4.3.2: Factors Influencing Economic Growth & Development

Question 1

What are the economic factors influencing economic growth & development?
[3 DETAILED]

Answer 1

-Primary product dependency (Prebisch-Singer Hypothesis & Dutch disease).
-Volatility of commodity prices.
-Savings gap (Harrod-Dollar model).

Question 2

What are the economic factors influencing economic growth & development?
[7 SHORT]

Answer 2

-Foreign currency gap.
-Capital flight.
-Demographic factors.
-Debt.
-Access to credit & banking.
-Infrastructure.
-Education/skills.

Question 3

What are examples of primary products?

Answer 3

-Copper.
-Agriculture.
-Oil.

Question 4

What is primary product dependency?

Answer 4

A high reliance on the extraction & export of primary products for economic growth.

Question 5

Why may primary product dependency be a problem?

Answer 5

A country can run out of its primary products (through extraction or natural disasters).
The economy will be vulnerable to this lack of diversification.

Question 6

How can primary product dependency be used to increase economic growth & development?

Answer 6

Using primary products to invest in manufacturing (e.g. Saudi Arabia, oil).

Question 7

What are the two theories that are linked with primary product dependency?

Answer 7

-Prebisch-Singer Hypothesis.
-Dutch disease.

Question 8

What is the Prebisch-Singer Hypothesis?

Answer 8

A theory that suggests that over the long run, the prices of primary goods declines in proportion to the prices of manufactured goods.

Question 9

What is the impact of the Prebisch-Singer Hypothesis?

Answer 9

Countries that are dependant on primary exports will see a fall in their terms of trade.

Question 10

What is the Dutch disease?

Answer 10

The negative impact on an economy of anything that results in a sharp inflow of foreign currency (e.g. discovery of oil reserves).

Question 11

What is the impact of the Dutch disease?

Answer 11

A rise in export prices and a reduction in competitiveness of the economy, causing a fall in output in other areas (e.g. non-oil sectors for Nigeria).

Question 12

What is volatility of commodity prices (of primary goods)?

Answer 12

The fluctuation of prices of primary goods.

Question 13

Primary goods are demand ________ & supply ________.

Answer 13

Inelastic, inelastic.

Question 14

How are primary goods demand inelastic?

Answer 14

They are essentials that are required in the production of other goods (e.g. wheat, steel).

Question 15

How are primary goods supply inelastic?

Answer 15

Time lags (e.g. growing period for agriculture, developing mines).

Question 16

How does demand inelasticity & supply inelasticity contribute to volatility of commodity prices (of primary goods)?

Answer 16

Relatively small changes in demand or supply leads to huge fluctuations in price.

Question 17

What is savings gap?

Answer 17

The difference between actual savings and the level of savings needed to achieve a higher growth rate (e.g. investment).

Question 18

Why do developing countries have a higher savings gap than developed countries?

Answer 18

Higher MPC due to lower income.

Question 19

What is an example of a savings gap?

Answer 19

Savings rate for Africa: 17% of GDP.
Savings rate for middle income countries: 31% of GDP.

Question 20

What is the Harrod-Domar model?

Answer 20

Savings -> Investment -> Capital Accumulation -> Output & Income (and repeat) = Economic Growth.

Question 21

What is the equation of the Harrod-Domar model?

Answer 21

Savings Ratio / Capital Output = Rate Of Growth.
[PRODUCTIVITY OF CAPITAL INVESTMENT]

Question 22

How can foreign currency gap influence economic growth & development?

Answer 22

This is when exports are low in comparison to imports.
There is less money to finance investment or other exports that support financial growth.

Question 23

How can capital flight influence economic growth & development?

Answer 23

Occurs when owners of liquid assets move them to ‘safe haven’ countries.
It is triggered by an economic threat (e.g. hyperinflation).

Question 24

How can demographic factors influence economic growth & development?

Answer 24

High birth rates can negatively impact the development of a country.
Rapid population growth has complicated efforts to reduce poverty in Africa.

Question 25

How can debt influence economic growth & development?

Answer 25

Less money to spend on public services, and they may need to raise taxes.

Question 26

How can infrastructure influence economic growth & development?

Answer 26

Poor infrastructure makes it hard for firms to trade and set up within a country.
India saw power blackouts in 2012, damaging the tourism industry.

Question 27

How can education/skills influence economic growth & development?

Answer 27

Human capital ensures the economy can be productive and produce high quality goods & services.
It helps generate employment and raise standards of living.

Question 28

What are the economic factors influencing economic growth & development?
[3]

Answer 28

-Corruption.
-Civil war.
-External shocks.

Question 29

How can corruption influence economic growth & development?

Answer 29

Leaders make decisions that benefit themselves rather than the economy.

Question 30

How can civil war influence economic growth & development?

Answer 30

Causes high levels of poverty and destroys infrastructure.

Question 31

How can external shocks influence economic growth & development?

Answer 31

Natural disasters damage infrastructure (e.g. farms).