📈 Consequences of low income
Households can buy less, so living standards are lower. Fewer households can afford good food, healthcare or school fees.
Differences Between Countries » Development Gaps: Income, Productivity, Population and Sectors
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 5.4.1
- Why countries can have very different levels of development
- The causes and consequences of differences in income and productivity
- How population growth differs between countries and what it does to development
- How the size of the primary, secondary and tertiary sectors links to development
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Unlock This CourseWhy are some countries more developed than others?
Two countries can both have farms, shops, schools and hospitals, yet one has far higher living standards than the other. Economists look at the differences between them and ask two questions: what causes the gap, and what are the consequences of it?
This lesson covers four differences: income, productivity, population growth and the size of the three sectors. The other differences are covered in the next lesson, Development Gaps: Saving, Education, Healthcare and Resources. The indicators used to measure development were covered in Measuring Living Standards: GDP per Head and HDI.
These differences do not work alone. They affect each other, which is why a development gap can be hard to close.
Differences in income
Income per head is the most obvious gap. In a high-income country the average person has far more to spend on food, housing, transport and leisure than the average person in a low-income country.
Differences in income are partly a result of the other differences in this lesson and in the next one. Income is likely to be low when workers produce little, when many people work in low-value activities, and when the population grows faster than output. Low income can then feed back and make those problems worse.
🏢 Effect on the government
Low incomes mean less tax revenue. The government then has less to spend on schools, hospitals and roads, which makes it harder to raise incomes in future.
This is why low income can become self-reinforcing: low income leads to low spending on the things that would raise income later.
Differences in productivity
Remember that productivity is output per worker (or per unit of input), as covered in Production and Productivity. Productivity tends to be lower in less developed countries, and this is one of the main causes of lower income. A worker who produces little can only be paid a little.
Causes of lower productivity include:
- less capital: fewer machines, tools and vehicles for each worker
- older or simpler technology
- poor infrastructure, such as bad roads, unreliable electricity and weak communications
- workers with fewer skills and less training
Consequences of lower productivity include:
- lower output per worker, so lower national output
- lower wages and lower income per head
- firms find it harder to compete with firms from countries with high productivity, because their costs per unit are higher
Worked example
On a farm in Tessalia, 100 workers use hand tools and grow 200 tonnes of grain a year. On a farm in Corvandia, 100 workers use tractors and modern seeds and grow 1,500 tonnes.
Output per worker in Tessalia = 200 ÷ 100 = 2 tonnes.
Output per worker in Corvandia = 1,500 ÷ 100 = 15 tonnes.
A Corvandian worker produces 7.5 times as much (15 ÷ 2). The Corvandian farm can pay higher wages and still sell grain at a lower price per tonne. The Tessalian farm will struggle to match either.
Differences in population growth
Countries differ in how quickly their populations grow. As you saw in Birth Rates, Death Rates and Migration, growth depends on the birth rate, the death rate and net migration. Many low-income countries have high birth rates, while many high-income countries have low birth rates and some have a falling population.
👶 Fast population growth
More people share the same resources. If output does not grow as fast as the population, output per head falls. There are many children to support, so families and the government have less to spend on each person. In time, though, a larger labour force may be able to produce more.
👴 Slow or falling growth
Each worker has more resources and capital to share, which can raise output per head. But the labour force may shrink, there are more older people to support, and the government may have to raise taxes.
The important point is that the size of a population alone is not what matters. What matters is whether output grows faster than the population. If it does, income per head rises.
Differences in the size of the sectors
You have already met the three sectors: primary (extracting natural resources, such as farming and mining), secondary (making goods, such as manufacturing and construction) and tertiary (services, such as banking, transport and teaching).
The size of each sector, measured by its share of output or of the number of people employed, differs a lot between countries.
| Share of workers | Primary | Secondary | Tertiary |
|---|---|---|---|
| Tessalia (made up) | 60% | 15% | 25% |
| Corvandia (made up) | 3% | 22% | 75% |
In many low-income countries the primary sector is the largest. In many high-income countries the tertiary sector is the largest and the primary sector is small.
🌾 Causes
As a country develops, productivity in farming rises, so fewer workers are needed on the land. Higher incomes also mean people spend more on services such as education, travel and healthcare. Workers move from the primary sector to the secondary and then the tertiary sector.
📊 Consequences
A country that depends on primary goods can find its income swings with the weather and with world prices of raw materials. A country with only one or two main products has little to fall back on when output or prices drop.
A country with a large secondary and tertiary sector usually has more varied output, higher productivity and higher incomes. It also has more ways to earn money if one industry does badly.
Common mistakes
- Saying that a large primary sector causes poverty on its own. It is more accurate to say that it is linked to lower productivity and to income that is less certain.
- Saying that a large population always means low development. Output compared with population is what matters.
- Listing differences without explaining the effect. Always say what the difference leads to, for example "lower productivity, so lower wages".
Exam-style question
Tessalia and Corvandia are two countries. In Tessalia, 60% of workers are in the primary sector and output per worker is $2,000 a year. Its population is growing by 3% a year and real GDP is growing by 1% a year. In Corvandia, 75% of workers are in the tertiary sector, output per worker is $30,000 a year and the population is almost unchanged.
(a) Identify two differences between Tessalia and Corvandia. [2 marks]
(b) Explain one reason why productivity may be lower in Tessalia. [3 marks]
(c) Analyse how rapid population growth may affect living standards in Tessalia. [4 marks]
Model answer
(a) Tessalia has a much larger share of workers in the primary sector (1) and a faster growing population (1). Output per worker is much lower in Tessalia ($2,000 compared with $30,000) (1). Any two.
(b) Tessalia may have less capital for each worker, such as machines and tools (1). Workers using simple tools can produce less in the same time (1), so output per worker is lower (1).
(c) Population is growing at 3% but real GDP is growing at only 1% (1), so real GDP per head is falling (1). Each person has less to spend (1), and the government has more people to provide for with schools and healthcare, so living standards fall (1).
Exam tip
In part (c), use the figures in the question. Comparing 3% with 1% shows output per head falling, and that earns more marks than only saying "more people means less for each person".