4.3- Emerging and developing economies Flashcards
What are the 3 elements of the Human Development Index?
1- GDP per head, which is measured at purchasing power parity.
2- Health, which is measured in terms of life expectancy.
3- Education, which is measured in terms of mean years of schooling at age 25 and expected years of schooling at age 4.
What are the advantages of using the HDI?
1- It is a broader measure than GDP per capita
2- It is used to make comparisons of development between countries.
What are the limitations of the HDI?
1- It is too narrow, as it only comprises three aspects of development.
2- It is an average measure and so disguises disparities and inequalities within countries.
3- It is only concerned with long term-development countries.
What are examples of other indicators of development?
1- Energy consumption per person
2- The proportion of population with internet access.
3- Mobile phones per thousand of population
4- The proportion of population with access to clean water.
5- The degree of inequality
6- The degree of democracy.
What are the factors that affect growth and development?
1- Primary product dependency
2- Volatility of commodity prices
3- Savings gap
4- Foreign currency gap
5- Demographic factors
6- Debt
7- Access to credit and banking
8- Infrastructure
9- Educations/skills
10- Absence of property rights
11- Non Economic factors (civil wars, corruption)
What is Primary product dependency?
Primary product dependency occurs in countries where the value of production of primary products accounts for a large proportion of GDP, exports and employment
What are the two types of primary product?
1- Hard commodities: usually those that are mined or extracted, e.g. copper
2- Soft commodities: usually agricultural goods, e.g. rice
What are the various issues for countries dependant on primary products?
1- Extreme price fluctuations: since both the supply of, and the demand for, primary products tends to be inelastic, any change in the conditions of supply or demand causes large price fluctuations.
2- Fluctuations in producers revenues resulting from price fluctuations: These make it more difficult to plan investment and output.
3- Fluctuations in foreign exchange earnings: revenues from exports of primary products also fluctuate, making it more difficult for for the government to plan economic development.
4- Protectionism by developed countries.
5- Shortages of supplies for domestic consumption: cash drops are usually exported, meaning that there is little left for domestic consumption.
6- Finite supplies of hard commodities.
7- Appreciation of the currency: demand for a particular commodity will cause an increase in demand for the country’s currency.
8- Falling terms of trade
What is the Prebisch-Singer hypothesis
According to this hypothesis the demand for many primary products tends to be income income inelastic whereas the demand for manufactured goods is income elastic. Therefore as real incomes rise, the demand for manufactured goods will increase at a faster rate than the demand for primary goods. As a result the prices of manufactured goods rise faster than the prices of primary products. Consequently, the terms of trade of developing countries fall relative to those of developed countries.
What are the criticisms of the Prebish-Singer hypothesis?
1- The developing country may have a comparative advantage in the primary product.
2- The real price of primary products might increase over time with rising world incomes and population.
3- Foreign direct investment has significantly increased in recent years in countries dependant on primary products.
Explain the savings gap/ Harrod-Domar model
Developing countries have lower incomes and thus they save less. This means there
is less money for banks to lend, reducing borrowing and thus reducing
investment/consumption
The Harrod-Domar model illustrates the problem of how countries with low GDP per head will experience low saving ratios. Low savings mean that it will be difficult to finance investment and, therefore, capital accumulation will be limited. This translates into low output and low GDP.
What are the reasons the Harrod-Domar model is criticised?
1- It focuses on physical capita land ignores the significance of human capital
2- It assumes a constant relationship between capital and output.
3- The savings gap may be filled by means other than domestic savings, such as the FDI
What is the Foreign currency gap?
This is when exports from a developing country are too low compared to imports to finance the purchase of investment overseas required for faster economic growth.
What are the causes of the foreign currency gap?
1- Dependency on exports of primary products.
2-Dependancy on imports of oil and manufactured goods
3- Interest payments on loans from foreign countries.
4- Capital flight
What is capital flight?
Capital flight occurs when individuals and countries decide to transfer cash deposits to foreign banks, or to buy shares in overseas companies or assets in foreign countries.
How does capital flight cause influence growth and development?
Large amounts of money are taken out of the country, rather than being left there for people to borrow and invest. If money was placed in banks within the country. then credit could be created by banks for consumers and businesses to spend.
How do demographic factors limit economic growth?
1- Developing countries tend to have higher population growth, which limits development. This is because if the population grows by 5% the economy needs to grow by 5% in order to maintain living standards.
2- Ageing populations result in smaller working populations
How does debt impact economic growth/development?
Developing countries have received loans from developed countries. They now suffer from high interest payments. This means money is flowing from developing countries to developed countries. This means they may have less money to spend on services for their populations and may need to raise taxes which limits growth.
What are the causes of debt?
1- Primary product dependency
2- Interest payments on debt
3- Loans for major investment projects or military equipment
4- Depreciation of currency.
How does access to credit and banking impact economic growth and development?
Developing countries have limited access to credit and banking compared to developed countries. This means those in developing countries cannot access funds for investment. And thus limits growth.
What is a countries infrastructure?
A countries infrastructure refers to the physical and organisational structures and facilities that are required for the efficient operation of a society and operations.
How does infrastructure impact economic growth ?
If a country’s infrastructure (roads and rail) is poor it is likely to deter both domestic investment and FDI.
How does education/skills impact growth/development?
If the school enrolment ratio is low then the levels of literacy and numeracy are likely to be low. In turn:
1- The productivity of the workforce is likely to be low.
2- This will act as deterrent to FDI
What are property rights?
Property rights refer to the exclusive authority to determine how a resource is used whether that resource is owned by the government or individuals.
