Differences in economic development between countries

Economics · Economic development. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Economic development is an improvement in people's living standards and quality of life, not only a rise in output. Countries differ in income, productivity, population growth, saving and investment, education, healthcare, natural resources and the size of their three sectors.

These differences feed each other. Low income means low saving, so there is little investment in machines, schools and hospitals. Workers then stay unskilled and unhealthy, productivity stays low, and so does income. This is often called the poverty cycle.

As a country develops, workers usually move from the primary sector (farming, mining) to the secondary sector (manufacturing) and then to the tertiary sector (services).

Rules to remember

Productivity = output per worker (or per hour worked).
Low-income countries tend to have: a large primary sector, low saving and investment, fast population growth, low productivity.
High-income countries tend to have: a large tertiary sector, high saving and investment, slow population growth, high productivity.
Saving provides the funds for investment in capital goods, and investment raises productivity.
Better education and healthcare raise the quality of labour, so output per worker rises.
Fast population growth can mean output per head falls, even if total output rises.
Natural resources help only if the income is invested and shared; a country can be rich in resources and still poor.

Common mistake

Students assume that a country with many natural resources must be developed. Development depends on how the income is used: on education, health, investment and how widely it is shared.

Worked example

In Country M, 65% of workers are in farming and saving is very low. In Country N, 70% of workers are in services and saving is high. Which is likely to be more developed, and why?

A large primary sector usually means low output per worker, so incomes in M are low.
Low saving in M gives few funds for investment in machines, education and healthcare.
N's large tertiary sector and high saving point to high productivity and continuing investment.
Higher productivity gives higher incomes, more tax revenue and better public services.

Answer: Country N is likely to be more developed, with higher income per head and better education and healthcare.

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