Pearson Edexcel International Advanced Level Economics: Constraints on development (YEC11) – Revision Notes

These notes condense part of section 4.3.6, item 2 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics specification (YEC11), Issue 2, June 2018: the demographic, debt, credit, infrastructure and skills statements in 2a, and the non-economic statements in 2b. This is International A2 content, in Unit 4 (full International A Level only). Fuller explanations are in the study guide. Check recall with the practice questions. See also the Edexcel A Level Economics hub, the printable checklist and the free 10-minute diagnostics.

All figures are invented and illustrative.

Definitions to know

Term	Meaning
Economic growth	Increase in an economy’s real GDP between periods
Economic development	Rise in living standards and wellbeing (health, education, income)
Dependency ratio	(aged 0 to 14 plus aged 65 and over) / aged 15 to 64 x 100
Demographic dividend	Gain from a large working-age group relative to dependants
Brain drain	Emigration of skilled and educated workers
Remittances	Money sent home by migrants working abroad
Debt service ratio	Annual interest plus repayment / export earnings x 100
Financial exclusion	Lack of access to affordable saving, credit and insurance
Infrastructure	Transport, energy, water, telecoms and similar networks
Human capital	Knowledge, skills and health of the workforce
Corruption	Abuse of public office for private gain
Governance	Quality of rules, courts, property rights and public administration

Constraints at a glance

Constraint	How it limits growth or development	Evaluation hook
Population size	Output per head falls if population outgrows output	Big markets help too
Age structure	Young: schooling and job costs. Old: pension and health costs	Dividend needs jobs
Migration	Brain drain and strain on services, but remittances and skills	Who leaves, who stays
Overseas debt	Debt service crowds out spending; foreign-currency debt grows when the currency falls	Productive borrowing is fine
Household debt	Interest rises cut spending and confidence	Lenders and poor households differ
Credit and banking	Good projects unfunded or priced out	Informal credit is costly
Infrastructure	Higher costs, power cuts, lower FDI	Slow and costly to build
Education and skills	Low productivity, limited technology use	Quality, match, leakage
Corruption	A tax on firms, waste, deterred investors	Hard to measure
Poor governance	Insecure rights, unstable policy	Cause or effect of low income
Civil war	Capital destroyed, people displaced	Long recovery
Terrorism	Security costs, lost tourism and FDI	Often local and regional

Method boxes

Dependency ratios. Add the two dependant groups, divide by the working-age group, multiply by 100. Country C: 9m aged 0 to 14, 30m aged 15 to 64, 3m aged 65 and over. Youth = 9 / 30 = 30%. Old-age = 3 / 30 = 10%. Total = 12 / 30 = 40%.

Population and per-head growth. Natural increase = birth rate minus death rate (per thousand, divide by 10 for %). Add net migration. Population growth 1.4%, GDP growth 2.6%: GDP per head = (1.026 / 1.014) minus 1 = 1.18%. Rule of 70: doubling time = 70 / 1.4 = 50 years.

Debt measures. Country D: debt 5.4bn, GNI 18bn, debt service 0.66bn, exports 5.5bn. Debt to GNI = 5.4 / 18 = 30%. Debt service ratio = 0.66 / 5.5 = 12%. Household: repayments 1,000 from income 4,000 gives a household debt-service ratio of 25%.

Effective interest. Compound the periodic rate. 5% a month = 1.05 to the power 12, minus 1 = 79.6% a year. A bank at a lower annual rate is far cheaper.

Leakage. Contract worth 120 with 25% leakage: 120 x 0.75 = 90 reaches the project. The loss is 30.

Multiplier on a shock. Tourism income falls by 40m. Marginal propensity to withdraw 0.5 gives a multiplier of 1 / 0.5 = 2. Total fall = 80m.

Recovery arithmetic. Output index 100 falls 20% then 10%: 100 x 0.8 x 0.9 = 72. To return to 100 needs a rise of (100 / 72) minus 1 = 38.9%, not 30%. Losses are bigger than they look.

Return on training. Cost 1,500, earnings gain 250 a year: return 250 / 1,500 = 16.7% a year, payback 6 years.

Must-know distinctions

• Growth versus development. A country can grow with little improvement in health or education.
• Debt to GNI versus debt service ratio. The first measures size against output. The second measures the burden of payments against foreign earnings.
• Overseas versus household debt. Overseas debt affects the balance of payments and government choices. Household debt works through consumption and financial stability.
• Economic versus non-economic. Economic constraints include debt, credit, infrastructure and skills. Non-economic ones are corruption, poor governance, civil war, migration and terrorism. Many interact.
• Voluntary versus forced migration. Skilled people leave for wages. Refugees leave because of conflict. The effects on sending and receiving countries differ.

Chains of reasoning

Young population. Many children, so high spending on schools, low saving, and a rising number of job seekers. If jobs exist, the working-age share lifts output per head. If not, unemployment, lower living standards and unrest.

Weak credit. No affordable loans, so profitable projects are not funded. Firms stay small and productivity stays low, so incomes and saving stay low.

Corruption. Bribes raise costs and lower returns. Investors move to safer countries, so investment falls and growth slows. Public money is wasted, so fewer roads and schools are built.

Civil war. Capital is destroyed and workers flee. Output falls and public finances collapse, so schools, health and roads decline, and recovery is slow.

Sketches in words

Debt trap loop. Low export earnings lead to borrowing. Borrowing leads to debt service. Debt service takes money from investment and imports of capital goods. Low investment keeps exports low, and the loop repeats.

Credit gap. Draw the supply of loanable funds and the demand for loans. Where savers hold cash and banks are few, supply is low and the interest rate on the equilibrium is high. Only the safest borrowers get funded. Better banking shifts supply right, the equilibrium rate falls and more projects clear the return hurdle.

Population and output. Plot real GDP growth and population growth on one time axis. Where the output line sits above population, living standards rise. Where it falls below, output per head falls even though GDP grows.

Remittance reminder. Remittances of 1.2bn on GDP of 30bn are 4% of GDP. They raise consumption directly. They help development more if spent on education or small businesses than on imported goods.

Evaluation toolkit

• Magnitude: how large is the effect compared with GDP, exports or income?
• Time: short-run shock or long-run barrier?
• Country context: landlocked, island, resource-rich, conflict-affected.
• Interactions: constraints often reinforce each other.
• Cause or effect: poverty can create the constraint as well as follow it.
• Evidence: perception-based indices are imperfect.

Quick self-test

1. Country C has 9m aged 0 to 14, 30m aged 15 to 64 and 3m aged 65 and over. Calculate the total dependency ratio.
2. Population grows at 1.4% and real GDP at 2.6%. Calculate growth of GDP per head to two decimal places.
3. Debt service is 0.66bn and exports are 5.5bn. Calculate the debt service ratio.
4. A moneylender charges 5% a month. Calculate the effective annual rate to one decimal place.
5. A household has income of 4,000 and repayments of 1,000. State its debt-service ratio.
6. A 120 contract suffers 25% leakage. How much reaches the project?
7. Output falls 20% then 10%. What rise in output is needed to return to the starting level?
8. Tourism income falls by 40m. Half of each extra unit of income is withdrawn from the circular flow. Calculate the total fall in income.
9. Of 8,000 nurses, 800 emigrate. Calculate the percentage lost and give one benefit the country might receive.
10. Explain two ways in which poor infrastructure limits development.
11. Explain why a currency depreciation makes foreign-currency debt harder to repay.
12. Training costs 1,500 and adds 250 a year to earnings. Calculate the payback period.

Answers

1. (9 + 3) / 30 x 100 = 40%.
2. (1.026 / 1.014) minus 1 = 1.18%.
3. 0.66 / 5.5 x 100 = 12%.
4. 1.05 to the power 12 is 1.796, so 79.6%.
5. 1,000 / 4,000 = 25%.
6. 120 x 0.75 = 90.
7. 100 x 0.8 x 0.9 = 72, so 100 / 72 minus 1 = 38.9%.
8. 1 / 0.5 = 2, so 40m x 2 = 80m.
9. 800 / 8,000 = 10%. Remittances, or returning migrants bringing skills.
10. For example: transport costs and spoilage raise costs and cut competitiveness; unreliable power idles machines and deters foreign investors.
11. The debt is fixed in foreign currency, so more local currency is needed to buy it. Debt measured at home rises and repayments take a larger share of income.
12. 1,500 / 250 = 6 years.

Where marks are usually lost

• Stating a factor without explaining the chain to lower growth or development.
• Using only one side of migration.
• Mixing debt to GNI with the debt service ratio.
• Percentage arithmetic with the wrong base, especially recovery after a fall.
• Showing no working on a calculation, or giving no units.
• Treating all debt as harmful and ignoring what it financed.
• Writing an evaluation that restates the points instead of judging which matters most and why.
• Giving real-world statistics from memory that you cannot back up.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11) specification, Issue 2, June 2018, Pearson Education Limited, section 4.3.6, items 2a and 2b.