4.3.2 Factors Influencing Growth and Development

Question 1

What is the result of primary product dependency in an economy?

Typically LEDCs

Answer 1

• LEDC dependent on primary products which have volatile prices
• Value of exports fall over time so TOT falls
• Harder to import capital goods as less income to invest into capital
• Economic growth falls as less money flowing into the country
• Less improvement of SoL so SoL falls

Question 2

Savings ratio definition?

Answer 2

• The ratio of savings by individuals or households to disposable income

Question 3

Harrod-Domar model?

Answer 3

• Holds that economic growth is dependent on the savings ratio
• Savings ratio => investment => capital stock => output => income =>

Question 4

Evaluation of Harrod-Domar model?

Answer 4

• Low MPS in some countries so rise in income may not lead to a rise in savings
• Increase in savings = reduction in spending = fall in AD

Question 5

Potential solutions to low saving ratios?

Answer 5

• Borrow from abroad
• Reform financial sector (e.g. education)
• Microfinance
• Aid

Question 6

Why is foreign currency important for economic development in LEDCs?

Answer 6

• For importing raw materials unavailable domestically
• Importing capital goods during initial stages of industrialisation

Question 7

Foreign currency gap definition?

Answer 7

• When currency outflows persistently exceed currency inflows

Question 8

Consequences of a foreign currency gap?

Answer 8

• Not enough currency to purchase essential imports such as food, medicine or critical raw materials etc.

Question 9

Causes of a foreign currency gap?

Answer 9

• Relatively low export earnings
• High oil prices (increased cost of production and export income falls)
• Underperforming agricultural sector (due to natural disasters)
• Large foreign debt (can’t save because have to keep paying debt - low savings ratio)

Question 10

Solutions to foreign currency gaps?

Answer 10

• Debt relief (write off debt)
• Aid (e.g. IMF)
• Development of primary sector (into secondary sector)
• Development of tourism

Question 11

Capital flight definition?

Answer 11

• Uncertain and rapid movement of large sums of money out of a country

e.g. Asian Financial Crisis 1997 when US raised interest rates and hot money flows more attracted to US + default on debt repayments = investors lost confidence and withdrew their capital en masse

Question 12

Causes of capital flight?

Answer 12

• Anything that reduces confidence e.g. corporate tax rates, fears of economic instability
• War
• Corruption (political instability)

Question 13

Consequences of capital flight?

Answer 13

• Fall in FDI = fall in AD = fall in economic growth = knock-on effect on business and consumer confidence = fall in investment and consumption = fall in SoL

Question 14

How does capital flight impact economic growth and development?

Answer 14

• Less money available for investment
• Leads to depreciation of the exchange rate
• Currency speculators sell domestic currency
• Inflation likely to rise as import prices increased
• Inward FDI less attractive as country viewed as greater risk than before

Question 15

Dependency ratio?

Answer 15

No. of dependents / No. of working age people

Question 16

How does an ageing population limit economic growth?

Answer 16

• High dependency ratio
• = gov. spending on elderly at opportunity cost of gov. spending on SSPs and public services
• Leads to lower levels of economic growth

Question 17

How do high debt service ratios hinder economic growth?

Answer 17

• Large gov. spending used to repay debt
• Less available for public goods, education etc.
• Infrastructure, labour weaker than it could be
• Weaker economic growth

Question 18

How does a lack of access to credit and banking hinder development for firms?

Answer 18

• Borrowing from banks is an important means of financing their business operations
• No finance = no investment = fall in output

Question 19

How does a lack of access to credit and banking hinder development for individuals?

Answer 19

• Ability to access banking services allows for security and encourages saving
• No finance = a fall in consumption = a fall in SoL as cannot purchase goods and services to improve SoL

Question 20

How does infrastructure limit economic growth?

Answer 20

• Quality of infrastructure plays a role in determining the efficiency and quality firms produce at

LEDCs tend to have weaker infrastructure than MEDCs

Question 21

How do education systems in LEDCs hinder economic growth?

Answer 21

• Limited access to education/low quality = low no. of years in education = low quality of workforce = limited productivity = economic growth hindered as labour is a FoP

Question 22

How does an absence of property rights hinder economic growth?

Answer 22

• Can’t use property as collateral = difficult to obtain loans for financing investment = limited productivity/efficiency = innovation/competition constrained

Question 23

How do political factors hinder economic growth?

Answer 23

• Corruption = government pursues own interests rather than public’s = delayed projects = inadequate infrastructure = limited economic growth