10- Factors influencing growth and development

Question 1

Primary Product Dependency?

Answer 1

Many developing countries continue to have high dependence on extracting & exporting primary commodities. These economies are vulnerable to volatile global prices due to the weather and changes in demand.

Question 2

Why may Primary Product Dependency constrain growth and development?

Answer 2

• Volatility of world prices
• Risks from significant risks of over-specialisation especially when Terms of Trade suffer from main exports decline.
• Resource-rich country may suffer from the natural resource curve including the Dutch disease effect.
• High commodity prices can lead to a currency appreciation- may lead to Dutch disease effect

Question 3

Savings gap?

Answer 3

The inadequate capital accumulation due to the difficulty to access finance required for investment in poorer countries.

Question 4

Why may the Savings Gap constrain growth and development?

Answer 4

• Savings are needed to finance capital investment.
• In many smaller low-income countries, high levels of extreme poverty make it difficult to generate sufficient savings to provide the funds needed to fund investment projects.
• This increases reliance on aid or borrowing from overseas
• Consumer will buy imported goods

Question 5

The Harrod-Domar Model?

Answer 5

It states that economic growth (GDP) is dependent on the level of savings and the capital output ratio.

y=s/k
y- rate of economic growth
s- the savings to income
k- the capital output ratio

Question 6

How does the Harrod-Domar model explain how the level of savings and capital output ratio affects development and growth?

Answer 6

• Increase savings provide increased finance for investment.
• Increased investment increases the capital stock of an economy e.g. factories and machinery,
• Increases growth

Question 7

What is the capital output ratio?

Answer 7

The ratio of capital required to achieve a certain output over a period of time.

Question 8

Foreign Currency Gap?

Answer 8

A foreign currency gap exists when the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments. In other words, the value of the current account deficit is larger than the value of capital inflows.

Question 9

How can a Foreign Currency Gap constraint development and growth?

Answer 9

• Countries are forced to use foreign currency top pay interest on debt.
• A nation does not have enough foreign currency to pay for essential imports such as medicines, foodstuffs and critical raw materials and replacement component parts for machinery.

Question 10

Causes of a foreign currency gap

Answer 10

• A country is running a persistent current account deficit on their balance of payments
• There is an outflow of capital from investors in money and capital markets (this is known as capital flight)
• There is a fall in the value of inflows of remittances from nationals living and working overseas

Question 11

Capital flight definition

Answer 11

When individuals and forms in developing countries send money abroad to safer haves as instability in the developing country might lead to risk for financial assets.

Question 12

Causes of the problems with primary product dependancy?

Answer 12

• Natural disasters can wipe out production of natural resources so farmers are left with no income.
• These natural resources are often non-renewable so the country will suffer when they run out.
• Primary products have a low elasticity of demand as people become wealthier they tend to increase their demand for manufactured goods.
• Prebisch Singer Hypothesis- suggests the long run price of primary goods declines in proportion to manufactured goods- which means those dependent on primary products will see a fall in their Terms of Trade.

Question 13

How can demographic factors affect growth and development?

Answer 13

• From the movement of workers from rural to urban areas- so movement from primary to secondary sector.
• Population growth means absolute poverty exists, undermining the economy.

Question 14

How can high debt affect growth and development?

Answer 14

• Massive debt in developing countries means that they are often servicing their debts by paying off the interest on their loans rather than the loans themselves.

Question 15

How can poor access to banking and credit affect growth and development?

Answer 15

For developing countries:

• Less financial infrastructure (banking) makes it difficult to access finance.
• Riskier for lenders to ensure that can get a return on their money.
• Less collateral available to secure

Question 16

How can poor infrastructure affect growth and development?

Answer 16

• Infrastructure necessary for efficiency
• Poor infrastructure will increase transport costs
• It will discourage FDI
• Will make it harder to transport goods and services around the country

Question 17

How can weak education and skills affect growth and development?

Answer 17

• Reduces efficiency
• Reduces productivity
• Makes it harder to compete in a highly competitive environment
• Discourages FDI

Question 18

What are property rights

Answer 18

Property rights confer legal control or ownership of a good. For markets to operate efficiently, property rights must be clearly defined and protected - perhaps through government legislation and regulation.

E.g. patents, copyrights, trademarks, geographical indicators and industrial design.

Question 19

How the absence of property rights affects growth and development?

Answer 19

• Without property rights, insufficient incentives are given to individuals and firms to trade, innovate and develop.
• Property rights give firms the confidence to invest and takes away that risk.
• Absence of property rights discourages FDI with a reduced risk of nationalisation or losing out on their advances.

Question 20

Non-economic factors which influence growth and development?

Answer 20

• Corruption- rising costs for businesses- less success- some groups such as woman may not have access to the labour market
• Civil wars- less confidence and FDI
• Institutional factors- financial markets, public administration and judiciary. Developing countries poorly funded and managed so suffer from corruption. UK can developed with monetary policy at BofE seperate to governement.

Question 21

Tragedy of the Commons definition

Answer 21

• The tragedy of the commons is a situation where there is overconsumption of a particular product/service because rational individual decisions lead to an outcome that is damaging to the overall social welfare.
• The tragedy of the commons theory assumes that when making decisions, people take the course of action that maximises their own utility. However, if many people seek to do this, the net effect may be to deplete a resource making everyone worse off in the long run.
• Partly due to the free-rider problem