4.3.2 - Factors influencing growth and development Flashcards
What are the Terms of Trade ?
It is the ratio of an index of a country export prices to an index of its import prices
What is the equation for terms of trade ?
Terms of trade = (average export index price / average import index price) x 100
How can you alter the terms of trade to see a greater improvement ?
- Increasing price of exports means we can import even more with our exports
- Price of imports fall
What is the ToT like for developing countries ?
The ToT for these economies tend to fall over time because the price of agricultural products tends to rise at a slow pace
What is the YED like for primary products ?
They have a low YED
As people get wealthier they do not continue to increase the amount of primary products they buy
What are people likely to buy as they get richer ?
They are likely to increase their demand for manufactured goods
How can a deterioration of the ToT in a primary product dependent country affect them ?
Living standards will fall
Harder to import capital goods
Economic growth falls
What does volatility in export prices cause ?
Changes in firms revenue also volatile
Increased volatility in economic growth
Greater uncertainty makes investment less attractive
Lower investment limits growth and development
In MEDCs what are the agricultural sectors supported by ?
They are supported by protectionist measures such as subsidies
What are the downfalls of MEDCs using protectionist measures in agriculture for LEDCs ?
Agricultural producers in LEDCs struggle to complete
Therefore it is harder to pursue export led growth in these sectors
What is protectionism ?
It involves any attempt by a country to impose restrictions on the open trade in goods and services with other countries
What are some examples of protectionism ?
Tax
Quotas
Subsidies
What are tariffs ?
They are taxes placed by the government on imports
What do tariffs do ?
They raise the price for consumers, lead to a decline on imports, and can lead to retaliation by other countries
They restrict free trade
What is a savings ratio ?
The proportion of income that is saved is referred to as the savings ratio
Why do LEDCs have low savings ratios ?
- Most people in LEDCs have low income
- As a result they need to spend the majority of their income (they have a high MPC)
What is the Harrod-Domar model ?
It was an early model of economic growth that states economic growth is dependent on savings ratio
Explain what the Harrod-Domar model shows
In the theory, a higher saving ratio should lead to higher level investment in capital → large capital stock in the country → more total output is created → citizens become more efficient and earn higher income from capital.
What is the equation for rate of growth of GDP ?
Rate of growth of GDP = Savings ratio / capital output ratio
What is the capital output ratio ?
Capital output ratio is the amount of capital needed in the economy to produce a given quantity of goods
What is the equation for capital output ratio ?
Capital output ratio = value of capital equipment / annual output
What is the correlation between the capital output ratio and economic growth ?
The smaller the capital output ratio, the greater the economic growth
What is the correlation between the savings ratio and economic growth ?
The larger the savings ratio, the greater the economic growth
How can the rate of growth in an economy be increased ?
- Increased level of savings
- Reducing the capital output ratio i.e. increasing the quality/productivity of capital inputs
What are the current difficulties in closing the savings gap ?
- Extra income gained is often spent on increased consumption rather than saved
- Lack of a sound financial system
- Savings can be sent abroad - This is called capital flight
Savings ratio of a poor country
poor countries have low savings ratios … this results in low levels of investment … if investment is low, the amount of new capital goods and the overall capital stock will be limited … as a result, this also limits economic output … income growth is also limited which causes savings ratios to stay low thereby repeating the cycle
What are some potential solutions to low savings ratios ?
Borrow from abroad
Reform financial sector
Microfinance
Aid
Why are foreign currencies important for economic development in LEDCs ?
- In the initial stages of industrialisation importing capital goods is vital for success.
- Foreign currency is also important for importing raw materials unavailable domestically
Why might some LEDCs face a shortage of foreign currency ?
LEDCs often do not export enough to earn the foreign currency required to finance their desired level of imports
When does a foreign exchange gap occur ?
It happens when currency outflows are greater than currency inflows
What are the causes of a foreign currency gap ?
Relatively low export earnings
Underperforming agricultural sector
Large foreign debt
What are some solutions to the foreign currency gap ?
Debt relief from the IMF
Aid for development
Development of primary sector
Development of tourism
What type of capital is the capital in capital flight ?
Financial
What is capital flight ?
When a large amount of financial capital leaves a country due to an event, or events, that make investors lose confidence in the country
Why does capital flight negatively impact economic growth and development ?
There is less money available for investment.
Capital flight leads to a depreciation of the exchange rate because inward investment falls and outward investment rises.
As a result, currency speculators sell the domestic currency and buy the foreign currency because the value will strengthen, from the movement in the exchange rates, because they predict the currency to fall rapidly.
Consequently, the foreign currency gap problem is worsened as more money/currency flows out of the country.
What is the dependency ratio ?
Dependency ratio is a measure of the number ofdependentsaged zero to 15 and over the age of 65, compared with the total population aged 16 to 65.
Whats the relationship between the size of the working age population and the productive capacity of the economy ?
The larger the size of the working population the greater the productive capacity of the economy will be.
Why is government spending likely to increase if a country has an ageing population ?
The elderly are more likely to require health care and social care than other age groups
What does an ageing population cause in a MEDC ?
Ageing populations cause the dependency ratio to rise —> larger amounts of government spending and resources used to support elderly —> less available for supply-side policies and public services —> lower levels of economic growth
What do higher birth rates cause in a LEDC ?
High birth rates —> youthful populations with larger workforces —> greater potential for economic growth
However, this depends on the level of education and skills set by the country.
What is debt servicing ?
Repaying both the principal and the interest
What can a high debt burden lead to ?
An increase in government debt means agreater amount of government spending must be used towards repaying the debt … this reducesthe amount that can be spentin other areas
a high debt burden can therefore act to reduce economic growth
What is the debt service ratio ?
A country’s debt service ratio is the ratio of its debt service payments to its export earnings
How do high debt service ratios hinder economic growth ?
High debt burden
Large amounts of government spending used to service the debt
Less available to spend in other areas
Leads to weaker economic growth
What is access to credit vital for ?
on a micro level, access to credit is vitalforfirms to fundproduction and also expansion
What can poor credit availability lead to in a developing country ?
developing countries often have weak financial systems that only a small portion of the population has access to … this makes it harder for individuals and firms to borrow from formal financial institutions … this limits consumption and investment which in turn limits economic growth.
How can a lack of access to credit and banking hinder development ?
- For firms, borrowing from banks is an important means of financing their business operations
- For individuals, the ability to access banking services allows for security for cash and encourages saving
What is micro finance ?
a type of banking service provided to unemployed or low income individuals, who have no other access to financial services.
What can low levels of infrastructure lead to ?
- Low levels of infrastructure make it difficult for businesses to trade and set up within the country
- However, the development of infrastructure can be expensive and can lead to conflict with environmental goals
