4.3

Question 1

Explain the three dimension of the Human Develeopment Index (HDI), including how they are measured and combined

Answer 1

“Health” (life expectancy)
“Education” average years in education
“Standard of living” GNI per capita

Question 2

Explain the advantages and limitations of using the HDI to compare levels of develeopment betwen countries and over time

Answer 2

Adv-
Broad - 3 components- and still takes into account incomes
Health and education elements provide a focus on develeopment outcomes
Allows for progress to be measured and compared over time
Provides attention to those countries with low levels of develeopment
Dis-
Doesnt take into account income distribution - however, inequality adjusted HDI (IHDI) could be used to surmount this problem
Arbitary weighting
Doesnt include freedoms or choice available to people in the country

Question 3

Explain the two alternatives to HDI as indicators of development

Answer 3

Sustainable Economic Develeopment Assesment (SEDA) has 10 components
Access to clean water

Question 4

What is primary product dependency

Answer 4

Occurs in countries where the value of production of primary products accounts for a large proportion of GDP, exports and employment. Primary products tend to have a very low income elasticity of demand (YED). As world income increases, theres a less than proportion increase in demand. Primary products also have very little added value. Supply side shocks effect ppd countries alot.

Question 5

How does primary product dependency and Volatlity of commodity prices influence growth

Answer 5

Fall in exports may cause a fall in actual growth
Lower profits leads to a fall in investment

Question 6

How does primary product dependency and Volatlity of commodity prices influence development

Answer 6

GNI/capita leads to lower standards of living and less education

Question 7

What is Volatility of commodity prices

Answer 7

Due to the inelastic nature of both demand and supply of commodities, small changes in demand or supply can lead to large changes in price. When commodity price rise, GDP rise and vise versa

Question 8

What is the evaluation in regards to the negative effects of Primary product dependency and Volity of commodity prices

Answer 8

ppd- External factors such as a bad harvest do not always happen and could in fact be very rare + not all primary products have a low income elasticity of demand for example diamonds
Vocp- Solutions eg fair trade and a buffer stock scheme

Question 9

What is the Savings gap: Harrod-Domar model

Answer 9

A viscious cycle of low savings
Low income - Low savings - Low investment - Low Productivity - repeat

Question 10

How does the savings gap: Harrod-Domar model influence growth

Answer 10

Fall in consumption and investment leads to a fall in AD
A fall in capital (CELL) leads to a fall in AS

Question 11

How the savings gap: Harrod-Domar model influences develeopment

Answer 11

A fall in income leads to a fall in GNI per capita, especially if unemployed
Tax revenue is low and thus theres a low gov spending in healthcare and education

Question 12

What is the evaluation in the savings gap: Harrod-Domar model

Answer 12

FDI- Investment from foreign countries

Question 13

What is the foreign currency gap

Answer 13

a situation where a country’s expenditures in foreign currency, such as payments for imports or servicing foreign debt, exceed its foreign currency earnings from exports or other sources, such as foreign investment or remittances.

Question 14

How does the Harrod-Domar model influence growth

Answer 14

Lack of investment limits the level of AD and limits actual growth (AD=C+I+G+X-M)
Low levels of investment limits the productive potential of the economy (potential growth)

Question 15

How does the Harrod-Domar model influence development

Answer 15

Low investment means capital quality and quantity develop at a slower rate
The leads to slower gains in the level of living standards
GNI per capita grows more slowly
HDI grows more slowly

Question 16

Harrod-Domar model evaluation

Answer 16

Any intervention that breaks the cycle
Finance is internationalised, so funds may be available abroad, even if domestic savings are low
Microfinance could be used to create funding for those that otherwise would not get it
FDI attracts investment from abroad without needing domestic funds for investment

Question 17

What is Foreign currency gap

Answer 17

When foreign countries lack foreign currency.
Dependency on exports of primary products
Capital flight (transfers of assets to other countries)
High interest payments on foreign loans
This can lead to a lack of foreign currency with which to buy imported capital goods (i.e. machinery, etc.)

Question 18

How does foreign currency gap influence growth

Answer 18

Lack of capital goods limits the productive capacity of the economy
This restricts the potential growth of the economy

Question 19

How does foreign currency gap influence development

Answer 19

Lack of capital means that the country is not increasing the value of what they are producing
The leads to slower gains in the level of living standards
Slow growth of GNI per cap
HDI grows more slowly

Question 20

Evaluation to Foreign currency gap

Answer 20

Foreign finance may be available to provide funds for capital goods
Aid could provide the capital goods or the funds to buy them

Question 21

What is Capital flight

Answer 21

Capital flight is the uncertain and rapid movement of large sums of money out of a country
If the money was left in domestic banks, then credit could be created by banks for consumers and businesses to spend
Possible reasons:
Political unrest / conflict
Corruption and/or fears of governments seizing assets
Exchange rate volatility / uncertainty

Question 22

How capital flight impacts growth

Answer 22

Lack of funds for domestic investment along with a lack of FDI
Limits actual growth as investment is a component of AD
Limits potential growth as low levels of investment limits growth of LRAS

Question 23

How capital flight impacts development

Answer 23

Lack of funds for investment means output of the economy remains low value
This limits the level of GNI per capita
This limits the living standards dimension of HDI

Question 24

Capital flight evaluation

Answer 24

Governments can impose restrictions on the freedom to move money out of the economy
Likely to be highly unpopular, but can stop the outflow of currency from an economy
Alternatively, any strategy that creates funding/credit for investment could resolve the problem - e.g. microfinance, aid, FDI - these provide a way for investment without domestic funds
Although FDI might be unlikely for countries experiencing capital flight

Question 25

Explain demographic factors (as a factor impacting growth and development)

Answer 25

This vague term covers a range of different population issues
The main problems include:
High population growth
Rapidly growing populations need rapidly growth GDP just to stand still
If total population rises faster than total real GDP then real GDP per capita will fall
+ ageing population (higher dependency ratio)

Question 26

How demographic factors impact growth

Answer 26

Rapidly rising population can lead to a rising level of LRAS (potential growth) as the quantity of labour rises (even though it may lead to falling GDP per capita)

Question 27

How demographic factors impact development

Answer 27

If total population rises faster than GNI, then GNI per capita will fall
Living standards dimension falls
Rapidly rising population may make education less accessible as there is limited capacity (reduces years of schooling)

Question 28

Demographic factors evaluation

Answer 28

Falling birth rates over time means that globally, population is not rising as rapidly as it was - i.e. the issue is becoming less significant

Question 29

What is debt

Answer 29

Historic lending can leave developing economies burdened with significant levels of debt
High levels of debt mean significant spending on debt interest payments
Annual spending on interest removes spending on domestic infrastructure, health, education, etc.

Question 30

How debt influences growth

Answer 30

Debt payments are a withdrawal from the economy so every year debt interest is paid AD is lower than it would otherwise be
Reduces actual growth
Reduces ability of governments to develop supply side of the economy
Limits potential growth

Question 31

How debt influences development

Answer 31

Greater spending on interest payments limits health & education spending
Reduces years of schooling and life expectancy
Reduces level of HDI

Question 32

Debt evaluation

Answer 32

Gov may need it in order to grow an economy, capital - increase LRAS

HIPC debt relief programme- countries who are heavily indebted poorer countries will be given special assistance from the International Monetary Fund (IMF) and the World Bank

Question 33

What is Access to credit and banking

Answer 33

Developing countries often have less developed financial systems than developed countries
A lack of an established banking sector may limit the access to credit for businesses and individuals
Less availability of finance means less investment (refer back to the Harrod-Domar model)

Question 34

How access to credit and banking impacts growth

Answer 34

Lack of finance means lack of investment
Limits actual growth as investment is a component of AD
Limits potential growth as low levels of investment limits growth of LRAS

Question 35

How access to credit and banking impacts development

Answer 35

Lack of funds for investment means output of the economy remains low value
This limits the level of GNI per capita
This limits the living standards dimension of HDI

Question 36

Access to banking and finance evaluation

Answer 36

Some developing countries that do not have the banking infrastructure in towns & villages are able to now use ‘mobile banking’ via phones for citizens.
Alternatively, other sources of funds could be available e.g. Micro-finance, FDI etc.

Question 37

What is infrastructure

Answer 37

Infrastructure includes transport, communications, energy, etc.
Poor infrastructure reduces mobility in the economy and deters investment (both domestic and FDI)
Can limit access to international markets - so limiting amount of trade
Developing economies may lack the ability to fund large scale infrastructure projects

Question 38

How infrastructure impacts growth and development

Answer 38

How it affects economic growth
Lack of investment reduces AD (AD=C+I+G+X-M)
This limits the level of actual growth
Lack of investment also limits the increase in potential growth
How it affects development
Low investment means capital quality and quantity develop at a slower rate
The leads to slower gains in the level of living standards
GNI per capita grows more slowly
HDI grows more slowly

Question 39

Infrastructure evaluation

Answer 39

External funding can help to plug any domestic funding gap
E.g. Chinese state investment - significant investment in infrastructure in Sub-Saharan Africa

Question 40

Summarise education/skills as a factor

Answer 40

The education and skills of the workforce is sometimes referred to as ‘human capital’
Low levels of education and skills leads to low levels of productivity
Low skills levels may deter FDI - i.e. foreign companies will only look to invest in a country if workers have the necessary skills

Question 41

How education/skills impacts growth and development

Answer 41

How it affects economic growth
Low productivity negatively impacts LRAS so reducing potential growth
Lack of investment would reduce AD (AD=C+I+G+X-M)
This limits the level of actual growth
How it affects development
Low skills and productivity levels limit the earnings potential of workers
This limits the level of GNI per capita, so limiting the living standards dimension of HDI

Question 42

Education/Skills evaluation

Answer 42

Where domestic funding prevents the development of education, foreign sources of funding can be found
Aid could provide sources of funding to help more children go to school

Question 43

Summarise Absence of property rights
as a factor

Answer 43

When assets lack defined ownership they cannot be used as effectively to create investment
Cannot create value for the poor due to a lack of property rights (i.e. a lack of an identifiable owner)
Having clear property ownership allows banks to lend against the value of that asset (‘collateral’)
An absence of property rights therefore limits invest

Question 44

Evaluation to absence of property factors as a factor

Answer 44

When assets lack defined ownership they cannot be used as effectively to create investment
Cannot create value for the poor due to a lack of property rights (i.e. a lack of an identifiable owner)
Having clear property ownership allows banks to lend against the value of that asset (‘collateral’)
An absence of property rights therefore limits invest

Question 45

Summarise non-economic factors as a factor

Answer 45

This covers a range of factors, including:
Corruption
Diseases, e.g.
HIV/Aids
Malaria
Geography - e.g. problems trading if landlocked
Conflict

Question 46

How non-economic factors impact growth and development

Answer 46

How it affects economic growth
Corruption can lead to poor economic decision making
Also deters businesses that do not want the uncertainty associated with corruption
Less investment lowers AD and actual growth
How it affects development
Health problems from diseases limit HDI by lowering life expectancy
Conflict lowers income earning potential (GNI per capita), disrupts schooling (years of schooling), and reduces life expectancy

Question 47

Non economic factors evaluation

Answer 47

Problems that seem immense can be overcome:
Large drop in new HIV cases and deaths from AIDS in Sub-Saharan Africa since 2000
Corruption can be reduced through a change of government
Conflict can be ended by peace deals (Ethiopia/Tigray peace deal in 2022)