While some countries are moving forward economically in leaps and bounds others are continuing to lag behind; either treading water or actually regressing. So, the question that should be asked is why some countries have economic development while others simply can’t get things right.
While some countries are moving forward economically in leaps and bounds others are continuing to lag behind; either treading water or actually regressing.
So, the question that should be asked is why some countries have economic development while others simply can’t get things right.
To understand why some nations enjoy economic growth while others gnash their teeth in frustration, we use a simple framework that can account for changes in Gross Domestic Product (GDP) per person over a period of time.
However, it is of cardinal importance to begin with a very precise case- a single farming household.
Imagine that this household consists of a father, mother and four children. The household grows millet and provides for its own shelter in a grass thatched house. Being really poor, the family consumes its own millet harvest and earns no other cash income during most years.
This year, 2010, the household produces 2 tonnes of millet per hectare, or 4 tonnes in total. Even though the family eats its own millet, the statisticians in the government will allocate this household an income based on the market value of the millet.
Suppose that each tonne of millet is sold at the local market for $250 per ton. The family imputed annual income will be.
The government will add this figure to other household incomes to calculate the country’s GDP.
However, the family’s income per capita can increase in at least the following ways:
Saving:
The family may decide to consume only 3 out of 4 tons of millet. With the $250, the can family invests in poultry farming.
The poultry generates a new stream of income through selling eggs and the poultry. In economic term, the saving has led to capital accumulation (in the form of poultry farming, which in turn has raised the family living standards
Trade:
In another case, the family learns from a neighbouring farmer that they have the right kind of soil to produce grapes, which bring in a lot more income.
After some time, the family decides to shift to grapes as a cash crop. The next year the family earns $1800 in grapes and uses $1400 to buy 4 tons of millet for food.
As more grapes are harvested new trading firms also form, specializing in the shipping and storage of grapes.
Technology:
Alternatively, an agricultural extension officer teaches the farm household how to manage the soils nutrients in a new and improved process of planting special nitrogen- fixing trees that replenish soil and to multiply the benefits by using improved seeds.
The new seeds are faster maturing and pest resistant, and they do well with the replenished soil nutrients. As a result, the crop yield rises in a single year to 3 tons of millet per hectare.
The income per capita therefore raises $250(3 tons per hectare times 2 hectares at $250 per ton divided by six people).
Resource boom:
The farm household is able to move to a much larger and more fertile farm after the Ministry of Agriculture succeeds in controlling soil erosion.
Because of that development there are suddenly thousands of hectares of new farmland and a significant expansion of production capacity as a result.
Income increase and hunger falls as each household in the newly opened area is able to triple its previous food output.
The above mentioned points are the main ways that economies grow, albeit in much more complicated settings. Saving and capital accumulation, increasing specialization and trade, technological advance and greater natural resources per person are the way that nations advance. That’s the way that this nation will advance economically.
Festo Ngamije is a journalist with The New Times