Characteristics of Developing Countries

Developing countries are also called poor countries. Sometimes they are often called underdeveloped economics. According to the UN criteria, countries with less than $400 level of per capita income countries are designated as low income countries and countries with less than $750 per capita income as called less developed economics. The following are the main characteristics of developing countries:

General Poverty

Developing countries are poor. By definition, GDP and Per Capita Income are at low level. General living standard of people in these countries is very slow. Poverty is visibly disturbing every aspect of life. General health services for people is insignificant. The life expectancy at birth does not exceeds 60 years.

High Dependence on Agriculture

Agriculture is the main occupation in developing countries. More than 70 percent of active labor force is engaged in this primary sector. Population increases and the increased labor stick to agriculture thereby over burdening the firm size. There is low output per head.

Underutilized Natural Resources

Most of the developing countries are rich in natural resources. However, their exploration and exploitation is limited. Sometimes, foreign companies control them. Generally, raw products are exported at low prices.

Lack of Industries and Enterprises

The industrial sector in developing countries is at the primary stage of development. Its contribution to GDP is less than 10% employing 2 to 4% of the labor force. Industrial growth is very slow.

Lack of Capital and Technology

Capital deficiency is another common problem of developing countries. Because the countries are poor, they save less which results in low capital formation. They possess less investment capital. In addition their existing technology is old and unproductive.

Lack of Basic Infrastructures

The factors that help for development are called infrastructures. Good road system, highways, telephone, services, big dams and canals, banks and financial services are some examples of the necessary infrastructures.

Vicious Circle of Poverty

Developing countries are poor. They have low per capita income. Low income means less saving, that is less capital and less investment. Low investment leads to less production that means low income. The vicious circle of poverty is complete. It proves that a poor country is poor because it is poor. It is better understood from the following relation:

Low Investment-Low Production-Low Capital-Low Investment-Low Production-Low Income

Demographic Characteristics

There is high growth rate of population in developing countries. It is as high as 3 percent per annum. Children under the age of 15 constitutes a large proportion, generally more than 40 percent of the total population. Together these two age groups from about 45 percent of the population. Because these groups are economically inactive, they have to depend on the family.


Socio-cultural Characteristics

Different kinds of social groups reside in a country. They differ in terms of religion, castes, and creeds, cultures and customs, languages and beliefs, etc. Such social and cultural values have deep impact in the economy of a nation, Developing countries barbour may discordant social patterns in their economic life.

Dualistic Economy

All the sectors of economy have not been developed in developing countries. Employment opportunities or activities exists in urban areas whereas traditional production method is used in rural areas. Employment opportunities are less. Hence, these countries have dualistic economy which results in various problems with formulating economic policies.

Indicators of Economic Development

Measurement of economic development and express in definite index is very difficult task in economics. So many opinions are found to indicate level of economic development of a nation. However, some common and popular indicators that used to measure development are discussed below:

Volume of Per Capita Income

Per Capita Income is first and most important indicators of economic development of a nation. It is commonly used by all nations in the world along with UN while measuring economic position of the nation. The PCI of Least Developed Countries (LDCs) is less than $400. There are 49 countries LDCs across the globe.

Rise in Factor Productivity

Development means rise in production and productivity of factors of production. Productivity implies increased per unit of production of factors of production land, labor, capital and organization in terms of rent, wages, interest and profit.

Rise in Living Standard

Another indicator of development is living standard of common people which should go on rising to higher levels. The very objective of development is to provide better life to people. It refers to increase in average consumption level of individual and society.

Physical Quality of Life Index

Physical Quality of Life Index is a common indicator of development. It is computed from life expectancy at birth, infant mortality rate and literacy rate of a country. If people live longer and are literate, PQLI value will be high. It is measured in scale of 1 to 100.

Human Development Index

The Human Development Index as an indicator was introduced by UNDP in the World Human Development Report in 1990. Since then, it has been the most popular indicator of development. Its range of measurement is in between 0 to 1.


Poverty Alleviation and Inequality Reduction

As a nation develops, poverty must be reduced and the gap between the rich and poor must be narrowed down . Poverty limits opportunities of common people to uplift their life. It weakens their income earning capability. Their access to health, education and skill development is most essential to minimize poverty rate.

Economic Growth and Development

Economic Growth

An exact definition of economic growth has not been developed yet. However, it is defined as an increase in aggregate output of goods and services in a country during a given period of time.

In the words of Kuznet,"Economic growth is a long-term rise in the capacity to supply increasingly diversified economic goods and services to its population.

Economic Development

The concept of economic development changes along with changes in human attitudes, behaviour and activities. The definition given in a special period may not be suitable for another period. Hence, it is a dynamic subject of study. Economic development in the decade of 1950, compared in terms of per capita income. Similarly, in the decade of 1960, it was linked with human resource development.

Economic Development:Meaning and Indicators

Liberty from poverty is the essence of development. A better society with modern amenities where individuals enjoy quantitatively higher life and a dignified nation committed to sustained and advanced standard of living for longer period for a longer segments of the people are the concerned of economic development.

According to Adam Smith, "Development as an inquiry into the nature and causes of wealth of nation and their rise."

Similarly, Karl Marx defined,"Development in terms of fair share of national income for all including workers."

M.P. Todaro defined, "Development as in terms of three values

• Life Sustance
  
• Freedom of Choice;
• Self-Esteem.

Life Sustance

It means that the basic amenities like food, clothing, shelter, health, education, etc. It means availability of basic amenities to everyone.

Freedom of Choice

means freedom from hunger deprivation, destitution. Choice means expansion of capacity to choose different life patterns and way of living.

Self-Esteem

It means dignity of a person.

Development means raising level of living standard of the common people, per capita income to be able to choose a better alternatives to live in society. As a policy, it means creating new and better opportunities of employment and reduction inequality.

Recently, UN defined development as;

• Equality

A nation is supposed to be economically developed, if there is:

1. Equal employment opportunities;


2. Equal burden of taxation;


3. Equal credit facility.

• Sustainability
  

A nation is supposed to be economically developed, if there is:

1. Long lasting development in financial sector;
2. Long lasting development in environment;
3. Long lasting development in physical infrastructures.

• Productivity

A nation is supposed to be economically developed, if there is high amount of factor income of all factors of production.

• Employment

A nation is supposed to be economically developed, if there is:

1. Political freedom;
2. Women empowerment;
3. Public participation in development;
4. Human rights.

Definition of the Economics

Economics is the branch of social science which deals with production, distribution and consumption of available goods and services and their proper management. So, economics deals with the trade cycle, production, distribution, comsumption of goods and services in a systematic manner. Adam Smith (1723-1790), was consider as the "Father of Economics". He published his book entitled "The Wealth of Nations" in 1776. In this book he also talks about the "invisible hands". After the publication of the book entitled "The Wealth of Nations", he was become the most famous person and become the leader of classic ecomic period. In which he give the first concept of economics and it's importance to the human beings. In this book he emphasized the social human behaviour and his social activities with rational behaviour. He was the leader of classical economists. Since Smith's book was publishd he was famous for more than a century. It means that, he wasn't critisized till hundred years. Aftrewards, he was criticized in 1890, after another well functioned definition was published. And, starts middle age of the development of economics, which was lasted in 1932, when modern era of economices come into existance.

Difficulties in Measuring National Income

There are many difficulties in measuring national income of a country accurately. The difficulties involved in national income accounting are both conceptual and statical in nature. Some of these difficulties involved in the measurement of national income are discussed below:

Non Monetary Transactions

The first problem in National Income accounting relates to the treatment of non-monetary transactions such as the services of housewives to the members of the families. For example, if a man employees a maid servant for household work, payment to her will appear as a positive item in the national income. But, if the man were to marry to the maid servant, she would performing the same job as before but without any extra payments. In this case, the national income will decrease as her services performed remains the same as before.

Problem of Double Counting

Only final goods and services should be included in the national income accounting. But, it is very difficult to distinguish between final goods and intermediate goods and services. An intermediate goods and service used for final consumption. The difference between final goods and services and intermediate goods and services depends on the use of those goods and services so there are possibilities of double counting.

The Underground Economy

The underground economy consists of illegal and uncleared transactions where the goods and services are themselves illegal such as drugs, gambling, smuggling, and prostitution. Since, these incomes are not included in the national income, the national income seems to be less than the actual amount as they are not included in the accounting.

Petty Production

There are large numbers of petty producers and it is difficult to include their production in national income because they do not maintain any account.

Public Services

Another problem is whether the public services like general administration, police, army services, should be included in national income or not. It is very difficult to evaluate such services.

Transfer Payments

Individual get pension, unemployment allowance and interest on public loans, but these payments creates difficulty in the measurement of national income. These earnings are a part of individual income and they are also a part of government expenditures.

Capital Gains or Loss

When the market prices of capital assets change the owners make capital gains or loss such gains or losses are not included in national income.

Price Changes

National income is the money value of goods and services. Money value depends on market price, which often changes. The problem of changing prices is one of the major problems of national income accounting. Due to price rises the value of national income for particular year appends to increase even when the production is decreasing.

Wages and Salaries paid in Kind

Additional payments made in kind may not be included in national income. But, the facilities given in kind are calculated as the supplements of wages and salaries on the income side.

Illiteracy and Ignorance

The main problem is whether to include the income generated within the country or even generated abroad in national income and which method should be used in the measurement of national income.

Besides these, the following points are also represents the difficulties in national income accounting:

• Second hand transactions;
• Environment damages;
• Calculation of depreciation;
• Inadequate and unreliable statistics; etc.

Product Approach of NI Accounting

According to this method, national income is measured in the form of total product obtained from each economic sector such as primary, secondary and tertiary sectors. The product approach consists the following:

Primary Sector

It includes agriculture based productions like fishery, forestry, and other production activities.

Secondary Sector

It includes manufacturing, electricity, water supply and such other public welfare activities.

Tertiary Sector

It includes banking, insurance, transport and communication, defense, administration and such other institutions. Thus,

GDI=Total Production of (Primary+Secondary+Tertiary)sector
GNP=GDP+NFIA

In order to solve this problem, we can either of use the following two methods:

Final Product Method

GNP is the money value of final goods and services produced during a year. So, national income is measured by finding the market value of all final goods and services produced in the economy during a year.

Value Added Method

In this approach, the value added at different stages of production is calculated and then for estimating national income. According to this approach, national income is the sum total of value added by different producing units of a country in their production process. Thus,

Value Added=Value of Output-Cost of the Goods

Income Approach of NI Accounting

This approach is based on the estimation of income of various factors of production. Income method considers payments made to all productive resources of the country in the form of rent, wage, interest and profit. Thus,

GDI = Rent+Wage+Interest+Corporate Profits along with Indirect Taxes and Depreciation

GNI = GDI+NFIA

NNI = GNI-Depreciation

It doesn't includes the followings:

1. The income earn from the sale of car, house, property, etc. produced in past.
2. The income earned from the sale of stocks, bonds.
3. Transfer payments from government.

The income method consists the following:

Wages and Salaries

It includes the wages and salaries received by the employees during the year plus certain supplements like provident fund and other labor income.

Rent

Rent includes the rent of land, factories, and houses from where the production process is carried out to supply goods and services to the consumer.

Interest

It includes the net interest income received by the people of the country from the investment as a factors of production.

Corporate Profits

It consists of corporate profits with inventory valuation and capital consumption, adjustments. It is the profits before tax, which consists of dividend, profit, tax and undistributed profits.

Depreciation

The depreciation made by each firm for the repair and maintenance of capital goods is also included in national income.

Net Indirect Taxes

The income generated from indirect taxes is also included in national income accounting approach.

Measurement of National Income

There are three ways of calculating income. They are:expenditure, income and product method. Any of these methods can used in calculating national income. But, the choice of a particular method depends on the availability of data. The three approach are:

Expenditure Approach

Expenditure approach measures national income as the aggregate of all final expenditure made by different agents of the economy during a year.

GDP=C+G+I+(X-M), and
GNP=C+I+G+(X-M)+NFIA

Where,
C=Consumption
I=Private domestic expenditure
G=Government expenditure
NFIA=Net Factor Income from Abroad
X-M=Exports minus Imports

The expenditure account consists of the following four components:

Personal Consumption Expenditure

It includes the consumption expenditure made by individual consumers for both durable and non-durable goods and services produced in the economy.

Gross Private Domestic Investment

It includes private investment in capital goods like machinery, plant, equipment, etc. But the expenditure made on the goods and services produced in the past and the financial made in credit instrument are not included.

Government Expenditure

It includes government expenditure on national defense and social sector. But, transfer payments made by the government on social security are not included in GNP.

Net Exports

It means the difference between export earnings and import expenses. The imported goods are not produced within the country and cannot be included in national income, but exported goods are included in GNP as they are produced in the country.

Concepts of National Income

There are various concepts of National Income. The main concepts of NI are: GDP, GNP, NNP, NI, PI, DI, and PCI. These different concepts explain about the phenomenon of economic activities of the various sectors of the various sectors of the economy.

Gross Domestic Product (GDP)

The most important concept of national income is Gross Domestic Product. Gross domestic product is the money value of all final goods and services produced within the domestic territory of a country during a year.

Algebraic expression under product method is,

GDP=(P*Q)

where,
GDP=Gross Domestic Product
P=Price of goods and service
Q=Quantity of goods and service
denotes the summation of all values.

According to expenditure approach, GDP is the sum of consumption, investment, government expenditure, net foreign exports of a country during a year.

Algebraic expression under expenditure approach is,

GDP=C+I+G+(X-M)

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M)=Export minus import

GDP includes the following types of final goods and services. They are:

1. Consumer goods and services.
2. Gross private domestic investment in capital goods.
3. Government expenditure.
4. Exports and imports.

Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation:

GNP=GDP+NFIA (Net Factor Income from Abroad)
or, GNP=C+I+G+(X-M)+NFIA

Hence, GNP includes the following:

1. Consumer goods and services.
2. Gross private domestic investment in capital goods.
3. Government expenditure.
4. Net exports (exports-imports).
5. Net factor income from abroad.

Net National Product (NNP)

Net National Product is the market value of all final goods and services after allowing for depreciation. It is also called National Income at market price. When charges for depreciation are deducted from the gross national product, we get it. Thus,

NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M)+NFIA-Depreciation

National Income (NI)

National Income is also known as National Income at factor cost. National income at factor cost means the sum of all incomes earned by resources suppliers for their contribution of land, labor, capital and organizational ability which go into the years net production. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income. Symbolically,

NI=NNP+Subsidies-Interest Taxes
or,GNP-Depreciation+Subsidies-Indirect Taxes
or,NI=C+G+I+(X-M)+NFIA-Depreciation-Indirect Taxes+Subsidies

Personal Income (PI)

Personal Income i s the total money income received by individuals and households of a country from all possible sources before direct taxes. Therefore, personal income can be expressed as follows:

PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-Social Security Contribution+Transfer Payments

Disposable Income (DI)

The income left after the payment of direct taxes from personal income is called Disposable Income. Disposable income means actual income which can be spent on consumption by individuals and families. Thus, it can be expressed as:

DI=PI-Direct Taxes

From consumption approach,

DI=Consumption Expenditure+Savings

Per Capita Income (PCI)

Per Capita Income of a country is derived by dividing the national income of the country by the total population of a country. Thus,

PCI=Total National Income/Total National Population