1. How is poverty measured?

Poverty can be defined in an absolute sense: you are poor if your income is below a specified level. Poverty can also be defined in a relative sense: if your income is much less than the income of those around you, you feel poor.

When comparing countries, the usual measure of people’s standard of living is per capita GNP. The World Bank uses a per capita GNP of less than $765 as its standard for poverty. Other measures aim at the quality of life in different countries, using measures such as life expectancy, infant mortality, literacy, and other things that reflect a people’s standard of living.

2. Why are some countries poorer than others?

Several common factors have been found in many developing countries that help explain their lack of growth. These factors can be grouped into political obstacles and social obstacles.

Political obstacles include a lack of skilled government officials, political instability and risks of expropriation, corruption, and constraints imposed on governments by special-interest groups. Social obstacles include cultural attitudes that discourage business and entrepreneurial activities, and rapid population growth, which can reduce the amount of capital per worker and can divert resources away from uses that promote economic growth.

3. What strategies can a nation use to increase its economic growth?

In terms of trade with other nations, most developing countries have a natural comparative advantage only in primary products such as agricultural products and minerals. Countries whose governments have wanted to encourage economic development have tried to shift resources from primary sectors to industrialized, manufacturing sectors in the belief that industrialization is necessary for economic development.

The two basic industrialization strategies followed by developing countries are known as inward-oriented development (followed by most developing countries) and outward-oriented development (followed by South Korea, Taiwan, Hong Kong, and Singapore)). Inward-oriented development focuses on import substitution: developing a domestic manufacturing sector to produce goods that replace imports. Outward-oriented development focuses on export substitution: developing a domestic manufacturing sector that can produce goods for export.

4. How are savings in one nation used to speed development in other nations?

In any country, savings are used to pay for investments in capital goods. Developing countries typically have such low levels of income that saving is difficult if not impossible. In order to buy capital goods, these countries must use other countries’ savings. Foreign investment in developing countries can be by private sources or in the form of foreign aid from other governments. Foreign investment can increase economic growth by creating new jobs, transferring modern technology, or stimulating exports.

5. What microeconomic issues are involved in the transition from socialism?

Prices and incomes must be removed from government determination. Instead, markets determine prices and incomes. Government-owned businesses must be privatized (transferred to the private sector). Because these changes can lead to temporary unemployment and rising prices, the government must provide a social safety net during the transition period.

6. What macroeconomic issues are involved in the transition from socialism?

Macroeconomic stabilization must be achieved before microeconomic reforms can be undertaken effectively. To achieve stabilization, monetary overhangs must be eliminated, free currency convertibility must be implemented, and credit must be allocated on a market basis. The objective of monetary policy is a low, stable rate of inflation. Fiscal policy should avoid large budget deficits.