CHARACTERISTICS OF DEVELOPING COUNTRIES.

Developing countries are also called poor countries. Sometimes they are often called underdeveloped economics. According to the UN criteria, countries with less than $400 level of per capita income countries are designated as low income countries and countries with less than $750 per capita income as called less developed economics. The following are the main characteristics of developing countries:

General Poverty

Developing countries are poor. By definition, GDP and Per Capita Income are at low level. General living standard of people in these countries is very slow. Poverty is visibly disturbing every aspect of life. General health services for people are insignificant. The life expectancy at birth does not exceed 60 years.

High Dependence on Agriculture

Agriculture is the main occupation in developing countries. More than 70 percent of active labour force is engaged in this primary sector. Population increases and the increased labour stick to agriculture thereby over burdening the firm size. There is low output per head.

Underutilized Natural Resources

Most of the developing countries are rich in natural resources. However, their exploration and exploitation is limited. Sometimes, foreign companies control them. Generally, raw products are exported at low prices.

Lack of Industries and Enterprises

The industrial sector in developing countries is at the primary stage of development. Its contribution to GDP is less than 10% employing 2 to 4% of the labour force. Industrial growth is very slow.

Lack of Capital and Technology

Capital deficiency is another common problem of developing countries. Because the countries are poor, they save less which results in low capital formation. They possess less investment capital. In addition their existing technology is old and unproductive.

Lack of Basic Infrastructures

The factors that help for development are called infrastructures. Good road system, highways, telephone, services, big dams and canals, banks and financial services are some examples of the necessary infrastructures.

Vicious Circle of Poverty

Developing countries is poor. They have low per capita income. Low income means less saving, that is less capital and less investment. Low investment leads to less production that means low income. The vicious circle of poverty is complete. It proves that a poor country is poor because it is poor. It is better understood from the following relation:

Low Investment-Low Production-Low Capital-Low Investment-Low Production-Low Income

Demographic Characteristics

There is high growth rate of population in developing countries. It is as high as 3 percent per annum. Children under the age of 15 constitute a large proportion, generally more than 40 percent of the total population. Together these two age groups from about 45 percent of the population. Because these groups are economically inactive, they have to depend on the family.


Socio-cultural Characteristics

Different kinds of social groups reside in a country. They differ in terms of religion, castes, and creeds, cultures and customs, languages and beliefs, etc. Such social and cultural values have deep impact in the economy of a nation; Developing countries Barbour may discordant social patterns in their economic life.

Dualistic Economy

All the sectors of economy have not been developed in developing countries. Employment opportunities or activities exist in urban areas whereas traditional production method is used in rural areas. Employment opportunities are less. Hence, these countries have dualistic economy which results in various problems with formulating economic policies.

ECONOMICS CONCEPTS ON NATIONAL INCOME.

There are various concepts of National Income. The main concepts of NI are: GDP, GNP, NNP, NI, PI, DI, and PCI. These different concepts explain about the phenomenon of economic activities of the various sectors of the various sectors of the economy.

Gross Domestic Product (GDP)

The most important concept of national income is Gross Domestic Product. Gross domestic product is the money value of all final goods and services produced within the domestic territory of a country during a year.

Algebraic expression under product method is,

GDP=(P*Q)

where,
GDP=Gross Domestic Product
P=Price of goods and service
Q=Quantity of goods and service
denotes the summation of all values.

According to expenditure approach, GDP is the sum of consumption, investment, government expenditure, net foreign exports of a country during a year.

Algebraic expression under expenditure approach is,

GDP=C+I+G+(X-M)

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M)=Export minus import

GDP includes the following types of final goods and services. They are:

1.    Consumer goods and services.

2.    Gross private domestic investment in capital goods.

3.    Government expenditure.

4.    Exports and imports.

Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation:

GNP=GDP+NFIA (Net Factor Income from Abroad) 
or, GNP=C+I+G+(X-M)+NFIA

Hence, GNP includes the following:

1.    Consumer goods and services.

2.    Gross private domestic investment in capital goods.

3.    Government expenditure.

4.    Net exports (exports-imports).

5.    Net factor income from abroad.

TANZANIA ,ECONOMIC OVERVIEW 2015-2016

Economic Overview

Gross domestic production (GDP) growth remained strong at 7% in 2015 due to increased public consumption together with burgeoning construction, communication, financial services and mining sectors. While tourism is the top foreign exchange earner, agriculture, a mainstay of about 70% of households, has continued to post slower growth.

Inflation, at 6.5% in January 2016 due to higher domestic food prices and lagged effects of the Tanzanian shilling’s depreciation, declined to 4.9% in August 2016. Fiscal policy management remains a challenge owing to huge investments in the offing amid ambitious but feasible domestic revenue targets, diminishing aid flows, and volatile global financial markets.

The 2016/17 budget reflects the government’s high priorities in development expenditure in infrastructure while trimming nonessential expenses.

The revenue administration reforms that are in place since November 2015 continue to yield positive impact on monthly revenue collection, which has been on target for each month except a few. Sustaining these efforts remains critical for the government to achieve a revenue target of 16.3% GDP in 2016/17.

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KNOW ABOUT WTO

The Uruguay round of GATT (1986-93) gave birth to World Trade Organization. The members of GATT singed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new organization named WTO.

It was officially constituted on January 1, 1995 which took the place of GATT as an effective formal, organization. GATT was an informal organization which regulated world trade since 1948.

Contrary to the temporary nature of GATT, WTO is a permanent organization which has been established on the basis of an international treaty approved by participating countries. It achieved the international status like IMF and IBRD, but it is not an agency of the United Nations Organization (UNO).

Structure:

The WTO has nearly 153 members accounting for over 97% of world trade. Around 30 others are negotiating membership. Decisions are made by the entire membership. This is typically by consensus.

A majority vote is also possible but it has never been used in the WTO and was extremely rare under the WTO’s predecessor, GATT. The WTO’s agreements have been ratified in all members’ parliaments.

The WTO’s top level decision-making body is the Ministerial Conferences which meets at least once in every two years. Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members’ capitals) which meets several times a year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Disputes Settlement Body.

At the next level, the Goods Council, Services Council and Intellectual Property (TRIPs) Council report to the General Council. Numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as, the environment, development, membership applications and regional trade agreements.

Secretariat:

The WTO secretariat, based in Geneva, has around 600 staff and is headed by a Director-General. Its annual budget is roughly 160 million Swiss Francs. It does not have branch offices outside Geneva. Since decisions are taken by the members themselves, the secretariat does not have the decision making the role that other international bureaucracies are given.

The secretariat s main duties to supply technical support for the various councils and committees and the ministerial conferences, to provide technical assistance for developing countries, to analyze world trade and to explain WTO affairs to the public and media. The secretariat also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become members of the WTO.

Objectives:

The important objectives of WTO are:

1. To improve the standard of living of people in the member countries.

2. To ensure full employment and broad increase in effective demand.

3. To enlarge production and trade of goods.

4. To increase the trade of services.

5. To ensure optimum utilization of world resources.

6. To protect the environment.

7. To accept the concept of sustainable development.

Functions:

The main functions of WTO are discussed below:

1. To implement rules and provisions related to trade policy review mechanism.

2. To provide a platform to member countries to decide future strategies related to trade and tariff.

3. To provide facilities for implementation, administration and operation of multilateral and bilateral agreements of the world trade.

4. To administer the rules and processes related to dispute settlement.

5. To ensure the optimum use of world resources.

6. To assist international organizations such as, IMF and IBRD for establishing coherence in Universal Economic Policy determination

INFLATION.

 Inflation is a measure of changes in the cost of living. Inflation is measured by using a weighted basket of goods and looking at the changes in price. However, in practice, there are many practical difficulties for measuring inflation.

1. Family Expenditure Survey does not include everybody. E.g pensioners are excluded. Pensioners have different spending habits e.g. heating / bus travel account for a higher % of their expenditure. Young people will benefit more from falling prices of mobile phones and electronic goods. Therefore, the basket of goods may not be representative. Also, as it is updated once a year, it may soon become outdated for changes in spending habits.
2. Changes in Quality of goods. Changes in the quality of goods mean that price rises may not reflect inflation, but just the fact it is a different good. For example, computers have many more features than 10 years ago, so it is difficult to compare prices because they are effectively different goods. This is similar situation for many goods such as mobile phones and cars.
3. One off shocks may give a misleading impression. For example, a rise in oil prices will lead to higher inflation. But, this rise in prices may just be temporary. Tax changes have a similar effect.
4. Which Measure to Use? – CPI, RPI or RPIX. RPI includes mortgage interest payments. CPI doesn’t. In 2009, with falling interest rates, RPI gave a negative inflation rate, whilst CPI was positive. Therefore, it is important which measure is used. The government’s preferred measure is currently CPI.
5. People have different inflation rates. Rising electricity and gas prices may effect old people more than young people. Therefore, old people could have a higher inflation rate than the national average. This is important if pensions are index linked because their cost of living may rise more than prices causing a decrease in living standards.

Different Types of Inflation Measures

ü  RPI  – old headline inflation rate

ü  RPIX  – RPI less mortgage payments this is the underlying rate.

ü  This is used because interest rates are increased to reduce inflation but this higher interest rates increase the cost of mortgage repayments

ü  RPIY = RPIX less taxes (This is sometimes known as the harmonized rate)

ü  CPI – Consumer Price Index

Applications of linear programming for solving business problems:

 1. Production Management:

LP is applied for determining the optimal allocation of such resources as materials, machines, manpower, etc. by a firm. It is used to determine the optimal product- mix of the firm to maximize its revenue. It is also used for product smoothing and assembly line balancing.

2. Personnel Management:

LP technique enables the personnel manager to solve problems relating to recruitment, selection, training, and deployment of manpower to different departments of the firm. It is also used to determine the minimum number of employees required in various shifts to meet production schedule within a time schedule.

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INCOME INEQUALITY

   

In economics, the Lorenz curve is a graphical representation of the distribution of income or of wealth. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution.

The curve is a graph showing the proportion of overall income or wealth assumed by the bottom x% of the people although this is not rigorously true for a finite population. It is often used to represent income distribution, where it shows for the bottom x% of households, what percentage (y%) of the total income they have. The percentage of households is plotted on the x-axis, the percentage of income on the y-axis. It can also be used to show distribution of assets. In such use, many economists consider it to be a measure of social inequality.

The Lorenz curve is a measure of inequality.

The Lorenz curve shows cumulative income against cumulative income groups.
The government introduced policies to reduce inequality. Higher income tax on rich, benefits for the poor, the Lorenz curve would shift to the left and get closer to the line of equality.
If there was an increase in wages for the highly skilled but not low skilled workers the Lorenz curve would shift to the right, showing an increase in inequality.             

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AUTOCORRELATION.

1. Autocorrelation refers to error term one observation related to or affected by the error term of another observation in other words it correlated to it. There is no similar number of features between autocorrelation and heteroscedasticity. It occurs in data when the error term of a regression forecasting model is correlated.

2. Consequences of autocorrelation.

v The estimates of the regression coefficients no longer have a minimum variable property and may be inefficient.

v The variance of the square error terms may be greatly underestimated by the mean sequence error value.

v The true standard deviation of the estimated regression coefficient is seriously underestimated.

v The confidence intervals and test using T and E distributed are no longer strictly applicable.

v Ordinary least square (OLS) estimators are still unbiased and linear. This is because both unbiased and consistency do not depend on the assumption six which in this case is violated.

v As ∑e² is affected then R² is also affected.

v The ordinary square estimators will be inefficient and therefore no longer BLUE.

 

3 The ways of detection of autocorrelation.

v Graphical Method: There are various ways of examining the residuals. The time sequence plot can be produced. Alternatively, we can plot the standardized residuals against time. The standardized residuals are simply the residuals divided by the standard error of the regression. If the actual and standard plot shows a pattern, then the errors may not be random. We can also plot the error term with its first lag. A positive autocorrelation is identified by a clustering of residuals with the same sign. A negative autocorrelation is identified by fast changes in the signs of consecutive residuals.

v The Runs Test- Consider a list of estimated error term, the errors term can be positive or negative. In the following sequence, there are three runs.(─ ─ ─ ─ ─ ─ ) ( + + + + + + + + + + + + + )  (─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─  ) A run is defined as uninterrupted sequence of one symbol or attribute, such as + or -. The length of the run is defined as the number of element in it. The above sequence as three runs, the first run is 6 minuses, the second one has 13 pluses and the last one has 11 minuses

v Use the Durbin-Watson statistic to test for the presence of autocorrelation. The test is based on an assumption that errors are generated by a first-order autoregressive process. If there are missing observations, these are omitted from the calculations, and only the no missing observations are used. To get a conclusion from the test, you will need to compare the displayed statistic with lower and upper bounds in the table.  If D > upper bound, no correlation exists; if D < lower bound, positive correlation exists; if D is in between the two bounds, the test is inconclusive.

4. Remedies of autocorrelation

1. To find out if the autocorrelation is pure and not the result of mis- specification of the model. Sometimes we observe patterns in residual because the model is mis- specified, that is to say it has excluded some important variables or because it is functional form is incorrect.
2. Transformation of the origin model
   If it is pure autocorrelation, one can use appropriate transformation of origin model so that in the transformed model we do not have the problem of pure autocorrelation. As in the case of heterogeneity, we will have to use some type of generalized Least – square (GLS) method.
3. Newey – west method.

In large samples we can use the newey- west method to data standard error of ordinal least square (OLS) estimator that are corrected for autocorrelation. This method is actually an extension of White’s heteroscadicity consistent standard error method.

4. Ordinary Least Square OLS)

In some situation we can use the ordinary least square method