Question

1. Compared to First World countries, developing countries would have _____.

a higher life expectancy

higher productivity rates

lower education levels

lower birthrates

a higher rate of private investment

2. In many less-developed countries, per capita GDP falls even though real GDP rises, because:

output grows at a slower rate than the population.

the GDP measures in developing countries are always inaccurate.

consumption spending exceeds investment spending.

these countries face an acute trade deficit.

prices increase faster than an increase in actual output level.

3. What is the main reason for the failure of import-substitution strategies to generate rapid economic growth?

Deteriorating terms of trade

Scarce natural resources

Inefficient allocation of resources

Lack of self-interested behavior by entrepreneurs

Insufficient subsidies to domestic producers

Answer 1

Answer to Question 1)

We look at all of the options available and determine the differences between First world countries and developing counterparts: -

1) A higher life expectancy: -

Developing countries do not have higher life expectancy as their systems of nutrition and health care are far less developed than first world ones. It is a fact that many children die of ailments which can be prevented and the overall health care in these countries suffers. Therefore, this option is false

2) Lower Education Rates: -

As the availability of capital is low in developing countries, their education sector suffers the most as governments do not have sufficient cash collections to promote the same, and private institutions remain beyond access for the general public.

Therefore, we can say that developing countries have lower education rates compared to first world developed ones.

This option is true

3) Lower Birth Rates: -

Developing countries such as Bangladesh, Pakistan and India suffer primarily because they have a large population to feed and the birth rates remain extremely high. Therefore, to say that developing countries have lower birth rates is false

4) Higher Private Investments: -

Private investments in developing countries are low. This is because investors do not prefer these countries because of their high taxations as well as lack of infrastructure when compared with developed counterparts.

This option is also false

Question 2)

Gross domestic product is the final value of goods and services being sold in a country. Per capita GDP refers to the distribution of this output among all people in a country by value. Real GDP on the other hand is GDP which is corrected for inflation. For example, if the GDP is thought to be 100$ and the inflation rate is 10%, the Real GDP is 90$. If the total population is 10, the Per Capita GDP is 9$ per person.

Per Capita GDP of developing nations remains low, primarily because the population in these countries grows higher than the total output levels. Option 1) Therefore is true we have examples of countries such as India, wherein even though the GDP level may have increased in 2 digits which is the highest across the world, yet the per capita GDP has not risen sharply as the population is expanding.

When we evaluate other options of the question, we cannot say that GDP measurement is inaccurate as often the same techniques used in developed countries are analysed and under reporting is avoided to ensure that the government can achieve its goals.

If consumption expenditure was high, per capita GDP would not have suffered. Therefore, that option is also inaccurate as increased expenditure indicate welfare in an economy.

Not all developing countries face fiscal deficits which are acute. With increased expenditure, and government relaxing norms, the fiscal deficit of developing countries has been controlled and is ever decreasing. Therefore, this option is also false.

Price increase in developing countries is not a measure of Per Capita GDP and over time, inflation rates in most developing countries has been stable.

Thus option 1) is the correct answer.

Question 3)

Import substitution refers to protectionism efforts whereby a country closes its economy for foreign goods and services. As a policy decision, however it has to face taxation from countries it has set high boundaries also. Therefore, on one hand exports decrease and on the other hand imports also decrease.

The net effect is that growth rates remain lower and the strategies have failed. The best option in this question is option 1)

When we look at other options such as Scarce Natural Resource or inefficient allocation, we cannot say this for certain that utilization by public or private enterprises is not efficient and on the other hand, we have numerous countries such as India and China which were previously promoting protectionism and had enough resources to produce but yet would fail as retrospective taxes would apply. Even when subsidies were being provided and there were still entrepreneurs which wanted to help the economy in growing it would not happen as other countries would not consider investment or imports due to high domestic trade barriers.

Thus, all options are false except option 1)

Please feel free to ask your doubts in the comments section.