What this lesson teaches
I can explain the causes and effects of differences between countries in income, productivity, population, sectors, saving, education, health and resources.
Syllabus K343, 5.4.1. Causes and consequences of international differences: differences in: income, productivity, population growth, size of primary, secondary and tertiary sectors, saving and investment, education, healthcare, natural resources
Make a guess
Most workers in a country work on small farms with simple tools. Why are incomes there usually low?
- Farmers do not want to earn more.
- Output per worker on such farms is low.
- Farm work is easy, so it pays little.
Show the answer
Output per worker on such farms is low.
Small farms with few machines produce little per worker, and harvests depend on the weather, so incomes stay low.
Countries with higher productivity, larger service and industry sectors, and more saving and investment tend to have higher incomes and more development.
Economic development means a rise in living standards, not just in output: higher incomes, longer lives and better schooling. Developed countries score high on these measures and developing countries lower. The syllabus lists eight differences that help explain the gap. This lesson covers four: income, productivity, the size of each sector, and saving and investment.
Income and productivity. Productivity is output per worker. In developed countries, workers have more machines, better technology and more skills, so each worker produces more. Firms can pay more to workers who produce more, so incomes are higher. Higher incomes let families buy better food, housing and healthcare, which raises living standards.
Size of the sectors. In many developing countries most people work in the primary sector, often on small farms with simple tools. There, output per worker is low and harvests depend on the weather. In developed countries most people work in the tertiary sector, and many in secondary industry, where output per worker is higher. Moving workers from farms to factories and offices raises average income.
Saving and investment. Richer households can save part of their income. Banks lend those savings to firms, which invest in machines, factories and roads, so workers become more productive and incomes rise further. Poorer countries can be stuck in a cycle: low income, so little saving, so little investment, so low productivity and low income again.
Put these in order
Put the cycle that can keep a developing country poor in order.
- Firms find little money to invest in machines and roads.
- Incomes stay low, and the cycle repeats.
- Households can save very little.
- Productivity stays low.
- Incomes in the country are low.
Show the answer
- Incomes in the country are low. With low incomes, families must spend almost everything on basic needs.
- Households can save very little. Banks have only a small pool of savings to lend.
- Firms find little money to invest in machines and roads. Without new capital, workers keep using simple tools.
- Productivity stays low. Low output per worker keeps wages and incomes low.
- Incomes stay low, and the cycle repeats.
- Development factors
- Income, productivity, population growth, sector structure, saving and investment, education, healthcare, resources.
- Poverty cycle
- Low income, low saving, low investment, low productivity.
Worked example: How Singapore broke out of the cycle
When Singapore became independent in 1965 it had high unemployment and few industries. Today its income per head is among the highest in the world.
- Saving: CPF made workers save part of every pay cheque, so the country had a large pool of savings to fund housing and infrastructure.
- Investment: the government built ports, industrial estates and an airport, and invited foreign MNCs to set up factories.
- Sectors: workers moved from low-paid jobs into manufacturing, and later into finance, trade and other services.
- Productivity: more machines and better skills meant each worker produced more, so wages and living standards rose.
Watch out for this
Countries rich in natural resources are always developed.
Resources help, but development also depends on education, investment, good government and how the resource income is used. Some resource-rich countries remain poor.
Check your understanding
Why does a large primary sector often go with lower incomes?
- The primary sector pays high wages, so firms there cannot afford to grow.
- Primary sector jobs, such as small-scale farming, often have low productivity.
- It means the country has few natural resources to sell abroad.
Show the answer
Primary sector jobs, such as small-scale farming, often have low productivity.
Right. Low output per worker means low incomes.