4.3.2B - factors influencing growth and development

Question 1

Describe malawi’s exports

Answer 1

71% raw tobacco
10% tea
4.4% raw sugar
3.3% nuts

Question 2

Describe norway’s exports

Answer 2

56.8% oil
10.4% fish
6.81% minerals

Question 3

Malawi is an example of a country that relies heavily on producing and exporting primary products such as raw tobacco and tea. What problems is this likely to cause

Answer 3

• It is likely to experience a fall in the terms of trade over time because the prices of its imports, mainly manufactured goods, will rise at a faster pace than its exports.
• This is because manufactures generally have a higher YED than primary products. This results in lower living standards and makes it harder to import capital goods. (cannot industrialise)
• Consequently, Malawi has a strong chance of being trapped in economic development terms.

Question 4

downside of falling tot

Answer 4

The country must export more to afford a given basket of imports. If demand for exports and imports is price inelastic, net trade (X – M) will fall thereby reducing economic growth.

Question 5

Define savings gap

Answer 5

savings gap refers to the deficit between current aggregate savings and the level of savings required to provide funds for business investment

Question 6

define savings surplus

Answer 6

The excess of aggregate savings over domestic investment, where investment is in fixed capital and inventories by both the public and the
private sectors.

Question 7

Outline harry domar model

Answer 7

• Developing countries have lower incomes
• thus they save less (lower savings ratio).
• This means there is less money for banks to lend, reducing borrowing and thus less funds available for investment/consumption.
• hence the capital stock of the economy is smaller due to lack of investment
• this the level of output is also limited, restricitng economic growth

Question 8

Barrier to economic growth in LEDC

Answer 8

low savings ratio: The proportion of disposable income that is saved is referred to as the savings ratio

Question 9

Why do LEDC have low savings ratio

Answer 9

1) Most people have low incomes so need to spend the majority, if not all, of their incomes to survive - v high MPC

2) The financial system (MEDCs). People living in remote areas may be prohibitively far away from any retail banks. Thereby, making saving harder.

Question 10

solutions to low savings ratio

Answer 10

1) Borrow from abroad
2) Reform financial sector
3) Microfinance
4) Aid
5) encourage the government to invest (main answer)

Question 11

Define foriegn currency gap

Answer 11

This is when currency outflows persistently exceed currency inflows, for example when a country is running a persistent current account deficit

Question 12

examples of currency inflows and outflow

Answer 12

• inflows: earnings from exports or other sources, such as foreign investment or remittances
• outflows: such as payments for imports or servicing foreign debt

Question 13

Why is foreign currency important for LEDC

Answer 13

• In the initial stages of industrialisation importing capital goods is vital for success.
• Foreign currency is also important for importing raw materials unavailable domestically. (medicine, food, raw material etc)

Question 14

Why might some LEDC face a shortage of foreign currency

Answer 14

• LEDCs often do not export enough to earn the foreign currency required to finance their desired level of imports.

Question 15

causes of FCP

Answer 15

Relatively low export earnings - country is uncompetitive in foreign markets
High oil prices - country isnt energy independent
Underperforming agricultural sector - inefficient farming sector
Large foreign debt - borrows unsustainably from debtors

Question 16

solutions to FCP

Answer 16

1) debt relief 2) aid 3) development of primary sector 4) development of tourism

Question 17

Evaluate devaluing a currency as solution to FCP

Answer 17

• Some countries resort to devaluing their exchange rates in a bid to improve the competitiveness of export industries but there is no guarantee that a weaker currency will help to resolve a foreign currency gap.
• Indeed, the threat of a currency devaluation might prompt a further outflow of currency from a country as investors get nervous.

Question 18

issues with FCP

Answer 18

• difficult for a country to pay for essential imports such as food, fuel, and raw materials
• difficult to service its foreign debt: FCP in venezuela led to shortage of essential imports and hyperinflation
  FCP in greece during sovereign debt crisis made debt servicing hard = financial crisis = EU bailout
• difficult to maintain a stable exchange rate:
• lead to a lack of investor confidence, which can make it difficult for a country to attract foreign investment
• decline in the standard of living for the population, as it makes it difficult for people to afford the imported goods and services that are essential for a decent standard of living.

Question 19

WHta issues did FCP in venezuela create

Answer 19

a shortage of foreign currency in 2017 when foreign currenyc reserves fell below $10bn for first time has led to a shortage of essential imports and hyperinflation. also bc they had lots of foreign debt

Question 20

what issues did FCP cause in greece

Answer 20

• hard to service foreign debt
  + a shortage of foreign currency during the sovereign debt crisis made it difficult for the country to service its debt, which led to a financial crisis and a bailout by the European Union

Question 21

Issues with FCP in argentina

Answer 21

led to a decline in the value of the Argentine peso, making it difficult for the country to maintain a stable exchange rate, which has contributed to the country’s economic problems.

argentina devalued currency by 50% to 801 pesos a dollar mid dec 2023, owes $45bn to IMF and has $18bn dollar in foreign reserves - not a lot

Question 22

define capital flight

Answer 22

Capital flight occurs when owners of liquid assets move them to other countries perceived as safe havens or as offering better returns (can be legal or illegal)

Question 23

define human capital flight

Answer 23

Another name for a brain drain – when a country suffers net outward migration of skilled / younger workers which causes their labour force to contract and may have a damaging effect on the level of labour productivity

Question 24

Causes of capital flight

Answer 24

• Political turmoil and unrest / risk of civil conflict
• Fall in price of an important commodity. If an economy relies on oil exports for export revenue and tax revenue. If oil prices fall, then the economy could suffer and prices fall significantly.
• Fears that a government plans to take assets under state control – the threat of nationalisation
• Fears of an increase in corporate tax rates (ro income/capital gains tax)
• Fears that a government might default on their debts
• Exchange rate uncertainty ahead of a possible devaluation of the currency
• Fears over the wider stability of a country’s financial system including the safety of commercial bank deposits
• if there is fear a gov will default on its debt:investors would sell those government bonds. This would cause a fall in the value of government bonds and an increase in interest rates. This would increase the cost for the government to service the debt. It would also cause a devaluation in the exchange rate leading to a decline in competitiveness.

Question 25

why is capital flight damaging for developing countries? consequences include….

Answer 25

• an outflow of currency causes the exchange rate to depreciate (currency weakness)
• This causes a sharp rise in imported inflation and a rising cost of living
• Higher inflation has regressive effects on poorer households
• Currency weakness and instability makes it more expensive for a government to finance new issues of debt
• It also increases the real value of existing external debts
• Capital flight may leave an economy unable to finance essential imports such as pharmaceuticals, food, animal feed and energy

Question 26

example of capital flight

Answer 26

• in the first three weeks of russia’s full scale invasion of ukraine in feb, there was resulting outflow of $20bn from egypt as foreing portfolio investors rushed to safe havens, also egypt would face increased import prices as russia and ukraine was 80% of wheat imports
• sri lanka experienced capital flight due to collapse in cureency throughout 2022 so gov forced exporters to repatriate foreing exchnage earnins within 180 days of transcations
• sir lankan rupee slumped against USD and other currenices so four month of Capital F in 2022