Cambridge O Level Economics: Differences in economic development between countries (2281) – Revision Notes

These notes condense section 5.4 (5.4.1) of the Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2. Tiers do not apply to this course. For the reasoning in full, read the study guide. Test yourself with the practice questions. Other links: the Cambridge O Level Economics hub, the printable checklist and the free diagnostics. All countries and numbers here are invented and illustrative.

The seven areas at a glance

Area	Typical cause of a low value	Typical impact of a low value
Income per head	Low output per worker, few resources used	Poor living standards, low saving, low tax revenue
Productivity	Little capital, weak skills, poor health	Low output and wages, weak competitiveness
Population growth (high)	High birth rate, falling death rate	Many dependants, pressure on land and jobs
Sector mix (large primary)	Resource-based economy, little investment	Low value added, unstable incomes
Saving and investment	Low incomes, weak banks, instability	Little new capital, slow growth
Education	Low spending, child labour, few teachers	Low skills, low productivity and earnings
Healthcare	Low spending, unsafe water, few doctors	Lost working days, shorter working life

Definitions

• Economic development: a rise in living standards and wellbeing, which includes but is not limited to higher income.
• Income per head: national income (GDP) divided by population. An average.
• Productivity: the output obtained from each unit of a resource, for example per worker.
• Primary sector: farming, mining, fishing. Secondary: manufacturing and construction. Tertiary: services.
• Saving: income not spent. Investment: spending on capital goods that raise future output.
• Brain drain: skilled people leaving a country for better pay elsewhere.

Formulas and quick calculations

Measure	Formula	Example (illustrative)
Income per head	GDP ÷ population	90,000 million ÷ 30 million = 3,000
Output per worker	Output ÷ workers	36,000 million ÷ 6 million = 6,000
Percentage change	(new − old) ÷ old × 100	(6,750 − 6,000) ÷ 6,000 × 100 = 12.5%
Growth in income per head	(1 + GDP growth) ÷ (1 + population growth) − 1	1.045 ÷ 1.03 − 1 = 1.46%
Investment	Investment share × GDP	21% of 60,000 million = 12,600 million
Sector share	Sector output ÷ GDP × 100	9,000 ÷ 60,000 × 100 = 15%

Quick rule: growth in income per head is roughly GDP growth minus population growth. In the first line above, 4.5 − 3 = 1.5, close to the exact 1.46. If population grows faster than GDP, income per head falls.

Method in steps: a “compare two countries” question

1. Work out the measure for each country, using the same formula.
2. Divide one by the other to give “times as large”, or subtract to give the gap.
3. State what the numbers show and one limit (an average hides inequality).
4. Link to a cause (for example fewer workers in services, less capital).

Worked reminder: productivity

Country P’s output is 36,000 million with 6 million workers, so output per worker is 6,000. After investment, output is 40,500 million with the same workers: 6,750. That is a rise of 12.5%. With unchanged hours and prices, the extra output can fund higher wages.

Causes and impacts, area by area

Income

• Causes of differences: productivity, resources, stability, openness to trade.
• Impacts of low income: low spending on health and education, low saving, low tax revenue.
• Trap: poverty limits saving and investment, which keeps income low.

Productivity

• Causes: more capital per worker, technology, education, health, management.
• Impacts: higher output and wages, lower costs per unit, more exports.

Population growth

• Causes: birth rate, death rate, net migration.
• Impacts of fast growth: more dependants, more spending needed on schools, less saving per household, jobs and capital must grow as fast. Impacts of slow growth or decline: fewer workers and taxpayers, but less pressure on resources.
• Key idea: compare GDP growth with population growth.

Size of sectors

Sector	Typical features	Typical pattern
Primary	Low output per worker, prices vary with weather and world demand	Larger share in lower-income countries
Secondary	Higher output per worker, needs capital and skills	Grows as investment rises
Tertiary	Wide range of jobs, grows as incomes rise	Largest share in higher-income countries

Moving workers from low-output to high-output sectors raises national output, but only if capital and skills are available for the new jobs.

Saving and investment

• Causes of low saving: low incomes, spending on necessities, weak banks, high inflation.
• Causes of low investment: little saving, risk, poor roads and power, weak property rights.
• Impacts: low capital stock, low productivity, reliance on foreign investment.

Education

• Causes of differences: government spending, family income, child labour, teacher supply.
• Impacts: skills, faster adoption of technology, higher earnings, more enterprise. Risk: brain drain.

Healthcare

• Causes: government spending, clean water, sanitation, doctors per head, income.
• Impacts: more working days, longer working life, better school attendance, lower child death rates.

Chains of reasoning to learn

Each chain moves from a cause to an impact. Write the links in full.

• Low income: low income, so most spending goes on necessities, so little is saved, so little is invested, so capital per worker stays low, so productivity and income stay low.
• Poor health: weak healthcare, so more days lost to illness, so less labour supplied and lower concentration, so lower output per worker.
• Little education: few skills, so workers cannot use advanced machines, so firms do not adopt new technology, so productivity and earnings stay low.
• Rapid population growth: births exceed deaths by a wide margin, so many dependants, so households and the government spend on children, so less is saved, so capital per person grows slowly.
• Large primary sector: output depends on weather and world prices, so export earnings and incomes fluctuate, so firms and the government find it hard to plan investment.

Worked reminder: structural change

Country R has 4 million workers. Primary workers produce 5,000 each and secondary workers 11,000 each. If 0.2 million workers move from primary to secondary work and match the secondary figure, output rises by 0.2 million x (11,000 - 5,000) = 1,200 million. This assumes capital and skills are available for the new jobs, which is the main practical difficulty.

Evaluation prompts

• Which factor is scarcest in this country? Fixing the scarcest one usually gives the largest gain.
• Over what time? Investment can raise output within a few years, while education takes a generation.
• Does the average hide differences? Income per head says nothing about how income is shared.

Must-know distinctions

• GDP growth vs growth in income per head. The second subtracts population growth.
• Cause vs impact. The syllabus asks for both. A cause explains why countries differ. An impact says what the difference leads to.
• Saving vs investment. Saving is not spending. Investment is spending on capital goods. Savings fund investment through banks.
• Output vs output per worker. A large country can have high output and low productivity.

Quick self-test

1. Country Q has GDP of 15,000 million and 5 million people. Calculate income per head.
2. A workforce of 400,000 produces 2,400 million. Calculate output per worker.
3. GDP grows by 5% and population by 2%. Calculate the approximate and exact growth in income per head.
4. A country invests 21% of a GDP of 60,000 million. How much is invested?
5. Primary output is 9,000 million in a GDP of 60,000 million. State the primary sector share.
6. State two causes of low saving in a low-income country.
7. State two ways better healthcare raises output.
8. Explain one way a large primary sector can lead to unstable income.
9. Explain one reason why a fast-growing population can lower income per head.
10. GDP grows by 1.8% and population by 2.2%. Calculate the exact change in income per head.

Answers

1. 15,000 ÷ 5 = 3,000.
2. 2,400 million ÷ 400,000 = 6,000.
3. Approximate 5 − 2 = 3%. Exact 1.05 ÷ 1.02 − 1 = 2.94%.
4. 0.21 × 60,000 = 12,600 million.
5. 9,000 ÷ 60,000 × 100 = 15%.
6. Low incomes leave little after necessities; weak or distant banks; high inflation; political risk (any two).
7. Fewer working days lost to illness; longer working life; healthier workers concentrate better; higher school attendance, which builds skills (any two).
8. Farm and mining output depends on weather and world prices, so export earnings and incomes rise and fall.
9. If population grows faster than output, output must be shared among more people, so income per head falls.
10. 1.018 ÷ 1.022 − 1 = −0.39%, so income per head falls.

Where marks are usually lost

• Giving a cause but no impact, or the reverse, when the question asks for both.
• Writing “more people means less money” with no link to output or jobs.
• Using GDP growth when the question asks about income per head.
• Forgetting units or the “times as large” step in a comparison question.
• Treating income per head as if it showed how income is shared.
• Saying “primary goods are bad” instead of explaining low value added and unstable prices.
• Giving a list of factors in an evaluation with no judgement on which matters most and why.
• Mixing up saving and investment, or saying that saving is spent.

Official syllabus

Cambridge O Level Economics 2281 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International Education).