AIOU Solved Assignments 1 & 2 Code 4659 Autumn 2019

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Aiou Solved Assignments code M.Sc 4659 Autumn 2019 assignments 1 and 2  Course: Economic Development of Pakistan-I (4659) spring 2019. aiou past papers

AIOU Solved Assignments 1 & 2 Code 4659 Autumn 2019

Course: Economic Development of Pakistan-I (4659)
Level:M.Sc.                                                 
Semester: Spring, 2019
ASSIGNMENT No. 2

Q.1   Examine the performance of major industries producing exportable commodities during 1970’s and early 80’s.                              

Ans The rapid increase in crop prices from 2006 through the first half of 2008 caught the world’s attention and raised concerns that permanent changes in the agricultural market environment were occurring. However, this recent dramatic rise in prices also has many features reminiscent of the past.

A number of factors combined to cause the 2006-08 runup in prices (see “Fluctuating Food Commodity Prices—A Complex Issue With No Easy Answers,” Amber Waves, November 2008). These factors included burgeoning food demand in developing and transition economies, sharply higher energy prices that boosted production costs of agricultural products, increased demand for corn and oilseeds for bioenergy, the depreciating U.S. dollar, production shortfalls due to weather, and policy responses of both importing and exporting countries. Many of these same factors were observed in two past periods of rapid price increases, making it worthwhile to review those incidents and the lessons learned regarding the response of the agricultural sector and the role of market forces in bringing prices back down.

It remains uncertain how market participants will finally adjust this time around. Crop prices have already fallen from their 2008 peak. The ongoing global economic crisis that started in 2008 will likely soften domestic and global agricultural demand, but continued mandatory biofuels blending will likely keep prices from falling to levels as low as those of the late 1990s and early 2000s. AIOU Solved Assignments 1 & 2 Code 4659 Autumn 2019

Looking Back at Historical Prices

Since the beginning of the 20th century, there have been several periods of dramatic crop price increases in the United States, including those experienced during the two World Wars. Two periods of rising agricultural prices are of particular interest, the early 1970s and the mid-1990s. Both periods saw record-breaking prices of at least two of three principal field crops—wheat, corn, and soybeans—and the price increases were sustained for two or more consecutive years. Each period was followed by declines in prices as the conditions that prompted the rapid increase in prices were reversed.

Wheat, corn, and soybean prices began rising rapidly in 1971. Prices peaked and reached record highs in 1974 and then declined, settling at a higher level than during the 1960s. Prices for most crops again started to climb slowly in 1990 and escalated rapidly beginning in 1994, peaking in 1995 (corn and wheat) and 1996 (soybeans) before declining sharply. While the increases in this period were not as dramatic as those in the 1970s, corn and wheat prices reached record levels.

Changes in supply and demand conditions put pressure on agricultural crop prices
Contributing factor1970s1990s2006-08
Long run
Demand
Export demand growthXXX
Due to food demand growthNAXX
Due to population growthNANAX
New use/innovation: biofuelsNANAX
Supply
Slow production growthXXX
Declining R&D investmentNAXX
Land retirementXXNA
Short run
Demand
Government food policiesXXX
Supply
Government food policiesXXX
Weather-?induced crop losses/?failureXXX
Macroeconomic
Economic growthNAXX
Depreciation of U.S. dollarXXX
Rising oil pricesXNAX
Accumulation of petrodollars/?foreign reservesXNAX
Futures market/?speculationXNAX
InflationXNANA
Financial crisisNAXX
NA = Not applicable.
Source: USDA, Economic Research Service.

Rapid Increase in Demand for Grains, Oilseeds Boosts 1970s Crop Prices

A rapid increase in global demand for grains and oilseeds triggered the 1971-74 runup in prices. A series of events, including the Soviet Union’s unexpected purchase of a large amount of grain in the global markets in the early 1970s, stimulated world demand. Many other centrally planned countries also decided to increase grain imports, causing world agricultural trade to rise dramatically. World exports of wheat increased nearly 29 percent between 1971 and 1972.

The entry of the Soviet Union and other centrally planned economies into global markets represented a significant change in grain and oilseed trade and started a period of strong growth in agricultural commodity trade that lasted throughout the 1970s. The abundance of petroleum-related revenues (petrodollars) and foreign exchange reserves generated by major oil-exporting countries also facilitated global trade growth. During the 1970s, the value of global agricultural commodity imports grew 4.8 percent a year, while the value of U.S. agricultural exports grew at an annual rate of 11.7 percent.

The 1971-74 price surge also coincided with a major depreciation of the U.S. dollar. In 1971, the United States, lacking sufficient gold reserves to defend the dollar’s fixed exchange rate, removed the dollar from the gold standard and began its transition to a floating exchange rate, finally realized in March 1973. This shift resulted in a persistent depreciation of the U.S. dollar against other major currencies, and, by the end of the decade, the dollar’s value had fallen by nearly 30 percent. The declining value of the dollar made U.S. products more competitive in overseas markets, so exports and prices rose.

Production shortfalls due to adverse weather conditions compounded the situation. In 1972, world grain production declined due to poor yields in the United States, Australia, Canada, and the Soviet Union. The Soviet Union turned to the global market to meet grain needs. Adverse weather conditions in major grain-producing countries persisted for several years. Production of grains and oilseeds continued to fall, even as plantings in the United States and other major grain-producing countries expanded. The failure of the Peruvian anchovy catch in 1972 led to a significant decline in the availability of high-protein feedstocks and increased demand for soybean meal. As a result, soybean prices soared in 1973 and 1974.

The effect of these production shortfalls was compounded by the decisions of the United States and other major exporting countries in the late 1960s to reduce stocks and idle cropland to cut government costs and support prices. By 1973/74, wheat ending stocks in Australia had fallen 93 percent from 1970/71, Canada’s stocks had dropped 64 percent, and U.S. wheat stocks had declined 59 percent.

During the 1970s, many countries adopted policies, such as export taxes, restrictions, and bans, to insulate their domestic markets from global grain and oilseed price increases. Importers also reduced tariffs, rebuilt stocks, and subsidized consumer prices. The availability of foreign exchange reserves resulting from the depreciation of the dollar and abundance of petrodollars in major oil-exporting countries facilitated these import and export policies. Overall, these policy actions further contributed to the tight global market conditions. AIOU Solved Assignments 2 code 4659.

High Crop Prices in the 1990s—Similar Causes but Shorter Duration

Strong demand and increasing trade, driven primarily by robust economic growth in newly industrialized Asian countries, were also behind the agricultural commodity price spike of 1994-96. But trade gains ended when the 1997-99 financial crisis and resulting decline in economic growth in Asia caused global demand to fall.

Like the events of the early 1970s, the 1994-96 price hikes coincided with the depreciation of the U.S. dollar against currencies of major U.S. trading partners, though, like the surge in global demand, this lasted for only a few years. Also in 1994-96, global production of grains fell for 3 consecutive years due to below-normal harvests in the major grain-exporting countries.

As in the 1970s, the impact of declining production on prices in the 1990s was compounded by the decisions of some countries, including the United States, to reduce carryover stocks and idle cropland to support prices. With lower stocks, global markets were more sensitive to production shortfalls and grain prices soared.

In contrast to the 1970s, however, country policy responses to the 1990s price spikes were muted, largely because the price increases lasted only 2 years. Moreover, inflation was relatively low, so the overall impact on consumer budgets was not severe. In addition, foreign reserves of many Asian markets were low in the mid-1990s, preventing many major importing countries from increasing imports above usual needs and limiting their ability to implement policies to protect consumers from higher prices. Increased trade liberalization also helped make agricultural commodity markets more flexible and responsive to changes in global supply and demand conditions. AIOU Solved Assignments 1 Code 4659

Looking at the Most Recent Price Surge From a Historical Perspective

As in the 1970s and the 1990s, one of the key factors contributing to higher crop prices in 2006-08 was the rapid increase in foreign demand for U.S. agricultural products since 2000. The value of global agricultural trade increased over 50 percent between 2000 and 2006, spurred primarily by rising incomes in developing countries. These nations accounted for 63 percent of the total value of U.S. agricultural exports in 2007.

Demand for agricultural food commodities in large developing countries, such as China, Brazil, Mexico, India, and countries of Southeast Asia and Central America, has grown rapidly as consumers have diversified their diets to include more vegetable oils, meat, and dairy products. As a result, demand for grains and oilseeds for livestock feed by developing countries has risen disproportionately more than overall demand for food.

Once again, the depreciation of the U.S. dollar, worldwide production shortfalls in 2006-07, and low stocks pushed commodity prices up. Global aggregate stocks-to-use ratios for grains and oilseeds declined to less than 15 percent, the lowest level since 1970. Policy responses, such as export controls, reduction of import barriers, and consumer subsidies on the part of both importers and exporters, exacerbated these developments.

A new factor contributing to agricultural markets is the emergence of biofuels as a major source of demand for grains and oilseeds (see “Growing Crops for Biofuels Has Spillover Effects”). Although ethanol production represented less than 7 percent of U.S. gasoline use in 2008, ethanol production accounted for 23 percent of total 2007-08 corn use. Neither the 1970s nor the mid-1990s were characterized by a comparable change in the makeup of global demand. Similarly, expanded biodiesel demand in the European Union has pressured global prices for vegetable oils.

Markets Adjust and Prices Retreat

The period of high prices during the 1970s ended as growth in world consumption slowed because of declining global economic expansion and oil prices, which reduced the availability of petrodollars. Restrictive monetary policies designed to curb inflation in some key countries (including the United States and the United Kingdom) and the debt crisis in many developing countries contributed to slowing economic growth. Thus, continued growth in global export demand proved unsustainable.

At the same time, global production, stimulated by productivity increases and government policies, grew faster than consumption. U.S. farmers responded to high prices by bringing cropland idled under acreage set-aside programs into production. Harvested areas of wheat, corn, and soybeans expanded over 20 percent from 1974 to 1980. Multinational firms responded to high grain and oilseed prices by making large investments in the development of agricultural infrastructure and port facilities in South American countries. This made it possible for farmers in Brazil and Argentina to compete and become major suppliers in the global grain and oilseed markets. The gains in production coupled with the slowdown in consumption caused global stocks of grains and oilseeds to grow to record levels. As a result, wheat and corn prices declined.

Unlike events in the 1970s, a shock external to the agricultural sector—namely, the Asian financial crisis of 1997-99—quickly ended the 1994-96 crop price surge. With the crisis, economic growth, and hence, agricultural consumption and trade, plummeted in the Asian countries. A reduction in food demand in high-income countries and an appreciating U.S. dollar also dampened agricultural trade. At the same time, the 1996 Farm Act ended the crop acreage reduction program, increasing land available for planting and boosting production. AIOU Solved Assignments 1 & 2 Code 4659 Autumn 2019

Will We See Similar Market Adjustments This Time?

During previous periods of price increases, markets adjusted and prices declined. Similarly, in the current situation, many market adjustments are already occurring. The U.S. dollar has started to strengthen against other major currencies. High prices for many crops encouraged increased plantings in 2008. Some land enrolled in the Federal Conservation Reserve Program has become available for production as contracts expire. These and other ongoing adjustments have placed downward pressure on prices.

Further, the current global economic crisis, a shock external to the agricultural sector, is a major contributing factor in reversing the 2006-08 price surge. In this way, the situation is similar to that in the mid-1990s, when a decline in crop prices was precipitated by the Asian financial crisis. This time, however, the crisis originated in more developed countries, such as the United States and Europe. The length and severity of the current global economic slowdown will help determine how fast, how far, and how long prices retreat. As agricultural markets adjust in this weakened economic environment, price behavior may continue to be volatile.

While history provides some insights into current and future economic phenomena, the past does not necessarily predict the future nor does it fully explain events occurring in the markets today. The current financial and economic structure in the agricultural sector is different than in the past and policy options and actions have changed as well. Nonetheless, future global income growth and policy developments will have a substantial impact on demand for agricultural commodities. Although movements in the value of the dollar will influence demand for U.S. agricultural exports, it is expected that food demand growth will resume and stimulate gains in global agricultural trade as the world economy recovers.

In particular, food demand in developing economies will likely accelerate since incomes in these countries are far from levels where food demand becomes saturated. Additionally, developing countries, which accounted for over 80 percent of global population in 2007, will continue to experience large population gains along with increased urbanization and expansion of the middle class. And populations in developing countries tend to be younger than those in developed countries, further supporting the potential for increased food demand and sustained growth in export demand.

Additional demand strength can be expected if U.S. and international policies continue to favor development of biofuels. These factors combined are likely to keep crop prices from falling as low as their pre-spike levels.

AIOU Solved Assignments 1 & 2 Code 4659

Q.2   Discuss that the Indirect taxes are the major source of revenue to the Government of Pakistan in the light of prescribed study material.  

Ans The intentions of Pakistan Muslim league-Nawaz (PML-N) government to generate an estimated Rs 255 billion for fiscal year 2014-15 through new taxes is likely to hit the low and middle income classes because of indirect taxes on necessities of life, said the economists at National Tax Summit in the federal capital on Thursday.

Pakistan’s indirect tax system is aggressive and bias against the poor, putting greater burden on the low-income households than the upper ones, according to various reports by rights and development organisations working in Pakistan.

A report by a social development organisation stated that the poorest 10 per cent of households contribute 16 per cent of their income to three indirect taxes – General Sales Tax (GST), Central Excise Duty (CED) and Customs Duty.

However, the burden of tax progressively declines as income rises and the richest 10 per cent of households contribute only about 10 per cent of their incomes to the indirect taxes.

Pakistan’s tax regime consists of four main revenue sources: GST, CED, Customs Duty and Income Tax. Its structure is dominated heavily by indirect taxes, which combines over two-third (68 per cent) of combined federal and provincial tax receipts.

Another report stated that if surcharges are included, the indirect taxes rise to over three-fourth (76 per cent). Thus all of these indirect taxes badly affect the poor of the country.

Other hurdles include unwillingness of the affluent to pay their dues, the token contribution to tax revenue by the country’s parliamentarians, barring a handful, widespread exemptions and privileges granted to the rich and powerful, many of which have been coded into law, a rising tax burden on honest taxpayers and formal businesses and the growing inability of government to finance the delivery of efficient and effective public services to a burgeoning population.

Forman Christian College University’s Dr Akmal Hussain said that the current status of taxation in Pakistan is highly regressive which is bound to create a wide gap between the have and have-nots. A successful tax system reduces inequalities through a policy of redistribution of income and wealth.\

“We must reduce the burden through decreasing indirect taxes while higher rates of income taxes, capital transfer taxes and wealth taxes on elite are some means adopted for achieving equity in society.”

Former FBR chairman Abdullah said that Pakistan has one of the lowest tax collection rates in the world and the international organisations are watching its efforts closely. They want Pakistan to do more to tackle rampant tax evasion, particularly by its wealthy elite. He said that for sustainable development we must rely on direct taxation instead of indirect taxation which creates woes to marginalised classes of the country.

Sustainable Policy Institute Deputy Executive Director Dr Vaqar Ahmed said that as part of the 7th National Finance Commission (NFC) Award, all the four provinces were supposed to improve tax collection, but they fell behind their commitment to collect tax on farm income and real estate to improve the country’s falling tax-to-GDP ratio.

It was agreed in the award that all the provinces will supplement centre’s efforts to increase the tax-to-GDP ratio to 13.60 per cent by 2012-13, but it actually ended up at 9.6 per cent for the same year, showing a dismal performance of the revenue realisation. Thus to rationalise the indirect taxation the provinces should have to move for direct tax collection on agriculture, on landlords, and on property owners, AIOU Solved Assignments Code 4659,

Q.3   Discuss all major factors responsible for low productivity during 1970’s in agriculture sector of Pakistan.                                      

Ans Agriculture is a vital sector of Pakistan’s economy and accounted for 25.9 percent of GDP in 1999-2000, according to government estimates. The sector directly supports three-quarters of the country’s population, employs half the labor force , and contributes a large share of foreign exchange earnings. The main agricultural products are cotton, wheat, rice, sugarcane, fruits, and vegetables, in addition to milk, beef, mutton, and eggs. Pakistan depends on one of the world’s largest irrigation systems to support production. There are 2 principal seasons. Cotton, rice, and sugarcane are produced during the kharif season, which lasts from May to November. Wheat is the major rabi crop, which extends from November to April. The key to a much-needed improvement of productivity lies in a more efficient use of resources, principally land and water. However, change is dependent on the large landowners who own 40 percent of the arable land and control most of the irrigation system, which makes widespread reform difficult. Assessments by independent agencies, including the World Bank, show these large landholdings to be very unproductive. Pakistan is a net importer of agricultural commodities. Annual imports total about US$2 billion and include wheat, edible oils, pulses, and consumer foods.

Pakistan is one of the world’s largest producers of raw cotton. The size of the annual cotton crop—the bulk of it grown in Punjab province—is a crucial barometer of the health of the overall economy, as it determines the availability and cost of the main raw material for the yarn-spinning industry, much of which is concentrated around the southern port city of Karachi. Official estimates put the 1999-2000 harvest at some 11.2 million 170-kilogram bales, compared with the 1998-99 outturn of 8.8 million bales and the record 12.8 million bales achieved in 1991-92. The government recently actively intervened in the market to boost prices and to encourage production. A major problem is that the cotton crop is highly susceptible to adverse weather and pest damage, which is reflected in crop figures. After peaking at 2.18 million tons in 1991-92, the lint harvest has since fluctuated considerably, ranging from a low of 1.37 million tons in 1993-94 to a high of 1.9 million tons in 1999-2000.

The 2000-01 wheat crop was forecast at a record 19.3 million tons, compared to 17.8 million tons produced during the previous year. This increase is due largely to favorable weather and a 25-percent increase in the procurement price to about US$135 per ton. About 85 percent of the crop is irrigated. Despite the record production, Pakistan will continue to be a major wheat importer. The government has imported an average of US$2.4 million annually over the past 5 years. The United States and Australia are the major suppliers. Demand for wheat is increasing from Pakistan’s rapidly growing population as well as from cross-border trade with Afghanistan.

Pakistan is a major rice exporter and annually exports about 2 million tons, or about 10 percent of world trade. About 25 percent of exports is Pakistan’s famous fragrant Basmati rice. Rice is Pakistan’s second leading source of export earnings. Private traders handle all exports. Pakistan’s main competitors in rice trade are Thailand, Vietnam, and India.

Tobacco is grown mainly in the North-West Frontier Province and Punjab and is an important cash crop. Yields in Pakistan are about twice those for neighboring countries largely due to the extension services provided by the industry. Quality, however, is improving only slowly due to problems related to climate and soil. Farmers have started inter-cropping tobacco with vegetables and sugarcane to increase returns. About half of the total production is used for cigarette manufacturing and the remainder used in traditional ways of smoking (in hand-rolled cigarettes called birris, in water pipes, and as snuff). The share of imported tobacco is increasing gradually in response to an increased demand for high-quality cigarettes.

Minor crops account for only 5 percent of total cultivated area; these include oilseeds (sunflower, soybean), chilies, potatoes, and onions. Domestic oilseed production accounts only for about 25 percent of Pakistan total edible oil needs. As a result, Pakistan spends more than US$1 billion annually in scarce foreign exchange to import edible oils, while its oilseed processing industry operates at less than 25 percent of capacity due to an inadequate supply of oilseeds. For 2000-01 total oilseed production was forecast to decrease 10 percent to 3.6 million tons. The government has highlighted development of the oilseed sector as a priority.

Pakistan’s fishing industry is relatively modest, but has shown strong growth in recent years. The domestic market is quite small, with per capita annual consumption of approximately 2 kilograms. About 80 percent of production comes from marine fisheries from 2 main areas, the Sindh coast east from Karachi to the Indian border, and the Makran coast of Baluchistan. Ninety percent of the total marine catch is fish; the shrimp which constitute the remainder are prized because of their greater relative value and demand in foreign markets. During 1999-00, total fish production was 620,000 tons, of which 440,000 tons consisted of sea fish and the remainder were fresh-water species. About one-third of the catch is consumed fresh, 9 percent is frozen, 8 percent canned, and about 43 percent used as fish meal for animal food.

Livestock accounts for 40 percent of the agricultural sector and 9 percent of the total GDP. Principal products are milk, beef, mutton, poultry, and wool. During 1999, the livestock population increased to 120 million head. That same year Pakistan generated 970,000 tons of beef, 640,000 tons of mutton, and 190,000 tons of poultry. In an effort to enhance milk and meat production, the government recently launched a comprehensive livestock development project with Asian Development Bank assistance. Poultry production provides an increasingly popular low-cost source of protein. Modern poultry production is constrained by high mortality, high incidence of disease, poor quality chicks, and poor quality feed, combined with an inadequate marketing system. Frozen poultry have only recently been introduced.

Forests cover an area of 4.2 million hectares or about 5 percent of the total area of Pakistan. The principal forest products are timber, principally for house construction, furniture, and firewood. Many of the country’s wooded areas are severely depleted as a result of over-exploitation. The government has restricted cutting to protect remaining resources—though corruption often jeopardizes environmental efforts—and has lowered duties to encourage imports. Forestry production has since declined from 1.07 million cubic meters in 1990-91 to 475,000 cubic meters in 1998-99. Pakistan imports an estimated US$150 million of wood products annually to meet the requirements of a growing population and rising demand by a wealthy elite.

Q.4   Discuss with examples that the “terms of trade” effect the nature and extent of a country’s development.                                               

Terms of trade are influenced by a number of factors. Important among them are given below:

1. Elasticity of Demand:

The elasticity of demand for exports and imports of a country influence its terms of trade. If the demand for a country’s exports is less elastic as compared to her imports, the terms of trade will tend to be favourable because the exports can command higher price than imports.

ADVERTISEMENTS:

On the other hand, if the demand for imports is less elastic than that for exports, the terms of trade will be unfavourable.

2. Elasticity of Supply:

The nature of elasticity of supply also significantly influence the country’s terms of trade. If the supply of a country’s exports is more elastic than the imports, the terms of trade will tend to be favourable.

3. Nature of Goods:

ADVERTISEMENTS:

If a country is producing and exporting only primary goods, and importing manufac­tured goods, the terms of trade will be unfavourable.

4. Economic Development:

The economic development has two types of effects: (a) The demand effect: It refers to the increase in demand for imports as a result of increase in income associated with economic development, (b) The supply effect: It refers to the increase in supply of import substitutes or import competing goods. The net effect of economic development depends upon the extent of these two effects.

5. Rate of Exchange:

ADVERTISEMENTS:

Changes in the rate of exchange of a country’s currency also affect its terms of trade. If a country’s currency appreciates, its terms of trade will improve because a rise in the value of the currency causes an increase in the export prices and decrease in the import prices.

6. Tariff Policy:

Tariffs and quotas also influence the terms of trade. These measures, if not retaliated by other countries, improve a country’s terms of trade by restricting imports.

7. Size of Population:

ADVERTISEMENTS:

An overpopulated country will have larger demand for imports. As a result, the terms of trade will tend to be unfavourable in this case relative to the under populated or optimally populated country.

8. Size of Country:

A larger country will tend to have less favourable terms of trade as compared to a smaller country. This is because the smaller country can reap the gains of economies of scale enjoyed by the larger one in the international trade.

9. Degree of Competition:

ADVERTISEMENTS:

If a country enjoys monopoly power in case of its exports and there are many alternative sources of supply of its imports, then it will have favourable terms of trade.

Q.5   Economic development without growth is almost inconceivable. Explain 
how growth is possible without development? Highlight your arguments with examples.                          

Economic development

Development looks at a wider range of statistics than just GDP per capita. Development is concerned with how people are actually affected. It looks at their actual living standards and the freedom they have to enjoy a good standard of living.

Measures of economic development will look at:

·         Real income per head – GDP per capita

·         Levels of literacy and education standards

·         Levels of healthcare e.g. number of doctors per 1000 population

·         Quality and availability of housing

·         Levels of environmental standards

·         Life expectancy.

Measures of economic development

Measuring economic development is not as precise as measuring GDP because it depends on what factors are included in the measure.

There are several different measures of economic development, such as the Human development index (HDI)

Human development index (HDI)

The HDI combines:

1.      Life Expectancy Index. Average life expectancy compared to a global expected life expectancy.

2.      Education Index

1.      mean years of schooling

2.      expected years of schooling

3.      Income Index (GNI at PPP)

more on Human development index (HDI)

Factors affecting economic growth in developing countries

·         Levels of infrastructure – e.g. transport and communication

·         Levels of corruption, e.g what percentage of tax rates are actually collected and spent on public services.

·         Educational standards and labour productivity. Basic levels of literacy and education can determine the productivity of the workforce.

·         Levels of inward investment. For example, China has invested in many African countries to help export raw materials, that its economy needs.

·         Labour mobility. Is labour able to move from relatively unproductive agriculture to more productive manufacturing?

·         The flow of foreign aid and investment. Targeted aid, can help improve infrastructure and living standards.

·         Level of savings and investment. Higher savings can fund more investment, helping economic growth.

Economic growth without development

It is possible to have economic growth without development. i.e. an increase in GDP, but most people don’t see any actual improvements in living standards.

1.      Economic growth may only benefit a small % of the population. For example, if a country produces more oil, it will see an increase in GDP. However, it is possible, that this oil is only owned by one firm, and therefore, the average worker doesn’t really benefit.

2.      Corruption. A country may see higher GDP, but the benefits of growth may be syphoned into the bank accounts of politicians

3.      Environmental problems. Producing toxic chemicals will lead to an increase in real GDP. However, without proper regulation, it can also lead to environmental and health problems. This is an example of where growth leads to a decline in living standards for many.

4.      Congestion. Economic growth can cause an increase in congestion. This means people will spend longer in traffic jams. GDP may increase but they have lower living standards because they spend more time in traffic jams.

5.      Production not consumed. If a state-owned industry increases output, this is reflected in an increase in GDP. However, if the output is not used by anyone then it causes no actual increase in living standards.

6.      Military spending. A country may increase GDP by spending more on military goods. However, if this is at the expense of health care and education it can lead to lower living standards.

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Muhammad Hammad Tanveer graduated from the Virtual University Of Pakistan with a B.S. in Software Engineering and is now a writer for Pcbeducation.com and Education News Daily. His background in EDUCATION TUTORING brings a critical eye to his reviews and features, helping students make the best decisions for their studies.

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