4.3 - factors affecting growth and development

Question 1

what are the three components of the Human development index and how are they measured

Answer 1

• health (measured by life expectancy at birth)
• education (measured by the mean years of schooling of adults aged 25+ and the
  expected years of schooling of a current 5-year-old over their lives)
• income measured by real GNI per capita at purchasing power parity)

Question 2

how are the components of the human development index combined

Answer 2

Each of the three indicators is given equal weighting and a mean is taken to give a figure
between 0 and 1. The higher the number, the greater the level of development.

Question 3

what are the advantages of using the HDI to measure development over time

Answer 3

• it takes into account 3 different factors which are important for development of a country
• it is relatively easy to calculate because governments tend to collect the statistics used in the data

Question 4

what are the limitations of using the HDI to measure development over time

Answer 4

• health doesnt factor in the quality of life
• education doesnt factor in the the quality and success of education
• there are no considerations for the equality of income
• it is only an indicator and not a precise measure, so it should not be expected to be perfect.

Question 5

name and explain three other measures of development

Answer 5

• the Inequality-adjusted Human Development Index (IHDI) - it adjusts measures for education, health and income according to the level of inequality.
• The Multi-Dimensional Poverty Index (MPI) - it measures the percentage of the population that is multidimensional poor. it uses data for health, education and standard of living but uses a broader range of indicators within these categories.
• The Genuine Progress Indicator - It is calculated from 26 different indicators grouped into three main categories:
  economic, environmental and social . It aims to look at economic sustainability, to ensure development does not limit the amount produced and consumed in the future.

Question 6

what is the difference between economic growth and economic development

Answer 6

economic growth is measured purely by real GDP and the productive potential of the
country, economic development is about improvements in living standards.

Question 7

what is meant by a primary product dependency

Answer 7

an economy that relies solely on the exporting of commodities such as agriculture, mining etc.

Question 8

how can a primary product dependency act as a constraint on development

Answer 8

prices of primary products tends to be volatile which means investment and GDP is volatile. also the terms of trade for primary products tends to fall over time meaning that more exports will need to be sold to buy the same amount of imports

Question 9

why do prices of primary products tend to be volatile

Answer 9

This is because of supply and demand shocks which are prevalent in these markets – for example weather events and conflicts can cause supply shocks. In addition, supply and demand tends to be inelastic, so it takes time for consumers and producers to respond to the change in price. This is because there are few substitutes for the primary products, and it takes times to plant new crops, or rear animals, and find new sources of mining resources so supply cannot respond quickly

Question 10

what is the Prebisch-Singer hypothesis and what does it tell you about countries with a primary product dependency

Answer 10

it suggests the long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their terms of trade .

Question 11

how can the Prebisch-singer hypothesis act as a constraint on development

Answer 11

Because it means that exporters of primary products may see a fall in their bargaining power, and will have to give up more output/primary goods, for the same amount of manufactured goods. This effectively makes them poorer

Question 12

what is meant by a savings gap

Answer 12

the difference between actual savingsand the level of savings needed to achieve a higher growth rate.

Question 13

What is the Harrod-Domar development theory?

Answer 13

economic growth depends on the level of national savings and the productivity of capital investment (the capital output ratio).

rate of growth of GDP = savings ratio/capital output ratio.

Question 14

How do savings act as a constraint on development?

Answer 14

without investment, growth is limited in the productive potential of an economy. Investment can create jobs and prosperity, and by doing this generate tax revenue and public spending on services and infrastructure, so can influence all elements of the HDI

Question 15

what is meant by a foreign currency gap

Answer 15

This is when the country is not earning enough foreign currency from exports to buy imports of capital and other products it would need to develop.

Question 16

how does the foreign currency gap act as a constraint on development

Answer 16

as firms may need to import goods such as computers, or components in order to expand their business, but as they do not make these goods domestically, they would need to import them. Without access to foreign currency they are unable to purchase the imports they need to grow.

Question 17

what is meant by capital flight

Answer 17

Large amounts of money are taken out of the country , rather than being left there
for people to borrow and invest.

Question 18

how can capital flight act as a constraint on development

Answer 18

This is a constraint as it represents a withdrawal from the circular flow of income, and therefore decreased AD with multiplier effects. This makes it very difficult for the economy to grow and develop

Question 19

what demographic factors can affect the rate at which a country can grow and develop

Answer 19

• high population growth
• ageing population
• increase in life expectancy

Question 20

how can each lf these demographic factors affect the rate at which a country grows and develops

Answer 20

A high fertility rate will act as a constraint in the short run, as having a high dependency ratio puts pressure on an economies ability to provide public services such as hospitals and schools, and means that output from the working population must be shared between a much larger population.
However, as these people enter the work force it can increase productive potential as long as there are jobs for them to go to.
An ageing population can have the same effect in the short run with pressure to pay state pensions, and falling growth due to a smaller active population.
An increase in life expectancy can have the opposite effect if it means that the retirement age increases – but if not, it can make the pressure of an ageing population worse as pensions have to be paid for longer and people are inactive for a greater proportion of their lives

Question 21

how can external debt act as a constraint on development

Answer 21

External debt is when the government of a country has taken loans from institutions such as the World Bank or International Monetary Fund. This means that they must pay back the debt with interest, and the interest payments can take a large proportion of tax revenue, leaving little fiscal space for spending on public services and supply side policies.money is flowing from developing to developed countries, meaning they have less money to spend on services for their population and
they may need to raise taxes, which limits growth and development

Question 22

how can lack of access to credit and banking act as a constraint on development

Answer 22

Developing countries have limited access to credit and banking compared to developed countries, who have complex systems. This means those in developing
countries cannot access funds for investment and they struggle to save for the future.

Question 23

how can poor infrastructure act as a constraint on development

Answer 23

Low levels of infrastructure make it hard for businesses to trade and set up within
the country, for example if there are a lack of roads. It makes their services and
production less reliable.the development of infrastructure can be expensive and tends to conflict with environmental goals.

Question 24

how can poor education and skills act as a constraint on development

Answer 24

Poor education leads to a fall in the quality of human capital, and this means low productivity. This means that wages are likely to be low, and therefore real GDP/capita will be low leading to poor growth and development. It may also deter FDI, as oversea firms are looking for good value access to workers and other resources in order maintain their profitability. It may mean that technology adoption is slow, and industrialisation may not happen as this requires more skilled workers

Question 25

what is meant by an absence of property rights

Answer 25

Property rights are where individuals are allowed to own and decide what happens to certain resources. A lack of rights mean that individuals and businesses cannot use the law to protect their assets, leading to reduced investment. They will be unwilling to buy machinery, build factories or establish brands.

Question 26

how can an absence of property rights act as a constraint on growth and development?

Answer 26

There is less likely to be investment, particularly FDI when property cannot be protected, which impacts on AD and productive potential

Question 27

what non-economic factors affect growth and development and how

Answer 27

Factors such as poor governance, political instability and civil wars affect economic growth, as uncertainty will reduce consumption and investment, and poor governance will lead to less development as health, infrastructure and education services will be underfunded. Civil wars can be particularly damaging as populations can feel unsafe, and there could be loss of life and loss of capital if damage is caused by bombing and/or fighting.

Question 28

what is trade liberalisation and how does it promote growth and development

Answer 28

Free trade is the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations. World GDP can be increased using free trade, since output increases when countries specialise. Therefore, living standards might increase and there could be more economic growth. It will allow firms to grow as they can export more

Question 29

how does promotion of FDI promote growth and development

Answer 29

FDI is the flow of capital from one country to another, in order to gain a lasting interest in an enterprise in the foreign country. FDI can help create employment, encourage the innovation of technology and help promote long term sustainable growth. It provides LEDCs with funds to invest and develop, helping to overcome the savings gap. It allows a transfer of knowledge, bringing production and management techniques which help to improve labour productivity.

Question 30

how does removal of government subsidies promote growth and development

Answer 30

Government subsidies could distort price signals by distorting the free market mechanism. A free market economist would argue that this could lead to government failure. There could be an inefficient allocation of resources because the market mechanism is not able to act freely. It also has a negative effect on the government budget and could cause excessive debts. However, they can be an effective way to minimise absolute poverty and ensure a minimum standard of living. Removing the subsidies can be politically unpopular and some governments have even been thrown out for attempting to do so.

Question 31

how do floating exchange rate systems promote growth and development

Answer 31

The value of the exchange rate in a floating system is determined by the forces of supply and demand. The government does not have to worry about gold and foreign currency reserves. However, the currency will be volatile and this will make it difficult for importers and exporters.

Question 32

how do micro finance schemes promote growth and development

Answer 32

Microfinance involves borrowing small amounts of money from lenders to finance enterprises. It increases the incomes of those who borrow, and can reduce their dependency on primary products. There could be a multiplier effect from the investment of the loan. They are small loans for usually unbankable people. It allows them to break away from aid and gives borrowers financial independence. Many borrowers are women. Microfinance loans detach the poor from high interest, exploitative loan sharks. They could help businesses to be set up, reducing the issue of the savings gap

Question 33

how does privatisation promote growth and development

Answer 33

This means that assets are transferred from the public sector to the private sector. The government sells a firm so that it is no longer in their control. Free market economists will argue that the private sector gives firms incentives to operate efficiently, which increases economic welfare. This is because firms operating on the free market have a profit incentive, whilst nationalised firms do not. Firms have to produce the goods and consumers want as they are on the free market. This increases allocative efficiency and might mean goods and services are of a higher quality. By selling the asset, revenue is raised for the government

Question 34

how does development of human capital promote growth and development

Answer 34

By developing human capital, the skills base in the economy would improve. This would improve productivity and allow more advanced technology to be used, since workers will have the necessary skills. Businesses struggle to expand where there are skills shortages. It also limits innovation. By developing human capital, the country can move their production up the supply chain from primary products, to manufactured goods and to services, which can earn them more. Bettereducation also improves quality of life. This can be difficult to do and is expensive

Question 35

how does protectionism promote growth and development

Answer 35

Protectionism can help reduce a trade deficit. This is because they will be importing less due to tariffs and quotas on imports. This will help to increase AD. It can protect infant industries and allow them to develop. It can create jobs in the short run.

Question 36

what is the evaluation to how protectionism promotes growth and development

Answer 36

However, protectionism could distort the market and lead to a loss of allocative efficiency. It prevents industries from competing in a competitive market and there is a loss of consumer welfare. Consumers face higher prices and less variety. By not competing in a competitive market, firms have little or no incentive to lower their costs of production. Tariffs are regressive and are most damaging to those on low and fixed incomes. There is also the risk of retaliation from other countries, so countries might become hostile.

Question 37

how does managed exchange rates promote growth and development

Answer 37

Managed exchange rate systems combine the characteristics of fixed and floating exchange rate systems. The currency fluctuates, but it does not float on a fully free market. This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate. It provides more stability than a floating system but requires less intervention.

Question 38

how does infrastructure development promote growth and development

Answer 38

projects such as water, transport, energy all bring positive social benefits such as increasing worker productivity, etc.

Question 39

how does promoting joint ventures with global companies promote growth and development

Answer 39

This occurs when a partnership is formed between two firms based in multiple countries. Joint ventures open up new markets for small firms, so they can distribute their products to customers. This saves them time and funds. It also spreads their risk, which is important in industries where developing a product is expensive. They have all the benefits of FDI, without the negatives of exploitation and some of the profits remain in the country.

Question 40

how do buffer stock schemes promote growth and development

Answer 40

In the agriculture market, governments might intervene with a buffer stock system to reduce price volatility. Governments buy up harvests during surpluses and then sell the goods onto the market when supplies are low. However, historically, these have been unsuccessful. It helps incomes of farmers to remain stable, because fluctuations in the market are reduced and it increases consumer welfare by ensuring prices are not in excess.

Question 41

how does the Lewis 2 sector model of development through industrialisation promote growth and development

Answer 41

- Lewis' two sector model shows that manufacturing employment has a higher productivity than agriculture. - This is because workers in manufacturing can work all year round, and manufacturing is more capital intensive - the provision of tools and machinery increases productivity. - When productivity is higher, wages are higher. Increased wages contributes to development through the ability to purchase more essential items such as housing, food, education and health services

Question 42

how does tourism promote growth and development

Answer 42

Tourism can create thousands of jobs and help shift a developing country away from dependency on primary products. Developing countries tend to have a high marginal propensity to consume, which could create a multiplier effect. It helps to diversify the economy and it could make the country more attractive to FDI, as well as developing their infrastructure. Tourism can also be a way of earning foreign currency for developing countries. The low technology and labour intensive work in tourism is suited to LEDCs.

Question 43

how does development of primary industries promote growth and development

Answer 43

Some developing countries have an abundance of raw materials, so some governments might choose to exploit this advantage and develop the industry so the country can have a comparative advantage in its production. Moreover, primary industries, especially those allied to farming, form the livelihoods of the bulk of the population. It is sometimes the only source of income for most families. Therefore, it is important that the industry is supported.

Question 44

how does fair trade promote growth and development

Answer 44

Fairtrade schemes ensure that farmers can receive a fair price for their goods. Supermarkets buy a guaranteed quantity at a price above the market equilibrium. This helps farmers since they have a guaranteed income and certainty about their sales, so they can plan for the future. Fairtrade can help support community development and social projects, as well as ensuring working conditions meet a minimum standard. It encourages sustainable production, promotes environmental protection, and stops the use of child labour.

Question 45

how does aid promote growth and development

Answer 45

Aid provides temporary assistance to a country, such as humanitarian aid offered to countries after conflicts or natural disasters. Aid could also be a grant for a project that a country might not have the funds for. Aid could be used to reduce human capital inadequacies or to pay off debt. It can improve infrastructure, which can help make the country moreproductive

Question 46

how does debt relief promote growth and development

Answer 46

Debt relief is the partial or total forgiveness of debt. In developing countries, debt is considered to be a principal cause of poverty, since it causes human suffering and misery, and it hampers development. With high levels of debt, financial resources are diverted from infrastructure, education and healthcare. Debt forgiveness can allow a country to import more and increase the population’s standard of living. It improves government finances, so public services could be funded instead.

Question 47

what is the role of the world bank in development

Answer 47

The World Bank can loan funds to member countries, and its aim is to promote economic and social progress by raising productivity and reducing poverty. The World Bank is involved in several projects globally, such as providing microcredit, supporting education, and helping the rebuilding of countries after earthquakes.

Question 48

what is the role of the international monetary fund (IMF) in development

Answer 48

The IMF aims to promote monetary cooperation between nations, and monetary problems can be consulted in the institution. It also aims to help free trade globally, so jobs are supported. The IMF promotes exchange rate stability, and tries to avoid competitive depreciations in the currency. Members can also borrow from the IMF, such as if they need to correct an imbalance in the balance of payments or to pay off national debt. In order to gain loans, countries have to promise to undertake reform, including reducing imports and government spending. These aim to ensure the country does not face similar problems in the future.

Question 49

what are NGOs and give examples

Answer 49

NGOs could be funded by governments, firms or private individuals, but they are not part of governments or for-profit businesses. They are voluntary groups which aim to raise the voices of ordinary citizens. Usually, they focus on particular issues such as human rights, healthcare or the environment. They can lobby the government to make changes, raise funds and undertake projects in developing countries, such as the establishment of schools. e.g. Oxfam, Christian Aid