Why Are Some Countries Richer Than Others?

Why Are Some Countries Richer Than Others?

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Why are Some Countries Richer than Others?

Poverty is still the biggest problem the world faces from day to day. Every country suffers from it to some degree, however certain places are greater effected than others. This is because the level of economic growth differs from country to country. The greater amount of growth the less room there is for poverty. This is simple reason why some countries are richer than others. If countries fail to move forward than it can present many problems. Mainly the needless suffering of many, and generally a lower level of living for all those caught in the trap. It is true that growth does create it own problems such as pollution and congestion, but these are acceptable compromises to reduce the level of poverty. The governments around the world have many policies to try and improve the workings of their economies. Governments will differ in the emphasis they give to particular objectives and the ways in which they try to achieve these. The circumstances around these change from time to time, focusing on certain objectives that need the most influence. Economic growth is an ongoing priority. Governments just have to make sure they manage what resources they have properly, in order to achieve this objective.

Every year there is a ‘league table‘ published showing the level of economic growth achieved by each country. The comparison is made using each countries Gross Domestic Product, or GDP. An important factor to look at is the difference between actual and potential economic growth. Actual economic growth increases in real GDP. This increase can occur as result of using previously unemployed resources, or reallocating resources into more productive areas or improving existing resources. Whereas potential economic growth is the productive capacity of the economy. For example, it can be shown by the predicted ability of the country to produce goods and services. This changes when there is an increase in the quantity or quality of the resources. All countries have different ways of achieving this with the resources they have available to them. For this reason it party answers the question of why some countries are richer than others. It is widely thought that the productive capacity of an economy will increase each year largely due to improvements in education and technology. This will obviously differ from country to country. For example, in the UK the quality of fertilizer could be improved, hence forth increase the years fruit and vegetable output.

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Soil in places such as Africa can barely sustain horticulture so these improvements would prove useless to those societies. Simple things like this can bridge the gap between countries throughout the world. In the short run, if a country is to sustain economic growth aggregate demand must increase, when the economy has a spare capacity, so it can operate inside its production possibility curve. However, for an economy to continue to produce more goods and services aggregate supply must also increase, which many poorer countries struggle to do. Countries also need larger inputs of capital to accommodate for this growth. The economy obeys the law of diminishing returns, meaning that each new bit of capital yields a slightly lower return than the one before. What is interesting here is that it implicates that poorer countries should grow faster than the rich ones. This is because since the poor countries start with less capital, in theory they should get higher returns from each new input of investment.

There are other views that contribute in the difference of wealth in various countries. There has been several researches that have shown that the countries with lots of human capital relative to their physical capital are much more likely to grow faster than those that have less. A good example of this can be seen in 1960’s when East Asia achieved great success with economic growth. Another large factor that determines the wealth of a country is the amount of saving and investments that are present. If there is greater investment, in theory it means there would be faster growth and greater wealth, at least in the short run. Although investment is not enough my itself, it can be seen from the past that high investment does in fact improve these key factors. These isn’t true for all counties of course, for example, the communist state of the USSR had amazingly high investment though out the country, but due to bad economic policies else where they failed to improve the countries economic situation to any much degree.

Poorer countries many also face the problem of high inflation. Many of the third world countries today still suffer from ‘hyperinflation’. This means that every year prices are rising at a phenomenal rate. A country can become very poor through this, simply because people don’t have the money to buy the goods that they require. Therefore money does not circulate through the economy like it should, and the problem continues to worsen. Germany experienced this in 1923 and by the end of the year, prices were almost one million times greater than 5 years previous. Under these conditions people will obviously loose faith in the countries economic state. When this occurs the only possible option is to abandon the countries currency and start again with a new one. We can see this happening quite often in third world and developing countries. For instance, how many African currencies can you name? If a country can keep a steady level of inflation then they will be much more better off.

Developing countries find it very hard to keep up with what the world wants. For example, Japan has become very rich form producing very well respected and high tech electronical devices. That is what their nation is known for. These exports are a great comparison to what a country like Zambia has to offer. Much of there trade is domestic, and not wanted by the outside world. Making it very hard for countries such as this to grow through this method. The knowledge, training and capital simply isn’t available to them to become competitive in markets such as these. There is much greater demand for electronics, than there is African cattle, explaining why Japan is somewhat richer than Zambia. Japans policies must be more effective to the economy for them to do this. For example, in the past they may have significantly lowered interest rates, so it makes it less costly for private firms to borrow money to buy new machines. As I have just said, it is only too apparent that is mainly a lack of capital that stops less developed countries from producing more and growing. Furthermore Japan most likely took it upon themselves to make “investments in people”. A more skilled and educated work force will the goods and services produced will be of a much higher quality. If the health care system of a country is also better than the output will also be much more efficient, meaning less sick days and a more productive work force. Things we take for granted, like a good health care system are not always present in poorer countries, adding a further problem in allowing them to grow and improve themselves. Without these foundations, economic growth is much harder to achieve, and this is why many developing countries are still falling behind the western world.

It is very hard to compare western world countries in terms of wealth. As the way their governments works, many of them implement similar policies that keep a steady level of economic growth, and henceforth, wealth. However, when comparing countries such as Japan and Zambia, it is clear to see who is the richer. Weather it be a lack of resources available, or simply bad planning the poorer countries of the world make themselves stand out. Once a country falls into such a slump it is very difficult for them to catch up with everyone else, which is why there is still so much poverty around the world today. Not only economic, but social reasons can also contribute. For instance, if a government isn’t running under a Democracy then the decisions made may not be best for the people and the country in general. For example, money may be allocated in other areas, such as the military. This occurred in Mozambique some years ago when £700 million was spent on improving the military, while the government let its people starve from a famine that only £5 million could have remedied. The wealth of a country not only depends on the resources available, but how they are managed and what plans government instigate for the future.

Bibliography

Moynihan, D., Economics: A Complete Course Second Edition (Oxford, 1993)

Grant, S. J., Introductory Economics Seventh Edition (Essex, 2000)

Parkin, M., Economics Sixth Edition (Essex, 2005)

Krugman, P., The Myth of the Asian Miracle: Foreign Affairs (London, 1994)

http://www.economist.com/articles/GrowthTheoryECO.htm
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