Central Economics Wiki

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Poverty cycle:[]

Another cycle consists of the fact that low income leads to low savings which leads to low investment which leads to low income again. If the general income in a country is low, people in that country have less money to save. Additionally, they are unable to save a substantial percentage of their income because they must spend a greater percentage on necessary goods, such as food, making savings low. Since the quantity of loanable funds is low, it is very difficult to borrow money. This discourages investors from taking out loans, which makes investment low. Since investment is low, there is nothing to raise the general income of the country. Income remains low and the cycle repeats itself. Because you have lower investment power, it is harder for companies to trust their money in your hands. Also, foreign direct investment tends to decrease because the foreign countries see less opportunity to make money because the general population doesn't have very much money. The only way to escape from the poverty cycle is to raise two or more of these three aspects: income, savings, and investment. The most effective is investment if raised high enough, the cycle could be broken because a great amount of investment has a higher potential to bring in greater revenue for businesses, thus increase in income, which leads to more saving.

More examples of solutions are...

small increase of what the person has now in savings = increase in everything else, so it can slowly begin to transform into a positive feedback loop that actually helps the population instead of damaging it.

the more educated parents = more educated kids ; more education = higher income micro loans which can help the nation develop without them going deep into debt. Small individual business borrowing a small amount of money for investment.

== Institutional and political factors==

• Ineffective Taxation Structure: A country that cannot tax effectively does not receive a steady flow of income, leading to a unusual, unreliable pattern to government spending, eventually leading to a decrease in development projects. When the taxation systems in a government of an undeveloped country is ineffective, the revenue collected is lower. The ineffective taxation causes the government to provide little or no basic institutions such as education, infrastructure, effective banking systems and health care. When such institutions are omitted in a government the development of that country slows, and may halt competely.

Lack of Property Rights: Within a country lacking property rights it is more difficult for businesses to start up, since property barriers are in general not respected. Because people are less likely to follow property rules, this will cause for the demand for property to go down. A great example of a country lacking in property rights is North Korea, which is currently in a dictatorship. The result is widespread famine and the country's overall unhappiness.

 Political Instability: Political instability can lay waste to a country's infrastructure, and can prevent government income from being distributed in the manner most likely to lead to development. In order to enforce rules and keep order that allow society to function there is a need for government. (Political instability means people who don't listen to higher authority.) People must be willing to obey the laws of a country or else it will not work. A government is the system that would regulate this.

• Corruption: When there is corruption in a government the whole country suffers. The people of living under the rule of a corrupt government do not have the benefit of stable institutions, and thus will have a lower standard of living due to lack of development. This is a likely problem in an undeveloped country because the government is unable to do anything beneficial for the country and its people. A corrupt or an instable government will hinder any development in a country.

- Informal markets is also a factor to instituitional makets. An example of informal market is someone who is selling brand name shoes in a parking lot for very cheap. No capital market DOES NOT equal expanding and the informal market being not taxed = BAD! VERY BAD!

Infrastructure Edit

Infrastructure is the foundation of services that an economy needs to function. Roads, water supply and sewers are all types of infrastructure. These necessities need to exist in an economy. A lack of infrastructure prevents an economy from developing. If there are fewer roads in an economy, there will obviously be less transportation, thus making goods more inaccessible to distribute. If there is a lack of water supply, there will be a huge demand for water in addition to immense disease and dehydration problems. People will have overdependence on primary goods and there will not be enough to support everyone. A lack of infrastructure greatly affects a countries ability to grow and develop.

Infrastructure is one of the key factor to a developed economy. Without infrastructure an economy doesn't run. If infrastructure within a country is fairly developed the country itself will mimic in it's development level.

Infrastructure includes roads, sewers, water supply, all basic things a developed country would have. It is also very hard to have healthy workers without having these basic needs for a country.

== International trade barriers==

• Overdependence on Primary Products - Overdependence on primary products has a downward trend in its history. Primary products are income and price inelastic. Therefore, even if the economy goes up, it would have little to no effect on the income. A country having only primary goods is unsustainable due to the limited amount of resources. An example of the effects of overdependance would be countrys who rely on oil as their main source of income. As oil is a non-renewable resource, the growth/development that results fromthe oil profits is not sustainable in the long run. Also, the price for primary goods tends to fluctuate wildly and is highly subjective to the fluctuations in the global market. Over time, a downward trend may appear. This means that countries lose money over time, growing power. This overdependence on primary products is also the reason why many undeveloped countries are not as developed as others.

• Consequences of Adverse Terms of Trade - Adverse terms of trade can be a barrier to economic growth because it means that import prices have increased in relation to export prices. This would cause an economy to find itself deeper and deeper in debt, and less and less competitive with trading partners. Such consequences include higher costs of debt servicing, current account deficits from falling export revenue, reduction in much-needed imports (Ex: fuel, capital), and increase in market for illegal crops.

• Consequences of a narrow range of exports- A narrow range of exports is usually due to a countries’ overdependence on primary goods. These countries often put primary goods as the main focus and overlook the opportunities of producing secondary and tertiary goods. There is also a lack of their products’ diversity. That is because these countries are often good at making a certain good and if there was ever a destruction or depletion of these goods, the exports drop dramatically down. These are the consequences of a narrow range of exports. This is often the reason why it is complicated for less developed countries to become more developed. Due to their heavy reliance on primary goods.

• Protectionism in international trade- Protectionism is the act of putting barriers into place to give domestic industries an edge over foreign competitors. Although domestic industries gain an advantage from proctectionism, consumers do not, because they must pay the price of the implied higher cost for goods produced domestically. In other words trade barriers are almost never a good idea, they represent a beggar thy neighbor philosophy and generally result in poor relationships between countries. Although there are very rare circumstances where trade barriers may be called for it is infrequent and should be taken as a general rule that trade barriers are bad. Note Ricardo's comparative advantage theory.

• Indebtedness- Country A borrows money from country B and uses it in such a way that doesnt improve their economy. Country A will then borrow money from country C, in order to pay off country B's loan. This therefore causes indebtedness and is an international trade barrier. Generally to prevent this from happening institutions are put in place to provide assurance that countries will spend money well. See institutions for more info.

• Non-convertible currencies- Non-convertable curriences is when a country has a fixed exchange rate, so their country is unable to buy or sell currencies. They won't be able to convert thier currieces which makes it harder for their country to import or export goods. Because their country is not able to import or export goods, their GDP must be pretty low since it's only their own country who is buying their own things. Not having a relationship with other countries as in imports/exports makes it harder for the country to become develope. Not only can't the country be able to buy or sell, other countries may be unattracted to it also and not buy nor sell with the country that has the non-convertible currencies problem.

• Capital flight- Capital flight is when foreign investments take all their money away from a country because something occured in their economy to "spook" them out of investing in that country. They decrease their investments and flow of money into the country. This is an international barrier to develpment because when the foreign investment is taken away, the investment in the country decreases which reduces the inward flow of money to the country. This doesn't help their growth in the slightest, and there would be less development in the country. This generally happens when the country is doing poorly. So as a result of the country doing poorly and the disppearance of the foreign investment, the country as a whole is serverely crippled.

An example of Capital flight is when the United States completely moved Google out of China. China was using google to spy on certain people through the Gmail account system. Google didn't like that they were doing this so they prohibited the use of google anywhere in China. They moved Google over to Japan to do business with them.

Social and cultural factors acting as barriersEdit

Social barriers to growth and development are any social issues that create barriers to economic development in either a moral or immoral way. These barriers are often results of philosophical and co-operative beliefs.

• Religion: Religion acts as a barrier to development because conflicting religions will fight, which impedes the growth of a country. Instead of working together, religions battle it out. Some problems may lead to persecution, which distracts the country so they put less time, and effort into developing their counrty. Another reason why religion acts as a barrier is because it ties into tradition. Some religions have certain rules and regulations that will halt the development process and slow it down. The ways of the old act as a barrier to development due to a common fear of change (this fear exists in all humans).

• Culture: Culture acts as a barrier to trade in a similar way as religion, meaning it prevents development through restrictions over what is socially acceptable. For example, if contraceptives are considered taboo, diseases such as AIDS will be more common in a country, lowering that country's human capital and chances for development.

• Tradition: Traditionalism acts as a barrier to development because traditions can be old and out of date as a result of social conservation. This means cultures with many traditions are at a disadvantage to other countries with more modern methods because those who believe in traditionalism do not want to change certain habits, and if the country does not change, it will never get developed. For example, attempting to create competitive and entrepeneurial forces in agriculture has sometimes been met with confusion in countries where people cannot imagine individuals personally owning land.

• Gender Issues: Most often, "gender issues" refers to sexism. If women are not allow to contribute to the economy, it is much harder for a country to develop due to the fact that women could increase productivity many times over. Having only men lead the government of a developing country can be a sign of corruption. This is a problem present in many developing country's governments. Also, if male children are preferred over female, it can lead to infanticide. In extreme circumstances, there may be considerably less females in respect to males in the country and overall efficiency will decrease, thus hindering development. Gender equality is dependant upon several factors, including education (educated women can take control of their rights; this enables them to join the workforce), legal rights (equal legal rights make women less dependant upon men for economic stability), and health care. An economy that does not fully utilize its resources -- in this case all potential persons in the workforce -- it is at a serious disadvantage in terms of development.