The Economics of Income: Which 'Wood' You Choose?

EDUCATOR'S VERSION

This lesson printed from:
http://www.econedlink.org/e140

Posted September 15, 2000

Standard: 6

Grades: 9-12

Author: Michael J. Ellerbrock

Posted: September 15, 2000

Updated: August 5, 2009

DESCRIPTION

A key turning point in a nation's economic development is when it starts to use its resources for long term versus short term purposes. A natural resource example is trees: should people use wood for cooking food or building homes? Simpler societies tend to use wood predominantly as a fuel source (an output), whereas more advanced economies use wood principally as a capital good (an input) with which to build durable social infrastructure, e.g., houses, furniture, books, boats, signs, etc. The same principle applies to all types of a nation's resources (natural, human, educational, scientific, technological, financial, political, et al.) - sustainable economic growth depends on implementing a long term vision of resources as inputs for producing outputs as efficiently as possible.

KEY CONCEPTS

Capital Resources, Exchange Rate, Income, Natural Resources

STUDENTS WILL

  • Compare cereal yields. 
  • Compare the conditions of countries. 
  • Explore food production around the world. 
  • Understand the impacts of poverty. 
  • Develop possible solutions to poverty. 

INTRODUCTION

What 'Wood' You Do: Cook Food or Build Houses?

A key turning point in a nation's economic development is when it starts to use its resources for long term versus short term purposes. A natural resource example is trees: should people use wood for cooking food or building homes? Simpler societies tend to use wood predominantly as a fuel source (an output), whereas more advanced economies use wood principally as a capital good (an input) with which to build durable social infrastructure, e.g., houses, furniture, books, boats, signs, etc. The same principle applies to all types of a nation's resources (natural, human, educational, scientific, technological, financial, political, et al.) - sustainable economic growth depends on implementing a long term vision of resources as inputs for producing outputs as efficiently as possible.

RESOURCES


PROCESS

Agricultural & Food Security
A safe, secure food supply is vital to a nation's health and development, enabling its government, businesses and citizens to make long term plans and investments. Some countries make a significant public investment in agricultural research and extension assistance, as in Canada, the United States and Asia (where the "Green Revolution" generated 4-5% annual growth in rice and wheat in India in recent decades), whereas other nations under-invest in agriculture, like Ecuador and Zambia. Other nations, such as Malawi, make poor choices by over-investing in crops like hybrid maize that do not reflect that nation's comparative advantage (i.e., the fertility of their agronomic resources relative to competing neighbors), instead of raising potentially more lucrative crops like burley tobacco for export and then importing maize from its maize-abundant neighbors. In economic terms, when Malawi raises maize it incurs large opportunity costs from not producing tobacco.

In regard to protecting natural and aesthetic resources, it is a mistake to think that economic development and environmental preservation are bitter enemies. In reality, more advanced economies generally do a better job of protecting their environmental assets than do poorer countries. Why? Because it is hard to get hungry, unemployed people to think long term about their environmental resources, e.g., to see their rain forests as capital assets rather than as sources of farmland. Even within agriculture, the poorest farmers tend to "mine" their soil's fertility by not making long term fertility-enriching investments in such things as terraces, grass strips, etc.

The solution to starvation and malnutrition is not necessarily for every hungry person to become a self-sufficient farmer, but to have a job with which to earn an income to buy food. Rain forests produce many marketable products (spices, pharmaceuticals, rubber, resins) and services (education, eco-tourism) which can be sold for income without destroying the forests. Furthermore, environmental conservation is an expensive enterprise in need of much scientific expertise and financial support. Hence, around the world, concern about preserving environmental quality tends to increase with incomes.

Natural Resources - some countries have plentiful supplies (endowments) of valuable natural resources and others do not. Saudi Arabia has a lot of oil, whereas Jordan does not. Jordan thus faces a more difficult path to developing a high standard of living.

Not only is it fortuitous to have ample natural resources, it also imperative to use them wisely. Whereas Botswana uses its valuable resources (primarily diamonds) efficiently, The Democratic Republic of the Congo (formerly Zaire) does not use its abundant supply of diamonds, gold, chromium and uranium as productively as possible.

Human Capital & Advanced Technology
Another vital turning point in economic growth is the development of people. A nation's educational, scientific, intellectual, artistic and cultural resources are not just ends in themselves for immediate enjoyment, they also represent capital assets that can enhance the quality of life for future generations. Anti-child labor laws reflect this view in the best interests of the individual child and future national productivity. Countries with a lack of abundant natural resources, like the "Pacific Rim" nations (including Korea, Japan, Singapore, Thailand, Taiwan, among others), have wisely concentrated on development of their human and technological resources. With rather homogeneous cultures, they have easily developed stable legal and political systems and sophisticated urban infrastructure. However, people outside the region have expressed some concern about a lack of opportunities for girls and women to pursue professional advancement.

Critical first steps toward investment in human resources include maternal health programs and immunization of children against preventable diseases. These actions generally decrease the among children, and increase life expectancies, allowing households to undertake longer-term planning and investments.

Economic Openness
An important lesson learned from economic history is that international trade usually benefits all parties involved, regardless of size or wealth. Specialization and trade enhances a nation's productivity and standard of living. Western Europe and Eastern Asia governments understand this principle and have enjoyed immense benefits from opening their economies to imports of others' goods and services, thereby increasing their own exports. During the 1950s, Argentina and other Latin American countries cautiously avoided trade under the goal of national self-sufficiency. These inward-looking policies isolated Argentina from participating in much of the global growth in the 1960s and 1970s. Chile has participated in world trade, but most of the benefits have accrued to the richest Chileans, thereby widening the gap in Chile's national income distribution and causing civic unrest.

Political Stability - another key to sustainable economic development is stability in a nation's political, financial and civic systems. Stability has been a boon to long-term business investment and consumer confidence in Canada, the United States and China (where the "Household Responsibility System" generated approximately 11% annual economic growth during the 1980s and 1990s). These countries allow their citizens to benefit from the output of their productive activities, which promotes a long term vision among workers. In economic terms, the institution of property rights is critical for entrepreneurs to be willing to take risks in hopes of earning profits. Political instability has hurt long-term planning in Uganda, Rwanda and, most recently, Indonesia.

A key government policy involves currency exchange rates. Currency exchange rates determine the prices consumers pay for imported goods and producers receive for their exports. During unstable times, governments are tempted to adopt a short term perspective and deliberately overvalue their currency, a strategy which cannot be sustained. Eventually the country must devalue its currency back to internationally competitive levels, which can cause even more social unrest, as it has recently in Indonesia and Mexico.

ASSESSMENT ACTIVITY

Compare cereal yields (average weight of production of corn, rice, and other grains) per unit of land for Malawi and Thailand.

To make comparisons, go to:data.worldbank.org/indicator/AG.YLD.CREL.KG/countries/MW-TH?display=graph

Which country is likely to enjoy a higher standard of living? Why? Compare the growth in yields for Thailand and Malawi between 1961 and 2008. Is this growth related to economic development?

For More Info:

What is community-based natural resource management? How does involving communities in decisions regarding management of their natural resources (including soil, woods, and others) enhance the possibilities for more effective long-run development? How are incentives changed when communities are able to effectively voice their concerns about and involve themselves in managing their resources?

In 1997, Haiti was the poorest country in Latin America, with an average income per person of $250 per year. Venezuela was a relatively prosperous middle-income country with a per capita income of $3,020 per year. Please contrast the two countries' approaches with respect to health care. Also contrast the current health status of each country. Where is life expectancy higher? Where is infant mortality lower?

Which country invests more in children, in health care and in education? How are prospects for economic development in Haiti likely to be stunted by the inability to invest in children?

Convertibility of money between two countries refers to the ability to exchange one currency for another (for example, to convert US Dollars to Japanese Yen) in a free market. How does convertibility of money affect the ability to trade between two countries? How does this trade, then, make people in the country better off?

How do the lending and credit operations of the International Monetary Fund (IMF) promote or fail to promote political stability? During the recent financial crisis, the IMF took a substantial and highly visible role. What are some of the ways in which the IMF intervened on the international scene during the past few years?