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