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YOUR NOTES
IGCSE Economics CIE 

5. Economic Development

CONTENTS
5.1 Living Standards
5.1.1 Indicators of Living Standards
5.1.2 Living Standards & Income Distribution
5.2 Poverty
5.2.1 Causes of Poverty
5.2.2 Policies to Alleviate Poverty
5.3 Population
5.3.1 Population Growth
5.3.2 Effects of Changing Population Sizes
5.4 Differences in Economic Development
5.4.1 Reasons for Differences in Development

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5.1 Living Standards YOUR NOTES


5.1.1 Indicators of Living Standards
Real GDP Per Capita
Economic development is the sustainable increase in living standards for a
country, typically characterised by increases in life span, education levels, &
income
There are many measures of living standards
Single indicators e.g. real gross domestic product/capita, number of
doctors/1000 people; infant mortality rate; % of the population with access to
clean drinking water
Composite indicators such as the Human Development Index (HDI)

The Distinction Between Real, Nominal & Per Capita GDP

In economics, the use of the word nominal refers to the fact that the metric has
not been adjusted for inflation
Nominal GDP is the actual value of all goods/services produced in an economy in
a one-year period
There has been no adjustment to the amount based on the increase in
general price levels (inflation)

Real GDP is the value of all goods/services produced in an economy in a one-

year period - & adjusted for inflation
For example, if nominal GDP is $100bn and inflation is 10% then real GDP is
$90bn
Real GDP per capita = rGDP / the population
It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living betweencountries:
For example, Switzerland has a much higher GDP/capita than Burundi
It is useful to know the rGDP/capita, however it has the following disadvantages
It is a single indicator so provides very limited information
It is an average so there may be significant poverty in many parts of a country
that has a high rGDP/capita

 Exam Tip
When an exam question uses the phrase 'at constant prices' it is referring to
real GDP. For example, a question may read, 'Explain what is meant by a rise
in GDP at constant prices'. This requires you to define real GDP and then
explain the rise.

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The Human Development Index (HDI) YOUR NOTES

Developed by the United Nations, it is a combination of 3 indicators 
1. Health, as measured by the life expectancy at birth e.g.in 2019 it was 81.2 years in
the UK
2. Education, as measured by a combination of the mean years of schooling that 25
year olds have received, together with the expected years of schooling for a pre-
school child
3. Income, as measured by the real GDP

Each indicator is given equal weighting in the index

The index ranks countries on a score between 0 & 1
The closer to 1, the higher the level of economic development & the better the
standard of living
A value of < 0.550 is considered low development e.g. Chad 0.394
A value of 0.550-0.699 is considered medium development e.g. El Salvador
0.673
A value of 0.700-0.799 is considered high development e.g Thailand 0.777
A value ≥ 0.800 is considered very high development e.g. Norway 0.957

An Evaluation of HDI

1. It is a composite indicator & includes several important indicators of living

standards
2. It includes rGDP/capita which is an average - so the HDI still does not take into
account inequality in the distribution of income
3. It does not measure environmental damage or resource depletion
4. It does not take into account cultural differences or measure qualitative factors
such as happiness or equal rights

 Exam Tip
Both MCQ & structured questions often ask you to compare or analyse the
HDI & GDP/capita of a country. On the whole, there is usually a positive
relationship. Countries with a higher HDI value usually have a higher
GDP/Capita. However, look for exceptions in the data presented - is the
GDP/capita rising while the HDI is falling? If so, one reason may be that the
inequality in the country is worsening (rich getting richer & the poor,
relatively poorer).

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5.1.2 Living Standards & Income Distribution YOUR NOTES


Reasons for Differences in Living Standards & Income
Distribution
There are many reasons that cause differences in living standards & the income
distribution within & between countries

1. Economic system: a mixed economy provides the highest quality of living

standards. There is much debate on how much government planning there should
be. However, countries in Scandinavia with a more mixed economic system score
very highly on HDI & living standards. With completely free markets (unchecked
capitalism), wealth inequalities increase exponentially. With planned economies,
shortages abound
2. The Government: the values of a government influence their economic agenda, tax
system & government spending. Governments are more easily held accountable by
the citizens in countries with a low level of corruption

3. Corruption: significantly undermines quality of life & the standards of living

4. Tax system: most countries have a progressive tax system for corporate &
personal income tax. However, there can be many indirect taxes which completely
change the quality of life for the poorest households
5. Productivity levels: differences in skills result in difference in productivity &
higher levels of productivity are rewarded with higher wages, which leads to a
better standard of living
6. Size of the population: more densely populated countries or cities face more
challenges. A larger population can mean higher tax revenues but at the same
time, government expenditure on services is spread across more people often
resulting in less government spending/capita
7. Education levels: These directly influence productivity & wages
8. Inflation: Tends to impact poorer households more as any increase in general
price levels represents a larger absolute value of their wages when compared to
wealthier households
9. Regional differences: Many countries have historically poor areas, as well as
wealthier ones. Poverty in certain regions can be much higher
10. Personal freedoms: religious, economic, personal, political & civil freedoms
improve the quality of life within a nation

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5.2 Poverty YOUR NOTES


5.2.1 Causes of Poverty
Absolute & Relative Poverty
Poverty is a situation where a person lacks the financial resources to sustain a
basic standard of living
Economists distinguish between absolute & relative poverty
Absolute poverty is a situation where individuals cannot afford to acquire the
basic necessities for a healthy & safe existence
These necessities include shelter, water, nutrition, clothing & healthcare
In 2022, the World Bank defined absolute poverty as anyone who was
living on less than $1.90 a day
Absolute poverty is more prevalent in developing countries than
developed ones
Relative poverty is a situation where household income is a certain percentage
less than the median household income in the economy
Poverty in a household is considered relative to income levels in other
households
E.g. The UK defines relative poverty as households that are living with less
than 60% of the median household income
In May 2022, the median UK monthly household income was £2072/month
This meant that the relative poverty line was any household earning less
than £1243,20/month
Relative poverty is the main form of poverty that occurs in developed countries

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Causes of Poverty YOUR NOTES

There are many causes of poverty. However, poor countries have several common 
characteristics which can be summarised in a poverty cycle diagram

Poverty is caused by a lack of both economic growth & human development

Low wages represent the intersection of economic growth & human development
& are the major cause of poverty
Low wages are usually the result of unemployment, informal employment, a
lack of skills, or a primary sector based economy
Education & healthcare cost money & with lower wage levels these are not
accessible, resulting in poor human capital
People find it harder to stay well or to recover from illness resulting in lower
productivity & shorter life expectancy

Low productivity results in low wages & the cycle continues

Populationswith a large number of dependents (old people & children) for each
working household tend to experience higher levels of poverty

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5.2.2 Policies to Alleviate Poverty YOUR NOTES


Policies Aimed At Alleviating Poverty
The poverty cycle diagram (below) was introduced in the previous subtopic &
helps to explain the causes of poverty
Any policy that helps to break the poverty cycle at any point will help to improve
the standards of living within a country
Policies used to alleviate poverty include promoting economic growth, improving
education, providing more generous state benefits, progressive taxation, & the
establishment/increase of a national minimum wage

Policies which help to improve any factor in the diagram will help to alleviate poverty

How Different Policies Alleviate Poverty

Policy Impact on Poverty

Explanation
Cycle

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Promoting economic Removing protectionism or Higher growth →

YOUR NOTES
growth engaging in expansionary higher wages → better 
demand & supply-side education/healthcare
policies will promote growth → better human capital
Data shows that economic growth → better productivity
has a very positive impact on → higher income
economic development
In most cases growth precedes
development
Often in less developed countries,
economic growth is linked to one
industry & generates many
negative externalities of
production possibly resulting in
decreased living standards

Improving education Investing in this supply-side Higher education/skill

policy increases the potential levels → higher human
output of the country (shifts the capital → increased
production possibility frontier productivity → higher
outwards) output → higher
income

More generous state State benefits are usually given to More benefits → higher
benefits the poorest & most vulnerable wages → better
people in society education/healthcare
State benefits include → better human capital
unemployment & disability → better productivity
payments, pension payments, → higher wages
heating discounts, public
transport subsidies etc.

Progressive taxation A progressive tax system Higher redistribution

redistributes from those with → better
higher income to those with lower education/healthcare
income & reduces income → better human capital
inequality → better productivity
Redistribution often starts with → higher income
the provision of free education &
healthcare
Sometimes the benefits of a good
progressive tax system are
eradicated by the penalties
imposed through multiple
regressive (indirect) taxes

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Establishment/increase Minimum wages are set above Higher wages → better

YOUR NOTES
of national minimum the free market rate education/healthcare 
wage Firms are not allowed to pay → better human capital
anyone less than the legal rate → better productivity
→ higher wages

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5.3 Population YOUR NOTES


5.3.1 Population Growth
Factors that Affect Population Growth
Population refers to all of the inhabitants of a particular country
The population growth rate is the size of the change in the population of a
country, expressed as a percentage
The following factors affect population growth
The annual birth rate
The annual death rate
The net migration
A higher birth rate & lower death rate would both increase the population
More immigration than emigration would increase the growth rate
All countries have different rates of population growth
Population growth rates are currently highest in less economically developed
countries such as Niger, Mali and Zambia
Population growth rates are lowest in more economically developed countries
In some MEDCs such as Italy and Japan, the population is decreasing as the
number of deaths is higher than the number of births

 Exam Tip
MCQ will often check your understanding of the differences between these
terms. Remember immigration & emigration are not the same. Immigration
is the inward movement of people into a country. Emigration is the outward
movement of people from a country.

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Reasons For Different Rates of Population Growth YOUR NOTES

There are two broad causes of population change 
Migration (explained above)
Natural population change (birth rates & death rates)

Natural Causes of Population Change

Natural change in population is calculated by deducting the death rate from the
birth rate

The following factors led to a decrease in the death rate

The agricultural revolution led to higher yields & healthier, more varied diets
Improvements to medicine & medical care
Improvements to technology & transport, leading to a wealthier population
which increases life expectancy
Improved housing & sanitation
The birth rate has remained high in LEDCs due to
Lack of access to family planning & contraception
An increase in women surviving childbirth
Families continuing to have large numbers of children to look after their
parents in old age & to help support the family
Culture of having larger families which takes many years to change
Religious reasons

The birth rate has fallen significantly in many MEDCs due to

Increased access to family planning & contraception
Changing social norms which include starting families later, having fewer
children, or remaining single
Increased costs of child rearing & university education

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5.3.2 Effects of Changing Population Sizes YOUR NOTES


The Optimum Population
Overpopulation occurs when there are more people in a country/region than can
be supported by its resources & technology & leads to
Higher levels of pollution
Higher crime rates
Higher unemployment or underemployment
Higher levels of food & water shortages
Higher pressure on services such as hospitals & schools
Underpopulation occurs when there are more resources available than the
population can use effectively & may lead to
Fewer people paying tax which can lead to higher taxes
Underused resources, which can lead to wastage
A shortage of workers
Lower levels of exports & production which affects the wealth of an area
Fewer customers for goods & services
Optimum population occurs when there is a balance between the number of
people & the resources/technology available

Optimum Theory of Population

The optimum population results in the highest standard of living

There are not so many people or so few resources that the standard of living
falls
There are enough people to develop the resources of the country

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YOUR NOTES
 Exam Tip
It is important to remember that over-population does not just mean there 
are a lot of people & under-population that there are few people. The terms
refer to the balance between population & resources. There may be many
people in a country, but it is only over-populated when there are too few
resources to support that population.

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Population Distribution YOUR NOTES

The characteristics of a population (the distribution of age, sex, ethnicity, religion 
etc), is known as the population structure
The population structure is the result of changes in:
the birth rate
the death rate
net migration
The two main characteristics of age & sex can be shown on a population pyramid

Population Pyramids
Population pyramids are used to display the gender & age structure of a given
population
They illustrate the distribution of population across age groups and between
male/female
Population pyramids can be used to identify the following groups:
Young dependents
Old dependents e.g number of retired people
Economically active (working population or labour force)
Dependency ratio

Example 1 - Niger As A Less Economically Developed Country (LEDC)

Population Pyramid - Niger

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LEDCs like Niger have a concave pyramid shape which indicates YOUR NOTES
High birth rate

Low life expectancy
High death rate but starting to decrease (people dying through every age
group)
High infant mortality rate (significant decrease between 0-5)
Young dependent population dominates the distribution

Example 2 - USA As A More Economically Developed Country (MEDC)

Population Pyramid - USA

This population pyramid indicates:

Decreasing birth rate - there is a smaller population reading down from age
29
Increasing life expectancy - indicated by the relatively straight sides reaching
the age of 70, followed by a good proportion of people living much longer
Decreasing death rate - indicated by the relatively straight sides reaching the
age of 70
Low infant mortality - hardly any change between 0-9 years
Larger working age population - 15 to 69 represents a large proportion of
the population

Example 3 - Japan As A More Economically Developed Country (MEDC)

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YOUR NOTES


Population Pyramid - Japan

This population pyramid indicates

Decreasing birth rate - indicated by decreasing population levels from age 29
Increasing life expectancy - indicated by the relatively straight sides reaching
the age of 74, followed by a good proportion of people living much longer
Death rate is higher than the birth rate due to the ageing population
Low infant mortality
Ageing population - older dependent population with large proportion of the
population older than 40

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Effects of Population Changes YOUR NOTES

Population changes can have major impacts within the economy resulting in 
changes to consumption, production, lifestyle, standards of living & government
policies (fiscal, monetary & supply-side)
Typical changes that occur are
Progressively ageing populations as economies develop
Falling birth rates as economies develop
Swings in net migration as influenced by war, famine, natural disasters &
government policy

Ageing Populations
Many developed economies are experiencing ageing populations & an increase in
the older dependent population
The implications of this include
Increased pension payments by governments
Increased need for care homes (public & private)
Increased pressure on the healthcare service & social care results in higher
government spending
It also results in a smaller labour force
& often Governments collect less tax
Firms suffer worker shortages
Labour shortages result in increased wage costs for firms

Falling Birth Rates

Falling birth rates have the following impact on an economy
School closures due to fewer children
Future labour shortages
Governments typically put in place incentives that encourage families to have
more children
Governments may change the migration laws to encourage immigration so
that labour shortages are prevented
Excessive immigration can change the nature & culture of different
regions within a country

Migration
In some countries migration can lead to an imbalance in the population structure
e.g. the UAE has significantly more males than females
Rapid population growth caused by migration can lead to
Increased pressure on services such as healthcare & schools resulting in
increased costs for government
A shortage of housing which generates social issues in society
Increased traffic congestion which is a negative externality
Increased water & air pollution which are negative externalities
Food shortages

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5.4 Differences in Economic Development YOUR NOTES


5.4.1 Reasons for Differences in Development
Causes of Differences in Development
Economic development is the sustainable increase in living standards for a
country, typically characterised by increases in life span, education levels, &
income
Two indicators used to compare development are the real GDP & the Human
Development Index (see sub-topic 5.1.1)
Countries are all at different points of development& economists distinguish
between them using different criteria
E.g. HDI has five categories of development based on the HDI score
Low human development (<0.550)
Medium human development (0.550–0.699)
High human development (0.700–0.799)
Very high human development (>0.800)
There are numerous reasons for these differences including differences in
income, productivity, population growth, size of primary, secondary & tertiary
sectors, saving & investment, education & healthcare

Causes of Differences in Development

Factor Explanation

Differences in income Countries with a higher GDP/capita tend to be more

developed
Even with high GDP/capita, there may be significant
inequality in the distribution of income resulting in poor
living standards for many

Differences in Differences in skills result in difference in productivity

productivity Higher levels of productivity are rewarded with higher
wages, which leads to a better standard of living

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Differences in More densely populated countries or cities face more YOUR NOTES
population growth challenges 
A larger population can mean higher tax revenues for the
government but at the same time, government expenditure
on services is spread across more people
Poorer economies are characterised by less government
spending/capita

Differences in Economies with a larger proportion of secondary & tertiary

economic sector sizes activity tend to be more developed due to the wages
associated with each sector
Primary sector workers are usually paid low wages due to
the unskilled nature of the job & the fact that raw materials
often generate the lowest profits in the production chain
Secondary sector workers add value to the raw materials &
these products sell for higher profits. Therefore wages tend
to be higher than primary sector wages
Tertiary sector workers are paid the highest. Their jobs
often require highly valued skills that take years to acquire
& the products they sell or services they provide can be
complex & expensive e.g. artificial intelligence coders

Differences in saving Higher savings result in higher investment & economic

& investment growth. It is believed that as economies develop, savings
increase
Increased savings → increased investment → higher capital
stock → higher economic growth → increased savings
If the dependency ratio is high it means there is less
money available for savings & investment

Differences in These directly influence the level of skill in an economy

education Improved skills results in higher productivity & wages

Differences in The level of health directly impacts productivity of labour

healthcare Productivity influences output & income
Developed economies tend to have healthy workforces
The less developed the economy, the more sickness &
disease there is

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