus, as the price of a good or
of second- or third-world countries, where service increases, consumer demand for the good
most economic activity revolves around or service will decrease, and vice versa.
farming and other traditional activities. • DEMAND is the amount of some product that a
• These economies often suffer from a lack consumer is willing and able to purchase at each
of resources. Either because those resources price.
don’t naturally occur in the region or The law of demand says that the higher the price, the
because access to them is highly restricted lower the quantity demanded, because consumers’
by other, more powerful economies. opportunity cost to acquire that good or service
2. COMMAND increases, and they must make more tradeoffs to
A command economic system is characterized by acquire the more expensive product.
a dominant centralized power (usually the
government) that controls a large part of all economic THE LAW OF DIMINISHING MARGINAL
activity. This type of economy is most commonly UTILITY
found in communist countries. It is sometimes also Focused on the Demand side. Ceteris paribus, as
referred to as a planned economic system, because consumption of one thing increases, marginal
most production decisions are made by the utility (satisfaction) derived from each additional
government and there is no free market at play. unit declines.
3. LAISSEZ-FAIRE
Laissez-faire is French for "allow them to do." This FACTORS AFFECTING DEMAND OUTSIDE
approach was proposed by Adam Smith in The OF CETERIS PARIBUS
Wealth of the Nations, with the introduction of the a. INCOME
Invisible Hand concept. b. UNEMPLOYMENT RATES
A laissez-faire economic system relies on free c. CHANGING TASTES
markets and does not allow any kind of d. CHANGING DEMOGRAPHICS
government involvement in the economy. In this e. CHANGES IN THE PRICES OF
system, the government does not control any RELATED GOODS AND SERVICES
 f. CHANGES IN EXPECTATIONS ABOUT PRICE CEILING AND PRICE FLOOR
FUTURE PRICES AND EVENTS Price Ceiling: Legally mandated maximum price
(overpricing of sellers)
THE LAW OF SUPPLY Price Floor: legally mandated minimum price.
The law of supply is the microeconomic law that (abused from consumers)
states that, ceteris paribus, as the price of a good or Price ceilings and floors prevent a price from rising
service increases, the quantity of goods or services above or falling below a certain level.
that suppliers offer will increase, and vice versa.
Unlike demand, SUPPLY refers to the willingness of MARKET SATURATION
a seller to sell the specified amount of a product Market saturation: situation that arises when the
within a particular price and time. volume of a product or service in a marketplace
has been maximized.
THE LAW OF DIMINISHING MARGINAL • Growth can be achieved through product
RETURNS improvements or through products being
Focused on the Supply side. Ceteris paribus, if one designed to wear down.
factor of production is increased while other
factors are held constant, the marginal output per
unit will eventually diminish.

FACTORS AFFECTING SUPPLY OUTSIDE OF

CETERIS PARIBUS
a. COST OF PRODUCTION
b. NATURAL CONDITIONS
c. TECHNOLOGY
d. TRANSPORT CONDITIONS
e. GOVERNMENT REGULATIONS AND
POLICIES
f. PRICES OF RELATED GOODS

EQUILIBRIUM
Economic theory suggests that, in a free market there
will be a single price which brings demand and
supply into balance, called equilibrium price.
• If the price exceeds the equilibrium price, a surplus
occurs.
• If the price is below the equilibrium price, a
shortage occurs.
TOPIC 2: ECONOMICS AND • The international agenda began to focus on
DEVELOPMENT development beginning in the second half of the
twentieth century. An understanding developed that
THE SCIENCE OF MACROECONOMICS economic growth did not necessarily lead to a rise in
Microeconomics is the study of how households the level and quality of life for populations all over
and firms make decisions and how these decision the world; there was a need to place an emphasis on
makers interact in the marketplace. A central specific policies that would channel resources and
principle of microeconomics is that households and enable social and economic mobility for various
firms optimize — they do the best they can for layers of the population.
themselves, given their objectives and the constraints
they face. In microeconomic models, households
choose their purchases to maximize their level of
satisfaction, called utility, and firms make
production decisions to maximize their profits.
Macroeconomics is concerned with the overall
economy.
• Because economy-wide events arise from
the interaction of many households and
firms, macroeconomics and microeconomics
• Economic development generally refers to the
are inextricably linked. When we study the
sustained, concerted actions of policymakers and
economy as a whole, we must consider the
communities that promote the standard of living and
decisions of individual economic actors.
economic health of a specific area.
• Economic development may be defined as a
EVERYTHING IS DATA!!!
selective attack on the worst forms of poverty. It
• Casual observation is one source of information
implies the process of higher level of productivity in
about what’s happening in the economy.
different sectors of the economy. It is a process of
• Today, economic data offer a systematic and
stepping up the rate of capital formation that is
objective source of information, and almost every
needed for rapid capital development.
day you can hear or read a story about some newly
released statistic.
Governments and economic analysts all over the
world use three different statistics to implement
economic policies that could help their economies
progress:
1. GDP, tells us the nation’s total income and the
total expenditure on its output of goods and 1. Traditional Approaches to economic
services. development policies have been developed from the
2. The consumer price index, or CPI, measures the perspective of what was necessary to attract and keep
level of prices. businesses in local communities. This approach
3. The unemployment rate tells us the fraction of defines development strictly in economic terms. In
workers who are unemployed. the past, economic development was regarded as an
increase in real GDP over a long period of time. A
WHAT ACTUALLY IS DEVELOPMENT? long run expansion in production was to be achieved
Development is a process that creates growth, by rapid industrialization of the country at the
progress, positive change or the addition of physical, expense of rural development. The growth
economic, environmental, social and demographic development at that time mainly meant a growth of
components. material production. Traditional Approach thus
The purpose of development is a rise in the level and implies a sustained annual increase in GDP or
quality of life of the population, and the creation GNP.
or expansion of local regional income and
employment opportunities, without damaging the 2. Growing Economy Approach, on the other hand,
resources of the environment. Development is visible defines development including improvements in
and useful, not necessarily immediately, and material welfare especially for persons with the
includes an aspect of quality change and the creation lowest income and eradication of mass poverty
of conditions for a continuation of that change. with the availability of resources and their
distribution. In this approach, human resources are that an economy produces during a given
at the core of economic development. year, accounting for inflation.
- Real GDP per Capita is a measurement of
3. The non-economic factors are those factors the total economic output of a country
present in society which have no direct effect in the divided by the number of people and
economy of a country. The non-economic factors adjusted for inflation. It's used to compare
relate to sociocultural and political changes in society the standard of living between countries
which either lead to economic growth or serves as a and over time.
hindrance to growth. (e.g. religion, culture, social Real GDP per Capita = Real GDP
activities, uprisings.) Population

- It is also necessary to understand the concept of THE GROSS NATIONAL INCOME (GNI)
underdevelopment while studying development. This Gross national income: a measurement of a
takes place when resources are not used to their full country's income. It includes all the income earned
socio-economic capabilities or potential. Thus, it by a country's residents and businesses, including
results in local or regional development at a slower those earned abroad.
pace than it should be. GNI per capita: a measurement of income divided
- Underdevelopment is also caused by the by the number of people in the country.
coexistence of unutilized and underutilized - The World Bank provides this information.
manpower and exploited and unknown resources. The value is converted to US Dollars.
Among underdeveloped economies, countries with a
high rate of development are called developing THE CONSUMER PRICE INDEX (CPI)
countries. The Consumer Price Index: a measure that
examines the weighted average of prices of a basket
GROSS DOMESTIC PRODUCT (GDP) of consumer goods and services.
An estimated value of the total worth of a country’s - Changes in the CPI are used to assess price
production and services, within its boundary, by its changes associated with the cost of living;
nationals and foreigners, calculated usually over the - the CPI is one of the most frequently used
course on one year. statistics for identifying periods of
- GDP enables policymakers and central inflation or deflation.
banks to judge whether the economy is - It is calculated by taking price changes for
contracting or expanding, whether it needs a each item in the predetermined basket of
boost or restraint, and if a threat such as a goods and averaging them.
recession or inflation looms on the horizon.
- GDP is the primary measure for Basket of goods: a relatively fixed set of consumer
identifying and measuring phases of the products and services valued on an annual basis and
country's business cycle, such as recession used to track inflation in a specific market or country.
and expansion. - How should economists aggregate the many
prices in the economy into a single index
GROSS NATIONAL PRODUCT (GNP) that reliably measures the price level? They
GNP is an estimated value of the total worth of could simply compute an average of all
production and services, by citizens of a country, on prices. But this approach would treat all
its land or on foreign land. goods and services equally.
-
NOMINAL AND REAL GDP CPI = (Q x New Price of Good in the same basket)
1. Nominal GDP: When the GDP is estimated (Q x Base Price of Good in the same basket)
at current prices. The nominal GDP is the
value of all the final goods and services that
an economy produced during a given year. It
is calculated by using the prices that are
current in the year in which the output is
produced.
2. Real GDP: when the estimation is made at
constant prices. The real GDP is the total
value of all of the final goods and services
CPI AND INFLATION 3. Stagflation: condition of slow economic
Inflation: defined as a sustained increase in the growth and relatively high unemployment –
general level of prices for goods and services in a economic stagnation – accompanied by
country, and is measured as an annual percentage rising prices, or inflation, or inflation and a
change. decline in Gross Domestic Product (GDP).
- Under conditions of inflation, the prices of 4. Deflation: when the general level of prices
things rise over time. Put differently, as are falling. It is the opposite effect of
inflation rises, every peso you own buys a inflation. Deflation tends to occur more
smaller percentage of a good or service. rarely and for shorter periods of time than
When prices rise, and alternatively when the inflation. Deflation occurs typically during
value of money falls you have inflation. times of recession or economic crisis and
Computing for Inflation Rates: can lead to deep economic crises including
Year 2 CPI-Year 1 CPI = n depression, which then causes a
Inflation Rate = 100 x ___n____ deflationary spiral.
Year 1 CPI The reason for this is the so-called deflationary
spiral: when prices are going down, why would you
spend your money today, when each dollar will be
WHAT CAUSES INFLATION? more valuable tomorrow? And why spend tomorrow
There is no single theory for the cause of inflation when each dollar can buy more the day after?
that is universally agreed upon by economists and
academics, but there are a few hypotheses that are UNEMPLOYMENT
commonly held. Take note that inflation does not Unemployment: a phenomenon that occurs when a
apply to the price level of just one good, but rather to person who is actively searching for employment is
how prices are doing overall. unable to find work. Unemployment is often used as
1. Demand-Pull Inflation – is caused by the a measure of the health of the economy.
overall increase in demand for goods and - The most frequented measure of
services, which bids up their prices. This unemployment is the unemployment rate,
theory can be summarized as "too much which is the number of unemployed people
money chasing too few goods”. If demand divided by the number of people in the labor
is growing faster than supply, prices will force.
increase. This usually occurs in rapidly - Labor Force is the number of people in a
growing economies. country who are employed plus the
2. Cost-Push Inflation – caused when unemployed. Not everyone who is jobless is
companies' costs of production go up. automatically counted as unemployed. Many
When this happens, they need to increase are jobless by choice and aren't looking for
prices to maintain their profit margins. work. Examples include stay-at-home
Increased costs can include things such as parents, the retired, or students.
wages, taxes, or increased costs of natural Computing for Unemployment Rates:
resources or imports. Unemployment Rate = 100 x Unemployed
3. Monetary Inflation – Inflation is caused by Labor Force
an oversupply of money in the economy.
Just like any other commodity, the prices of KINDS OF UNEMPLOYMENT
things are determined by their supply and 1. Frictional unemployment: arises when a
demand. If there is too much supply, the person is in-between jobs. After a person
price of that thing goes down. leaves a company, it naturally takes time to
find another job, making this type of
OTHER EVENTS RELATED TO INFLATION unemployment short-lived. It is also the least
1. Disinflation: a condition where inflation is problematic from an economic standpoint.
still positive, but the rate of inflation is 2. Cyclical unemployment: comes around due
decreasing – for example from +3% to +2%. to the business cycle itself. Cyclical
2. Hyperinflation: unusually rapid inflation, unemployment rises during recessionary
typically more than 50% in a single month. periods and declines during periods of
In extreme cases, this inflation gone awry economic growth. Cyclical unemployment
can lead to the breakdown of a nation's tends to create more unemployment. This is
monetary system or even its economy. because the laid-off workers have less
 money to buy the things they need, further
lowering demand.
3. Structural unemployment: comes about
through technological advances, or when
people lose their jobs because their skills are
outdated.
4. Seasonal unemployment: results from
regular changes in the season. (e.g. Ski
Instructors, resort workers)
5. Classical Unemployment: happens when
wages are higher than the laws of supply and
demand would normally dictate.
6. Underemployment - Underemployed
workers have jobs, but they aren't working
to their full capacity or skill level.
TOPIC 3: CLASSIFYING THE THE FIRST WORLD
COUNTRIES OF THE WORLD The term First World refers to the
- developed, capitalist, industrial countries,
- generally aligned with NATO and the
THE 1ST, 2ND, AND 3RD WORLDS
USA. The bloc of countries aligned with the
People often use the term “Third World” as
United States after World War II, which had
shorthand for poor or developing nations. By more or less common political and economic
contrast, wealthier countries such as the United States interests.
and the nations of Western Europe are described as
- The first worlds were Belgium, France,
being part of the “First World.” Where did these Iceland, Netherlands, Spain, Canada,
distinctions come from, and why do we rarely hear Italy, Germany, Norway, Turkey,
about the “Second World?”
Denmark, Greece, Luxembourg,
Portugal, U.K., Israel, Japan, South
The “three worlds” model of geopolitics first arose Korea, Australia, New Zealand, Austria,
in the mid-20th century as a way of mapping the
Switzerland, Ireland, and Sweden.
various players in the Cold War.
THE SECOND WORLD
The origins of the concept are complex, but historians
The Second World refers to the
usually credit it to the French demographer Alfred
- former communist-socialist, less
Sauvy, who coined the term “Third World” in a
industrialized states known as the Eastern
1952 article entitled “Three Worlds, One Planet.”
Bloc.
- In this original context, the First World
- The countries in the sphere of influence of
included the United States and its capitalist
the Soviet Union.
allies in places such as Western Europe,
- The Second Worlds were Albania,
Japan and Australia.
Armenia, Azerbaijan, Belarus, Bosnia
- The Second World consisted of the
and Herzegovina, Bulgaria, China,
communist Soviet Union and its Eastern
Croatia, Czech Republic, Estonia,
European satellites.
Georgia, East Germany, Hungary,
- The Third World, meanwhile,
Kazakhstan, Kyrgyzstan, Laos, Latvia,
encompassed all the other countries that
Lithuania, Macedonia, Moldova,
were not actively aligned with either side in
Mongolia, Montenegro, North Korea,
the Cold War. These were often
Poland, Romania, Serbia, Slovakia,
impoverished former European colonies, and
Slovenia, Tajikistan, Turkmenistan,
included nearly all the nations of Africa, the
Ukraine, Uzbekistan, and Vietnam.
Middle East, Latin America and Asia.
THE THIRD WORLD
COLD WAR The Third World was all the other countries.
The era known as the "Cold War" was a political
- The mainly underdeveloped agricultural
constellation of countries with two different world-
states and nations of Africa, Asia, and Latin
views. On one side were the industrialized capitalist
America, where the blessings of civilization
nations aligned with the USA, called the Western
benefited only a small ruling elite and the
Bloc, which likes to call itself the "Free World" or the
corporations and upper classes of the former
"Western world." On the other side were the
colonial powers.
Communist workers and peasants states of the
- Nowadays, the term Third World is more
Eastern Bloc, the socialist countries within the power
often replaced by the terms Least Developed
fabric of the Soviet Union, and Mao's China.
Countries (UN) or Low- Income Countries
- The term cold war is used because
(World Bank.) Whatever term is used, it
there was no large-scale fighting directly
serves to designate countries that suffer
between the two superpowers, but they
from high poverty, high child mortality,
each supported major regional conflicts
low economic and educational
known as proxy wars. The conflict was
development, and low self-consumption of
based around the ideological and
their natural resources. Countries that are
geopolitical struggle for global influence by
vulnerable to exploitation by large
these two superpowers, following
corporations and industrialized nations.
their temporary alliance and victory
against Nazi Germany in 1945.
 - These are the developing and THE BRANDT LINE
technologically less advanced nations of Developed in the 1980s by Willy Brandt as a way of
Asia, Africa, Oceania, and Latin America. showing the how the world was geographically split
- Third world nations tend to have economies into relatively richer and poorer nations.
dependent on the developed countries and - Richer countries are almost all located in
are generally characterized as poor with the Northern Hemisphere, with the
unstable governments and having high exception of Australia and New Zealand.
fertility rates, high gender-related illiteracy - Poorer countries are mostly located in
and are prone to diseases. tropical regions and in the Southern
- One of the critical factors is the lack of a Hemisphere.
middle class; there is a huge impoverished
population and a small elite upper class that
controls the country's wealth and resources.
Most Third World nations also have very
high foreign debt levels.

THE FOURTH WORLD

The term "Fourth World" first came into use in 1974
with the publication of George Manuel's: The
Fourth World: An Indian Reality.
- The term refers to nations (cultural entities,
ethnic groups) of indigenous peoples living
within or across state boundaries.

WHY DON'T WE HEAR THE "2ND WORLD"

ANYMORE?
- Today, the powerful economies of the West
are still sometimes described as “First
World,” but the term
- “Second World” has become largely
obsolete following the collapse of the
Soviet Union.
- “Third World” remains the most common
of the original designations, but its meaning
has changed from “non-aligned” and
become more of a blanket term for the
developing world.

THE GLOBAL NORTH AND THE GLOBAL

SOUTH
Economic and political definitions of regions vary
but what is agreeable is that regions are a group of
countries located in the same geographically
specified area organized to regulate and oversee
flows and policy choices.
The Global North and South: the concept of a gap
between the Global North and the Global South in
terms of development and wealth.
TOPIC 4: THE DEVELOPING The HDI was established to place emphasis on
COUNTRIES individuals' opportunities to realize satisfying work
and lives.
THE CHARACTERISTICS OF THE
- Evaluating a country’s potential for
DEVELOPING COUNTRIES individual human development provides a
supplementary metric for evaluating a
STANDARD OF LIVING country’s level of development besides
Standard of living: refers to the level of wealth, considering standard economic growth
comfort, material goods, and necessities available to statistics, such as gdp.
a certain socioeconomic class or geographic area. This index also can be used to examine the various
- Standard of living: is a comparison tool policy choices of nations; if, for example, two
used when describing two different countries have approximately the same GNI per
geographic areas. Metrics may include capita, then the HDI can help to evaluate why they
things like wealth levels, comfort, goods, produce widely disparate human development
and necessities that are available to people outcomes.
of different socioeconomic classes in those
areas. QUALITY OF LIFE
- The standard of living is measured by Quality of life: is a more subjective and intangible
things that are easily quantified, such as term than standard of living.
income, employment opportunities, cost of - As such, it can often be hard to quantify.
goods and services, and poverty. - The factors that affect the overall quality of
1. Class disparity (differences) life vary by people's lifestyles and their
2. poverty rate personal preferences.
3. quality and affordability of housing
- Regardless of these factors, this measure
4. hours of work required to purchase plays an important part in the financial
necessities decisions in everyone's lives. Some of the
5. gross domestic product (GDP)
factors that can affect a person's quality of
6. affordable access to quality healthcare
life can include conditions in the
7. quality and availability of education
workplace, healthcare, education, and
8. incidence of disease material living conditions.
9. infrastructure
10. national economic growth FACTORS CONTRIBUTING TO LOW
11. economic and political stability
STANDARD OF LIVING
12. political and religious freedom Factors that can contribute to a low living standards
13. environmental quality
include lack of adequate industry in a particular
14. climate
area, lack of jobs, insufficient health care services,
15. safety lack of public transportation, lack of food or
water, government oppression, and many more
HUMAN DEVELOPMENT INDEX (HDI)
factors.
The human development index (HDI) :is a statistic
developed and compiled by the united nations to • The life expectancy of a particular segment of
measure various countries’ levels of social and society may also contribute to a low standard of
economic development. living. People who have less access to quality foods
- It is composed of four principal areas of and clean homes, cities, and countries generally die
interest: earlier than people in more developed areas that offer
1. mean years of schooling, (15 years) good food and cleanliness.
2. expected years of schooling, (18 years)
3. life expectancy at birth, and • People in these poorer areas also tend to be less
4. gross national income (GNI) per capita. satisfied with their lives, which can contribute to
- This index is a tool used to follow changes increased morbidity.
in development levels over time and - Crime rates can begin to rise, further
compare the development levels of exacerbating the low standard of living in an
different countries. area and potentially leading to an increase in
mortality rates.
 - Lack of public services such as police and other hand, the country cannot utilize its
fire crews can perpetuate the high crime workforce productively, then unemployment
rates as well. rises, often leading to civil strife and
- Such poverty and high crime rates can be emigration.
caused by several factors, including - The capacity of the least developed
government corruption, lack of funding for countries to expand public sector services,
basic public services, occurrence of natural such as education and health, is challenged
disasters such as droughts, floods, and by the rapidly increasing numbers of
hurricanes, or isolation from other societies. children and youth, which have been rising
faster than service supply.
• Corrupt governments exist throughout the world,
and the general populace of that country can suffer THE MALTHUSIAN CATASTROPHE
immensely. In 1798, Thomas Malthus warned in his essay on the
- The distribution of wealth in a country can principle of population about the perils of
be skewed so that very few people have the overpopulation and how population growth will
most money, while the majority of people exhaust the world food supply by the middle of the
must make ends meet with very little. 19th century.
- This can lead to unrest in society, anger The Malthusian catastrophe is basically is a
toward the government, and upheaval prediction that growing population will soon
that leads to even more strife in an area. outpace the planet’s agricultural production
capacity.
• War is perhaps the biggest contributing factor to - In other words, at some point, there will be
a low standard of living. War-torn areas tend to suffer far too many people and a very limited food
immensely both during and after the war has taken supply, leading to great unrest.
place, and it can take decades for a society to Although scientists argue that Malthus overlooked
rebuild after battles have taken place. technological advancements especially in food
- Mortality rates are likely to rise production; demographic transitioning due to
significantly during and after a war, and migration; advances in public health and modern
access to basic services such as health care contraception.
is likely to be limited for long periods of
time. Destruction of buildings, roads, and
other properties is likely, and families may
be displaced for months or years on end

LOW LEVELS OF PRODUCTIVITY

• Poor productivity hampers wage growth, stoking
public dissatisfaction.
- “productivity isn’t everything, but in the
long run it is almost everything. A country’s UNEMPLOYMENT AND
ability to improve its standard of living over UNDEREMPLOYMENT
time depends almost entirely on its ability to While unemployment and underemployment are
raise its output per worker.” - Paul Krugman still a major concern among many industrialized
- Factors that could hold back productivity countries, these issues hit developing countries much
include an aging population, corruption, harder.
weak infrastructure, lack of technological - In south Asia, Latin America, and Africa, a
advancement. context of massive informality and poor
access to social protection makes workers
RAPID POPULATION GROWTH particularly vulnerable to shocks, whether
Rapid population growth leads to a country with a they be economic (bankruptcy, dismissal,
young average age. Young populations require etc.) Or personal (illness, occupational
creation of new infrastructure including shelter, accident, etc.).
health care, and schools. - Mass unemployment and
- If the country has the resources to employ underemployment exacerbate inequalities
their new labor, the population increase can and fuel a sense of resentment, occasionally
lead to rapid economic growth. If, on the leading even to violence.
 - The majority of workers in developing generate tax dollars. However, FDI also may
countries "are engaged in low- productivity generate problems.
work that is often physically onerous but - Foreign firms from developed nations
yet yields only meagre earnings." typically dominate the local market,
- In developing countries, where job markets preventing or discouraging the
are particularly tight, special attention must development of local industries. Moreover,
be given to ensuring that these employment the administration of the host country may
services also target employers in order to be asked to provide tax incentives to keep
help them create positions–including in the foreign company in the country. The
informal businesses, which make up the host country may also relax workplace or
majority of the economic fabric. environmental regulations to induce foreign
companies to establish or maintain
DEPENDENCY BURDEN businesses there.
Dependents: 0 to 14 yrs old
Working: 15 to 64 yrs old

COMMODITY DEPENDENCE
A country is considered to be dependent on
commodity exports when commodities constitute
the predominant share of its exports.
- A commodity, also called primary product
or primary good, is a good sold for
production or consumption just as it was
found in nature. Commodities include
crude oil, coal, copper or iron ore, rough
diamonds, and agricultural products such as
wheat, coffee beans or cotton.
- These economies are susceptible to volatile
global commodity prices, especially when
they over-specialize (dutch disease).

FOREIGN DEPENDENCY
Foreign dependency, is a global power structure in
which weaker countries are economically reliant
on stronger countries, allowing the stronger
countries to exercise significant control over the
weaker countries’ economic and political behavior.
- Foreign dependency generally fosters
underdevelopment in the dependent
country; a country’s adoption of policies
tailored to the interests of a stronger country
may inhibit the weaker country’s domestic
growth, speed environmental destruction, or
create temporary growth that precludes
sustainable development and economic
independence.
- Less-developed countries’ reliance on
foreign capital can also perpetuate
dependency.
- Much of the financial capital available in a
developing country arrives from outside its
borders. That capital may take the form of
foreign aid or foreign direct investment
(FDI), which includes activities such as
hosting foreign firms that provide jobs,
increase domestic capital flows, and
TOPIC 5: THE DEVELOPMENT higher—otherwise known as conspicuous
THEORIES consumption.
- Conspicuous consumption is the purchase
of goods or services for the specific purpose
RATIONAL CHOICE THEORY of displaying one's wealth.
Rational choice theory states that individuals use
rational calculations to make rational choices and Austrian economist Joseph Schumpeter also played
achieve outcomes that are aligned with their own an important role in the development of evolutionary
personal objectives. These results are also associated economics.
with maximizing an individual's self-interest. - His model of Creative Destruction
- Using rational choice theory is expected to described the essential nature of capitalism
result in outcomes that provide people with as a relentless drive toward progress,
the greatest benefit and satisfaction, given expanding on Veblen’s early observations.
the limited option they have available. - Schumpeter argued that human
Adam Smith is usually credited as the
entrepreneurs are the main drivers of
father of the Rational Choice Theory. economic development and that markets
are cyclical, moving up and down, as
Many mainstream economic assumptions and
companies constantly compete to find
theories are based on rational choice theory. Rational solutions to benefit mankind.
choice theory is associated with the concepts of
rational actors, self- interest, and the invisible FOLK-URBAN CONTINUUM
hand. We categorize settlements along a continuum, as
- An example of a rational consumer would be there are many settlements that show both rural and
a person choosing between two cars. Car B urban features, sitting between the extremes of a lone
is cheaper than Car A, so the consumer house in the countryside and an expanding
purchases Car B. metropolis.
- This idea was promulgated by Robert
EVOLUTIONARY ECONOMICS (mot all is
Redfield.
rational)
Due to the vast number of services that cities provide,
Evolutionary economics is a theory proposing that they attract people from the surrounding area
economic processes evolve and that economic who do not have access to these services locally. As
behavior is determined both by individuals and we move along the continuum from the most rural to
society as a whole.
the most urban locations, the number of services
- The term was first coined by Thorstein provided by each settlement increases.
Veblen, an American economist and
sociologist. It shuns the rational choice In folk-urban-continuum, folk society comes in
theory of traditional economics, arguing that contact with urban civilization and inherits
psychological factors are key drivers of certain characteristics. So a folk society has certain
the economy. characteristics of folk and certain characteristics of
urban.
Evolutionary economists believe the - It is between literate and illiterate,
economy is dynamic, constantly changing, and between developed and undeveloped
chaotic, rather than always tending toward a state societies.
of equilibrium.
- Folk society is loosing its characteristics
- Most evolutionary economists agree that because of urban contact. Isolation, kinship
failure is good and just as important as system, group feeling, homogeneity, is no
success as it paves the way to economic
more there.
prosperity by encouraging greater efficiency
and the development of better products and
services.
- It also teaches us more about how society's
needs develop over time.

Veblen used an example of social hierarchy and

status to make his point, noting that demand for
some goods tends to increase when the price is
LINEAR GROWTH THEORIES HARROD & DOMAR'S LINEAR GROWTH
One of the first growth theories was that proposed by THEORY
American economic historian Walt Whitman The simple circular flow model indicates the
Rostow in the early 1960s. connection between savings which provides a flow
- As a vigorous advocate of free market of funds, and for investment, which requires
capitalism, Rostow argued that economies abstinence from consumption in order that resources
must go through a number of can be freed up for investment.
developmental stages towards greater - Investment itself is an injection back into the
economic growth. circular flow, and increases the economy’s
- He argued that these stages followed a capacity to produce more output in the
logical sequence; each stage could only be future.
reached through the completion of the
previous stage.

• Traditional society, dominated by agriculture and

barter exchange, and where science and technology
are not understood or exploited.
• Pre-take-off stage, with the development of
education and an understating of science, the
application of science to technology and transport,
and the emergence of entrepreneurs and a simple
banking system, and hence rising savings.
• Take-off, with positive growth rates in particular STRUCTURAL FUNCTIONALISM
sectors and where organized systems of production The origin of contemporary references to social
and reward replace traditional methods and norms. structure can be traced to the French social scientist
• The drive to maturity, with an ongoing movement Émile Durkheim, who argued that parts of society
towards a diverse economy, with growth in many are interdependent and that this interdependency
sectors. imposes structure on the behavior of institutions
• The stage of mass consumption, where citizens and their members.
enjoy high and rising consumption per head, and - To Durkheim, the interrelations between
where rewards are spread more evenly. the parts of society contributed to social
unity—an integrated system with life
The importance of savings and investment is also characteristics of its own, exterior to
central to the work of Roy F. Harrod and Evsey D. individuals yet driving their behaviour.
Domar.
- For Harrod and Domar, economies must A school of thought according to which each of the
save and invest a certain proportion of their institutions, relationships, roles, and norms that
income to grow at a certain rate – failure to together constitute a society serves a purpose, and
develop is caused by the failure to save, and each is indispensable for the continued existence
accumulate capital. For take- off to of the others and of society as a whole.
happen, savings must be accumulated. - In structural functionalism, social change is
regarded as an adaptive response to some
According to Harrod and Domar's theory, there are tension within the social system. When
two determinants of the rate of growth of a country. some part of an integrated social system
1. The first looks at the relationship between changes, a tension between this and other
changes in the capital stock of a country, parts of the system is created, which will be
that is its capital investment, and its resolved by the adaptive change of the other
output, called the capital-output ratio. parts.
This shows how much new capital is needed
to create a given amount of new national
income.
2. The second element of the model considers
the relationship between savings and
national income is called the savings ratio,
and this shows how much is saved from a
given amount of national income.
CONFLICT THEORY (powered by fear) nations in an international system dominated
Conflict theory, first developed by Karl Marx, is a by such unequal power relationships
theory that society is in a state of perpetual conflict between the center (the developed
because of competition for limited resources. countries) and the periphery (the LDCs)
- Conflict theory holds that social order is renders attempts by poor nations to be self-
maintained by domination and power, reliant and independent difficult and
rather than by consensus and conformity. sometimes even impossible
- According to conflict theory, those with
wealth and power try to hold on to it by any B. FALSE-PARADIGM MODEL
means possible, chiefly by suppressing the A second and a less radical international-
poor and powerless. A basic premise of dependence approach to development, which we
conflict theory is that individuals and groups might call the False-Paradigm Model, attributes
within society will work to try to maximize Third World underdevelopment to faulty and
their own wealth and power. inappropriate advice provided by well-meaning
but often uninformed, biased, and ethnocentric
Conflict theory has sought to explain a wide range of international "expert" advisers from developed-
social phenomena, including wars, revolutions, country assistance agencies and multinational
poverty, discrimination, and domestic violence. donor organizations.
- It ascribes most of the fundamental - These experts offer sophisticated concepts,
developments in human history, such as elegant theoretical structures, and complex
democracy and civil rights, to capitalistic econometric models of development that
attempts to control the masses (as opposed often lead to inappropriate or incorrect
to a desire for social order). policies.
- With the rise of capitalism, Marx theorized
that the bourgeoisie, a minority within the C. DUALISTIC-DEVELOPMENT THESIS
population, would use their influence to Implicit in structural-change theories and explicit in
oppress the proletariat, the majority class. international-dependence theories is the notion of a
- 2 types of people: world of dual societies, of rich nations and poor
1. Proletariat: working class nations and, in the developing countries, pockets
2. Bourgeoisie: capitalists of wealth within broad areas of poverty.
- Dualism is a concept widely discussed in
INTERNATIONAL DEPENDENCE development economics. It represents the
REVOLUTION existence and persistence of increasing
Essentially, international-dependence models view divergences between rich and poor nations
Third World countries as beset by institutional, and rich and poor peoples on various levels.
political, and economic rigidities, both domestic
and international, and caught up in a dependence The concept of dualism embraces four key
and dominance relationship to rich countries. elements:
- Within this general approach there are three 1. Different sets of conditions, of which some
major streams of thought: are "superior" and others "inferior," can
1. the neocolonial dependence model, coexist in a given space.
2. the false-paradigm model, and 2. This coexistence is chronic and not merely
3. the dualistic-development thesis. transitional. The international coexistence of
wealth and poverty is not simply a historical
A. NEOCOLONIAL DEPENDENCE MODEL phenomenon that will be rectified in time.
The first major stream, which we call the 3. Not only do the degrees of superiority or
Neocolonial Dependence Model, is an indirect inferiority fail to show any signs of
outgrowth of Marxist thinking. diminishing, but they even have an inherent
- It attributes the existence and continuance of tendency to increase.
Third World underdevelopment primarily to 4. The interrelations between the superior and
the historical evolution of a highly inferior elements are such that the existence
unequal international capitalist system of of the superior elements does little or
rich country-poor country relationships. nothing to pull up the inferior element.
- Whether because rich nations are
intentionally exploitative or unintentionally
neglectful, the coexistence of rich and poor
NEOCLASSICAL COUNTER REVOLUTION
This advocates for freer markets and the
dismantling of public ownership, central planning
by the state and government regulation of
economic activity.
- Underdevelopment results from poor
resource allocation due to incorrect pricing
policies and too much state intervention of
overly active developing country
governments, thus slowing the pace of
economic growth.

NEW GROWTH THEORY

The new growth theory is an economic concept,
positing that humans' desires and unlimited wants
foster ever-increasing productivity and economic
growth.
- It argues that real GDP per capita will
perpetually increase because of people's
pursuit of profits. The theory emphasizes
the importance of entrepreneurship,
knowledge, innovation, and technology,
rejecting the popular view that economic
growth is determined by external,
uncontrollable forces.

A significant aspect of the new growth theory is the

idea that knowledge is treated as an asset for
growth that is not subject to finite restrictions or
diminishing returns like other assets such as
capital or real estate.
- Knowledge is an intangible quality, rather
than physical, and can be a resource
grown within an organization or industry.
- Under the new growth theory, nurturing
innovation internally is one of the reasons
for organizations to invest in human capital,
which is aligned with the Human Capital
Theory.