4.3.2 Factors influencing growth and development Flashcards
what are the constrains of development and growth?
- poor education
- poor infrastructure
- poor health
- population growth
- savings gaps
- dead capital
- corruption
- landlocked country
- infant indsutries
what are the stategies for improving growth and devlopment?
- improving education
- promoting FDI
- aid
- education
- micro finance
- property rights
- fair trade schemes
- debt relief
- protectionism/ competitive devaluation
why is poor education a constraint on grwoth and development?
- lower levels of human capital, making them unproductive, LRAS shift, less real GDP, less economic development
- less qualifications. lower paied jobs, less income tax, less money for development
why might improving education not lead to growth and development?
- in the short run encouraging education will defer children from working, their families will have a lower income and their consumption will decrease, decreasing AD, decreasing real GDP
- (long run) quality of education, low human capital, growth is limited
what is low human capital?
when workers do not have the necessary knowledge, skills or assets to be productive
why does poor infrastructure constrain development?
- poor infrastructure makes firms less productive as it takes workers longer to get everything done, cauing vital delays
- LRAS shifts to the left, less economic growth
- increased costs, increased prices, less competitive, less demand , less profits, less corporation tax revenue, less to spend on development
how does promoting FDI lead to development and growth?
- reducing corportation tax
- reducing wage costs
* more profit= more corporation tax, more spendning
in 1990, India reduced the rate from 50% to 40%
why may promoting FDI not lead to growth/ development?
evaluation
- eg: reduction in minimum wage
- less income, less consumption, less AD, less economic growth
- eg: reducing corporation tax
- in the short term, less revenue, less money
why does poor health occur?
- poor healthcare
- poor sex education
why does poor health limit development and growth?
- reduces worker productivity, as working while ill, LRAS curve to the left, constraining growth
- less ouput for firms, less reveunue, less cororation tax
- poor health keeps children out of school,children have to look after adults, do not go to school and work instead, low human capital…
what are ways to combat poor health?
- aid: funds healthcare programs, more productivity, LRAS…., also keeps children in school
*
how does aid help poor healthcare?
can be used to fud healthcare programs
* Improved health > Higher productivity >Shifts LRAS to the right >Increases real GDP >Increases economic development
- Improved health >Higher productivity > Decreases costs > More profit >More corporation tax revenue >More government spending on development
- Improved health> More children in school > Higher human capital > Higher productivity> Shifts LRAS to the right > Increases real GDP >Increases economic development
- Improved health > More children in school > Higher human capital > Higher productivity > Higher incomes > More income tax revenue > More government spending on development > Increases real GDP >Increases economic developmen
why may aid not lead to growth and development?
- corruption, less money on development, healthcare programs not funded
*
how does population growth constrain development?
low productivity:
- Parents stay at home to look after even more children, so they can’t develop their careers , which means that they often end up earning lower incomes.
- Schools and hospitals can become overrun. This starts to reduce the quality of education, which can lower human capital and reduce productivity.
how does improving education decrease population growth?
- Improved education → Higher human capital → Higher productivity → Higher incomes → Decrease birth rate → Higher quality education → Increases economic development
- improved sex education → Decrease birth rate → More time to focus on education/career → Increases incomes → Increases economic development
what is the evaluation for improved education to reduce population growth?
- Some religions can teach that contraception shouldn’t be used. This can contribute to higher levels of population growth even after education has improved.
- culturally women should stay at home
in iran only 17% of women work
what are the 2 reasons for low savings?
- low income
- low access to banks
what is a savings gap?
gap between a banks savings and the money firms want to borrow from the bank
what is the Harrod- Domar model?
explain how low savings make it difficult for firms to be able to invest which limits economic growth
Low incomes → Low savings → No money in the bank to lend → Low investment → Low AD and low LRAS → Low economic growth → Low incomes
how does a large savings gap limit devlopment ?
low investment→ low profits→ low tax revnue→ limiting development
what is micro finance ?
small loans provided to small businesses who othrwise would have no access to financial services
how does micro finance help development and growth?
- firms can invest in capital→ more productive→ production costs decrease→ lower prices → more competitive→ increased revenue and profits→ corpopration tax→ tax revnue spent on development
- more income → more savings in bank→ reduction in savings gap→ bigger loans and investment
why may micro finance not lad to growth and development?
- high intrest rates→ no extra income paying of debt→ no extra income.. harrod domar model
- potential bankrupcy and unemployment
what are property rights?
legal rights over their own property, meaning they can go to court if their property gets stolen
what is dead capital?
possesions lacking property rights
estimated $9.3 trillion dead capital globally
why does dead capital constrain growth and development?
dead capital cannot be used as collateral when taking out loans
* low investment→ keeps AD and LRAS left
* low incomes, less income tax , less growth development
how do property rights lead to development and growth?
- Increase investment → Increase AD → Increase economic growth → Increase economic development
- Increase investment → Increase productivity → Right shift of LRAS → Increase economic growth → Increase economic development
- Increase investment → Higher incomes → More income tax revenue → More government spending on development
what is collateral?
an asset given as security for the repayment of a loan
why may property rights not lead to development and growth?
- poor people with property rights are no more likley to take out loans, relucantancy to give the little they have as collateral
why does corruption constrian development and growth?
why does poor infrastructure limit development and growth?
Poor infrastructure → Increases costs → Shifts SRAS to the left → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development.
what is corruption?
when people working for the government use public funds for their own private expenses
over $300 billion has ‘gone missing’ from Venezuelan government funds
what are fair trade schemes?
when buying fair trade products part of the price creates fair trade premimums: a communal fund that fair trade farmrs can spend on development themselves
how do fair trade premimums promote growth and devlopment?
gives workers to spend themselvs rathr than giving to corrupt governments
* Money goes straight to farmers → Increases their incomes → Increases consumption → Increases AD → Increases economic growth
- Money goes straight to farmers → Increases their incomes → Increases income tax revenue → Increases government spending on development → Increases economic development
why may fair trade not lead to growth and development?
- farmers may not receive a substantial part of the extra Fair Trade price
less than 1% recieved by farmers
why does being landlocked constrain growth and development?
- Landlocked → Increases shipping costs → Left shift of SRAS → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development → Limits development
what is a landlocked country?
a country surrounded by other countries with no coasts
how may debt relief help growth and development?
- no national debt and no intrest payments→ more to spend on growth and development
what is debt relief?
When you tell somebody that has borrowed money from you that they no longer have to pay it back
$833 m of Burundi’s debt to world bank was relievd
why may debt relief not encourage growth and devlopment?
- corruption, no money going towards development
how do infant industries limit development and growth?
- Infant industry → Low output → High average costs → Left shift of SRAS → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development → Limits development
how does protectionism lead to growth and development?
- subsdies/ tarrifs/ quotas/ non tarrif barriers
- Subsidies → Decrease average costs → Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → Increases development
why may protectionsm not lead to growth and devlopment?
dependancy on subsidies, firms become lazy and inefficent→ output will decrease→ less profits for firms
what is competitive devaluation?
when the government reduces the fixed exchange rate to keep exports competitive
decrease intrst rate/ increase supply of currency by selling it
how would competitive devaluation help growth and development?
by helping infant industries
decreasing fixed exchange rates (by selling domestic currency, increasing supply of the currency to the rest of the world)
* lower intrest rates> cheaper exports for foreign consumers >lower prices> more competive prices>
* Investment in machinery → Decrease average costs → Right shift of SRAS → Decreases price level → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development → Increases development
why would competitive devaluation not lead to growth and devlopment ?
(evaluation)
can lead to a currency war
* imports become really expensive
* increased price of imported raw materials→ High average costs → Left shift of SRAS → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development → Limits development
what is a foreign currency gap?
when the amount of foreign currency in a country decreases (net outflows of foreign currency > net inflows)
A foreign currency gap leads to a depreciation in the value of a country’s currency. This is problematic for countries with a trade deficit . An increase in the price of imports leads to cost-push or cost push inflation, which will in turn lead to an economic downturn.
net imports> net exports
what are the effects of a foreign currency gap?
increase in the price of imports which can lead to inflation
how has diversififcation of exports impacted the foreign currency gap?
an increase in demand for a country’s exports will increase the demand for that country’s currency, decreasing foreign currency gap. decreasing price of imports
what are problems with diversification?
postive effects only seen in the long run
* policies required for economic diversification may lead to increased budget deficit> increasing levels of national debt
policies such as government investmnet/ low corporation tax
