Pearson Edexcel International Advanced Level Economics: Development strategies (YEC11) – Revision Notes

These revision notes condense the study guide, which has the full explanations and longer worked examples. They follow the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018, section 4.3.6 item 3, points a and b. The specification labels Units 1 and 2 as the International AS and Units 3 and 4 as the extra International A2 content, so this is Unit 4 material for the full International A Level only. All figures below are invented and fictional.

Related pages: practice questions, the Edexcel economics hub, the printable checklist, exam preparation and the free diagnostics.

The twelve strategies at a glance

Ref	Strategy	How it works	Main gain	Main risk
3a	Trade liberalisation	Tariffs and quotas cut	Cheaper inputs, bigger markets	Lost tariff revenue, import competition
3a	Promotion of FDI	Tax breaks, stable rules	Capital, technology, jobs	Profit leaves, local firms squeezed
3a	Removal of subsidies	Prices rise to cost	Fiscal saving, less waste	Hits the poor, unrest
3a	Privatisation	State assets sold	Efficiency, receipts	Private monopoly, job losses
3a	Floating exchange rate	Market sets the rate	Shock absorber, no reserves	Volatility, imported inflation
3a	Microfinance	Small loans, often to groups	Credit for the excluded	High rates, tiny loans
3b	Human capital	Education, training, health	Productivity, lower poverty	Slow payback, brain drain
3b	Protectionism	Tariffs for infant industries	Time to learn	Inefficiency, retaliation
3b	Managed exchange rate	Central bank steers the rate	Stability, competitive exports	Reserves cost, inflation, crisis
3b	Infrastructure	Roads, power, ports	Lower costs, higher LRAS	Cost, delay, corruption
3b	Joint ventures with TNCs	Shared ownership	Skills transfer, retained profit	Partner dominance
3b	Buffer stock schemes	Buy at a floor, sell at a ceiling	Stable prices and incomes	Funds run out, storage cost

Formulas and rules

Item	Rule
Landed price with tariff	World price x (1 + tariff rate)
Percentage change	(new - old)/old x 100
Change in quantity	Elasticity x percentage change in price
Multiplier	1/marginal propensity to withdraw, where MPW = MPS + MPT + MPM
GNI change	GDP change minus profit sent abroad
Dollar value of 1 unit of local currency	1/(units of local currency per dollar)
Marshall-Lerner condition	PED of exports + PED of imports > 1
Present value of an even stream	Annual benefit x (1 - (1 + r)^-n)/r
Net present value	Present value of benefits minus cost
Simple payback	Cost divided by annual benefit
Flat interest rate	Total interest/amount borrowed

Method in steps: a development strategy answer

1. Name the strategy and define it in one line.
2. Give the mechanism, for example “a cheaper tariff-free input lowers firms’ costs, shifting long-run aggregate supply to the right”.
3. Link to growth, then to development: poverty, health, education, equality.
4. Say who gains and who loses (consumers, firms, government, the poor, other countries).
5. State what the outcome depends on (country size, institutions, elasticity, time).
6. Make a judgement for the country in the question and justify it.

Worked reminders

Tariff cut. The tariff falls from 15% to 5% on an import with world price 80. Landed price goes from 80 x 1.15 = 92 to 80 x 1.05 = 84, a fall of 8/92 = 8.7%.

GDP versus GNI. A foreign-owned mine adds 250 to GDP; 70 of profit goes abroad. GNI rises by 250 - 70 = 180.

Multiplier. MPW = 0.20, so the multiplier is 1/0.20 = 5. An FDI injection of 60 raises GDP by 60 x 5 = 300.

Subsidy removal. A subsidy of 3 holds a staple at 5. The unsubsidised price is 8, a rise of 3/5 = 60%. Poor households spend a high share of income on staples, so the real income fall is large unless compensated.

Exchange rate. The rate moves from 4 to 5 local units per dollar. The dollar value of a local unit falls from 0.25 to 0.20, which is 20%. The local price of a dollar rises 25%. Mixing these two percentages is a common slip.

Microfinance. A loan of 150 is repaid in six monthly instalments of 28. Total repaid is 168, so flat interest is 18/150 = 12%. Because the balance falls each month, the effective annual rate is about 48%.

Human capital. Training costs 800 and adds 120 a year for 10 years. Payback is 800/120 = 6.7 years, and the undiscounted gain is 1,200 - 800 = 400. Discounting reduces it.

Infrastructure. Cost 400, benefit 60 a year for 10 years at 10%. Annuity factor 6.145, present value 369, NPV = 369 - 400 = -31. Reject on cost alone, but check wider benefits.

Buffer stock. Demand is 300 - 4P. After a glut, supply is 140 + 4P. At a floor of 36, quantity demanded is 156 and supplied 284. The authority buys 128 units at 36, which costs 4,608.

Joint venture. Pre-tax profit 100, tax 20%, local partner holds 51%. Profit after tax 80; local share 40.8. In the country: 20 + 40.8 = 60.8, or 60.8% of profit.

Must-know distinctions

• Market-orientated vs interventionist: prices and private owners lead versus the state directs, protects or funds. Many real packages mix both.
• Growth vs development: growth is a rise in real output. Development also covers poverty, health, education and freedom.
• GDP vs GNI: GNI subtracts profits and income paid abroad, so FDI can raise GDP more than GNI.
• Depreciation vs devaluation: depreciation happens when a floating rate falls; devaluation is a deliberate cut in an official peg or managed rate.
• Floating vs managed: floating leaves the rate to markets; managed uses the central bank, reserves and interest rates to steer it.
• Privatisation vs deregulation: privatisation changes ownership; deregulation removes rules or barriers to entry.
• Tariff vs subsidy as protection: a tariff taxes imports and raises revenue; a subsidy to domestic producers costs the government money.

Evaluation prompts

Use these to turn description into judgement.

• Short run versus long run: liberalisation, subsidy removal and privatisation often hurt some groups first; human capital and infrastructure pay back slowly.
• Who gains: does the benefit reach the poor, rural households and women, or only urban firms and foreign owners?
• Institutions: privatisation needs a regulator, microfinance needs honest lenders, infrastructure needs clean contracts.
• Size and structure: a small economy with one export is more exposed to liberalisation and to commodity price swings than a diversified one.
• Government failure: state-led strategies can pick the wrong industry, protect for too long or waste funds.
• Combination: most successful packages mix both, for example open trade with state investment in schools.

Quick self-test

1. A tariff falls from 15% to 5% on an import with world price 80. Find the percentage fall in the landed price.
2. FDI adds 250 to GDP and 70 of profit is sent abroad. What is the rise in GNI?
3. A currency moves from 4 to 5 per dollar. Find the percentage fall in the dollar value of the local currency.
4. MPW is 0.2 and an injection is 60. Find the rise in GDP.
5. A loan of 150 is repaid with six payments of 28. Find the flat interest rate.
6. Training costs 800 and raises earnings by 120 a year for 10 years. Find the simple payback.
7. A project costs 400, with 60 a year for 10 years at 10%. State the sign of NPV and say what it means.
8. With demand 300 - 4P, glut supply 140 + 4P and a floor of 36, how much does the authority spend?
9. Pre-tax profit 100, tax 20%, local share 51%. Find the share of pre-tax profit staying in the country.
10. Give two reasons why removing a food subsidy might raise poverty.

Answers

1. 8.7%.
3. 20%.
4. 60 x 5 = 300.
5. 12%.
6. 6.7 years.
7. NPV = -31, so benefits fall short of cost at 10%.
8. 128 units x 36 = 4,608.
9. 60.8%.
10. Prices rise sharply for households that spend a large share of income on food; compensation schemes may be poorly targeted or slow; and smaller farms that relied on cheaper inputs may cut output.

Where marks are usually lost

• Listing strategies without saying how each affects growth or development.
• Calling any rise in GDP a rise in national income when profits are sent abroad.
• Mixing up the percentage fall in a currency’s value with the percentage rise in the price of the dollar.
• Quoting the flat microfinance rate as the true cost of borrowing.
• Saying a tariff protects an industry without saying the industry must become competitive within a set time.
• Assuming a buffer stock always makes a profit, when a floor above the long-run price builds an ever-growing stock.
• Giving one-sided answers with no judgement about the country described.
• Using a formula without showing the working, so a slip cannot be traced.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics, Specification, Issue 2, June 2018, published by Pearson Education Limited. Section 4.3.6, Growth and development in developing, emerging and developed economies, item 3, points a and b.