What does the vicious circle theory suggest ?
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Answer: C. poverty perpetuates itself in mutually reinforcing circles on supply and demand sides
Explanation
The vicious circle theory posits that poverty perpetuates itself through mutually reinforcing supply and demand mechanisms. Low national incomes result in low savings which constrain investments and trap countries in underdevelopment. On the demand side, low incomes limit market size and discourage profitable capital investments. Development economists like Ragnar Nurkse popularized the concept of vicious circles of poverty in development theory. The supply side circle highlights low productivity leading to low incomes, savings, and capital accumulation. Breaking these entrenched developmental traps typically requires external aid, institutional reform, or targeted investments.
Developing nations utilize foreign assistance and industrial policies to break free from these self-reinforcing poverty traps. Understanding these economic feedback loops helps international organizations design effective poverty reduction strategies. Human capital development and infrastructure investments are standard prescriptions for countering vicious circles. Being poor due to low productivity combined with high savings contradicts the fundamental mechanics of the theory. The idea that richer countries save less contradicts standard empirical observations of savings rates across nations. Large market sizes in less developed countries contradict the demand-side constraints emphasized by the theory.
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