4.3.2 - Factors influencing growth and development Flashcards
Name the ELEVEN economic factors that affect growth and development
. primary product dependency
. Volatility of commodity prices
. savings gap: Harrod-Domar model
. foreign currency gap
. capital flight
. demographic factors
. debt
. access to credit and banking
. infrastructure
. education/skills
. absence of property rights
1.) Explain Primary Product Dependency
. Refers to countries whose main bulk of exported goods are primary goods (raw materials), such as wood and crops
. This limit growth, as primary products usually have little return and there will only be a small inflow of income into the economy
The reason why primary products have little return is as they usually have a lower income elasticity of demand. For example, if one’s income grew they would probably not eat more primary products, such as potatoes as they are already very cheap
. Commodity price are volatile and fluctuate, due to them having inelastic demand and create inflation fluctuations, which can deter potential investors into the country and thus prevent countries gain the influx of income they need to develop
Explain Savings Gap : Harrod -Domar Model
. This suggests that the higher the savings, the higher the investment and higher the capital stock, which can be used for economic growth
. The Harrod Domar Model involves the capital ratio and the savings ratio
. The capital output ratio looks at the efficiency of capital to produce goods; the more productive capital is, the more goods and services producer so more economic growth
. The savings ratio looks at the level of saving in a country. The higher the savings ratio, the easier it is for banks to lend money for firms to grow and invest, which leads to economic growth
.
Explain Demographic Factors
. Economic development is affect by the age distribution of a population
. Countries with an ageing population are likely to be restricted in growth as the population will not be part of the workforce as they are outside the working age. More money will also be spent on healthcare and care for the elderly. This is seen with Japan which has one of the highest average ages.
. A very young population means a large burden on the education system. There will also be large unemployment and underemployment because economies cannot provide jobs for the large cohort of young people joining the working population.
Name Non - Economic Factors that affect growth and development
. Corruption
. Wars
. Landlocked countries
Debt
.If national debt increases, it means that future tax payers will have to pay more tax to the government. This would mean that individuals would have less disposable income to spend on their basic needs, which could affect their standard of living and quality of life leading to a fall in economic development.
Some government would reduce debt by printing more money, which would lead to demand pull inflation. This would mean there would be less economic development. (Refer to impact of inflation flashcards). Printing money would lead to hyperinflation, which was seen in Venezuela in the year beginning 2016.
. Crowding out can also occur if there is government borrowing (Finish)
Explain education and skills
. Investment in education and gaining skills through training increases the human capital of the population
. This allows them to be more productive and result in them having a higher chance of getting a job and/or a higher wage.
. If individuals can have more disposable income through their job, it leads to them spending more on goods and services which would lead to an increased quality of life and hence a increase in economic development
HOWEVER, education and training is a long run impact on economic development as it takes time.
Explain access to credit and banking
. Developed countries have systems financial system to allow saving, borrowing and investing money (e.g. equity stake in company)
. Poor countries have less access to banks and markets, which restricts them from saving,borrowing and investing
. This means that there is less opportunity gain capital from either dividends from shares or saving account interest. This leads less disposable income spend on goods and services so a lower quality of life and thus a fall in economic development.
. This could lead to the use of loans sharks who have high interest rates.
Explain absence of property rights
. Refers to when goods are not protected and instead free to use by everyone often due to reasons such as expensiveness or physically impossible e.g. ocean, beaches, air
. Leads to over - use of resources such as over -fishing and depletion of rainforests. This leads to less opportunities to gain capital by others, which would lead to less disposable income spent on goods and services and lower quality of life, increasing economic development.
. Opportunism encouraged and leads to the free rider problem. Free rider problem is a type of market failure that occurs when those who benefit from public goods do not pay for them e.g. public libraries. As a consequence, the producer of the resource cannot be sufficiently compensated. This means less disposable income for the producers and less spending on goods and services which will reduce quality of life and so a fall in economic development
. A lack of property rights leads to a fall in economic development
Explain infrastructure
. Built environment ins vital for economic development
. Developed countries have networks of building, railways, ports, water and gas pipes, electricity, etc.
. The more developed the higher the value of the built environment.
. It leads to increased demand for goods and services such as trains. This leads to a higher GDP if consumption increases.
. Transport infrastructure allows better access to jobs by improving journey times and connectivity, which can reduce structural unemployment which improves living standards due to more disposable income
. Better transport means increased connectivity and thus a more globalised society. (Refer to advantages of globalisation)
It could also cause pollution, which could affect health and lead to a lower HDI score due to lower average life expectancy.
