4.3.2, 4.3.3 Flashcards
what are the economic factors that affect growth and development?
primary product dependency, volatility of commodity prices, savings gaps, foreign currency gaps, capital flight, demographic factors, debt, access to credit and banking, infrastructure, education and skills, absence of property rights
what is a primary product?
Primary products include agriculture, mining etc
what types of countries are most likely to be dependent on primary products?
developing countries economies are most dependent on primary products
why can countries not rely on primary products as a source of revenue in the long run?
They are often non-renewable, which means the
country will suffer when they run out of the product. they will need to find other sources of revenue.
what is the income elasticity of demand for primary products?
They tend to have a low-income elasticity of demand , which means as people get wealthier, they don’t continue to increase the amount of primary products they buy whereas they are likely to increase their demand for manufactured goods
what does the Prebisch Singer Hypothesis state?
the long run price of primary goods declines
in proportion to the price of manufactured goods
what is the effect of the Prebisch Singer Hypothesis?
those dependent on primary exports will see a fall in their terms of trade
why is the Prebisch Singer Hypothesis weakened in recent times?
in recent years, there has been a rise in the prices of some key commodities , such as food and a fall in prices of some manufactured goods due to the expansion to places like China.
what is dutch disease?
This is when a country becomes a significant commodity producer in a short amount of time, causing an increase in demand for the currency (to enable people to buy the goods) which pushes its value
up. This increases export prices and leads to a reduction in competitiveness of the economy, causing a fall in output in other areas.
how might primary products be used to increase growth?
It is suggested that countries should use primary product revenue to invest in manufacturing. this has occurred with Saudi Arabia and there oil supply
what primary products don’t have a low income elasticity of demand?
diamonds, gold , rare metals
why are primary products volatile?
they are volatile because the price elasticity of demand and supply is inelastic and supply fluctuates often due to the fact primary products are affected by factors such as the weather which alters supply
why is the volatility of primary products affect growth and development?
These large changes in price mean that producers’ income and the country’s earnings are also rapidly fluctuating, making it difficult to plan and carry out long
term investment as well as meaning that producers can see their income fall very rapidly, causing poverty.
why does the volatility of commodity prices affect growth and development?
When prices of commodities rise for a number of years, there tends to be over-investment in the production of the commodity causing long term risk when the price eventually falls.
define the saving gap?
A savings gap is the difference between actual savings and the level of savings needed to achieve a higher growth rate.
how does the savings gap affect growth in developing countries?
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.
how does the savings rate compare from africa to the average middle income countries?
The savings rate in Africa is around 17% of GDP compared to 31% on average for middle income countries (Tutor2u).
what is the Harrod-Domar-model?
The Harrod-Domar model suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment.
what does the harrod-domar model suggests for developing countries?
the savings gap in developing countries is what is prohibiting growth. growth requires capital and labour. developing countries have excess labour but not enough capital. In order to improve capital, investment is necessary and investment requires savings.
what are the problems with the harrod-domar model?
Economic growth is not the same as economic development, difficult for individuals to save when they have little income, borrowing from overseas causes problems with debt, investment could be wasted
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 or other goods from overseas that are required for faster economic growth.
what country suffers from a foreign currency gap?
Ethiopia. In 2018, public debt was around 60%
of GDP; most of it in foreign currency so it is possible that they will not have enough foreign currency to repay their debt. It is thought there are only enough currency reserves to pay for a month of imports
what is capital flight?
Large amounts of money are taken out of the country , rather than being left there for people to borrow and invest
how does capital flight affect growth and development?
if money was left within the banks, then this could create credit by banks for consumers and business to spend
why might capital flight occur?
This can occur because of lack of confidence in the country’s stability, to hide it from government authorities or simply for profit repatriation.
what is an example of capital flight?
the Argentine economic crisis in 2001.
what are demographic factors that affect growth?
developing countries tend to have higher population. whatever rate population increases by then economy must increase at same rate for living standards to remain same. this high birth rate puts pressure on the government to pay for healthcare and it means there is high youth unemployment
when is the African population expected to double by and what is the effect of this?
it is expected to double by 2050 which will create complications for efforts to reduce hunger and poverty
how does debt affect growth and development?
During the 1970s and 1980s, developing countries received vast loans from banks in the developed world. Now, they suffer from high levels of interest repayment ; sometimes even higher than the loans and aid they receive from developed
countries, meaning money is flowing from developing to developed countries. This means they have less money to spend on services for their population and
they may need to raise taxes, which limits growth and development.
what is an example of a country with high debt?
Nigeria’s debt is 52% of GDP
is borrowing bad for growth?
no borrowing is not inherently bad as countrys borrow to expand just like firms do however the problems occur when governments take on too much debt and doesn’t invest it well
how does access to credit and banking affect growth and development?
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.
what are loan sharks?
a moneylender who charges extremely high rates of interest, typically under illegal conditions:
how do loan sharks affect growth and development?
as some community cant access finance through banks they may borrow through loan sharks who charge extremely high rates of interest which could leave them in permanent debt
how does the infrastructure affect growth and developement?
In a developed country, there is a complex network of buildings, roads, ports, railways, airports, utilities and electricity cables. 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
what are the cons behind building up infrastructure?
the development of infrastructure can be expensive and tends to conflict with environmental goals. also with a lack of property rights there could be a negative production externality for example china building infrastructure in Africa, villagers could have their houses destroyed in order to build infrastructure
what is an example of poor infrastructure affecting growth and development?
India is a country suffering from poor infrastructure. For example, they saw power blackouts in 2012 and this damages their potential tourism industry. About half their roads are not paved and they need to invest around $400bn in the power sector. (Tutor2u)
how does education affect growth and development?
Poor education within these countries means that workers are low skilled, sometimes unable to read and write, so have low levels of productivity.
what is an example for education affecting growth?
Countries like China and South Korea invested heavily in their human capital when they were developing, and this has benefitted them in the long term. Ethiopia suffers from high illiteracy rates at around only 49%. (Unesco)
what are the cons involving education?
when a country is over educated they may suffer underemployment for example when graduates cant gain graduate level degrees
define underemployment?
Underemployment is a measure of employment and labor utilization in the economy that looks at how well the labor force is being used in terms of skills, experience, and availability to work.
how does the absence of property rights affect growth and development?
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.
what is an example of loss of property rights affecting growth and development?
The loss of property rights in Zimbabwe led to economic collapse.
what are non economic factors that affect growth and development?
disease, corruption, poor climates, geographical terrain, civil wars
how does corruption affect growth?
Corruption means individuals will make decisions which maximise the bribes they receive as oppose to those which maximise development and output
what is a bureaucracy?
a system of government in which most of the important decisions are taken by state officials rather than by elected representatives.
what is the relationship between the level of bureaucracy and level of corruption?
High levels of bureaucracy are often linked to corruption.
what is an example against corruption?
Ghana’s high level of freedom and democracy is one reason why it has been able to develop so quickly.
how does civil war affect growth and development?
This causes high levels of poverty and destroys infrastructure, making it very difficult for the country to
rebuild even after the war has ended.
