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Subject: Macroeconomics

The Sources of Economic Development
The basic factors that limit a poor nation’s economic growth includes:  Capital Formation. A low level of output in developing nations is due to insufficient

quantities of necessary inputs. Developing nations have diverse resource endowments —Congo, for instance, is abundant in natural resources, while Bangladesh is resource-poor. Almost all developing nations have a scarcity of capital relative to other resources, especially labor. The small stock of physical capital (factories, machinery, farm equipment, and other productive capital) constrains labor’s productivity and holds back national output.  Human Resources and Entrepreneurial Ability Capital is not the only factor of production required to produce output. Labor is equally important. First of all, to be productive, the workforce must be healthy. Disease today is the leading threat to development in much of the world. In 2009, more than 1 million people died of malaria, almost all of them in Africa. The Gates Foundation has targeted malaria eradication as one of its key goals in the next decade. HIV/AIDS was still responsible for more than 2 million deaths in 2009, again mostly in Africa, and has left Africa with more than 14 million AIDS orphans. Iron deficiency and parasites sap the strength of many workers in the developing world.  Social Overhead Capital Anyone who has spent time in a developing nation knows how difficult it can be to carry on everyday life. Problems with water supplies, poor roads, and frequent electrical power outages— in the few areas where electricity is available— and often ineffective mosquito and pest control make life and commerce difficult. In any economy, developing or otherwise, the government plays an investment role. In a developing economy, the government must create a basic infrastructure—roads, power generation, and irrigation systems.

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Subject: Macroeconomics
Such projects, referred to as social overhead capital, often cannot successfully be undertaken by the private sector. Many of these projects operate with economies of scale, which means they can be efficient only if they are very large, perhaps too large for any private company or group of companies to carry out. In other cases, the benefits from a development project, while extraordinarily valuable, cannot be easily bought and sold. The availability of clean air and potable water are two examples. Here government must play its role before the private sector can proceed. For example, some observers have recently argued that India’s growth prospects are being limited by its poor rail transport system. Goods from Singapore to India move easily over water in less than a day, but they can take weeks to move from port cities to supply factories in the interior. China, by contrast, spent the bulk of its stimulus money in the 2008 –2009 periods trying to build new transportation networks in part because the government understood how key this social overhead capital was to economic growth.

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Subject: Macroeconomics

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