Examkin

Question

Difficulty: MediumObstacles to Economic Development in Developing Nations

In many developing economies, a persistent high birth rate creates a demographic structure heavily weighted toward young dependents. How does this high dependency ratio directly impede capital formation and economic development?

  1. It lowers household savings capacity and diverts national investment toward immediate consumption and basic social services.Answer
  2. B
    It automatically accelerates industrialization by expanding domestic labor supply and shifting workers into manufacturing.
  3. C
    It increases per capita real income by expanding overall market demand and aggregate domestic spending.
  4. D
    It shifts foreign investment flows directly into the financial capital account to offset low domestic savings.

Answer

It lowers household savings capacity and diverts national investment toward immediate consumption and basic social services.
A high demographic dependency ratio means that a small workforce must support a large dependent population. This depresses household savings capacity and forces both households and the government to prioritize immediate consumption spending over long-term capital formation, directly stalling structural economic development.

Step-by-Step Solution

1
Analyze the demographic effect of a high dependency ratio on household income allocation.
A high ratio of young dependents relative to working-age adults requires that most income be spent on immediate consumption needs (food, primary education, healthcare).
High consumption demands leave minimal residual income available for private household savings.
2
Relate domestic savings capacity to capital formation.
Low domestic savings restrict the financial capital pool needed for investment in physical capital goods and technology.
Economic development requires capital accumulation, which relies heavily on mobilization of domestic savings.
3
Evaluate the impact on government budget priorities.
Public revenues must be directed toward recurrent spending on basic social overheads rather than infrastructure and productive developmental projects.
Diverting national income to immediate maintenance rather than wealth creation creates a structural barrier to long-term economic growth and development.

Key Concept

Demographic Dependency Ratio and Capital Accumulation as Obstacles to Development
Rate this question

Topics

Obstacles to Economic Development in Developing Nations