4.3.3 - Strategies influencing growth

Question 1

Why is trade liberalisation likely to result in greater trade ?

Answer 1

Trade liberalisation makes trading goods and services between nations easier. Therefore, the amount of trade taking place should increase

Question 2

What are the advantages of trade liberalisation for firms ?

Answer 2

• Greater market access → potential for greater sales and opportunity to expand and benefit from economies of scale
• Cheaper raw materials and capital goods

Question 3

What are the disadvantages of trade liberalisation for firms ?

Answer 3

Greater level of consumption

Question 4

What are the advantages of trade liberalisation for economies ?

Answer 4

Removing trade barriers exposes firms to greater levels of competition. Domestic industries will therefore be under more pressure to increase efficiency and quality in order to remain profitable.

Resources can then be allocated to industries in which the country has a comparative advantage. This increases efficiency and economic growth.

Question 5

What are the disadvantages of trade liberalisation for economies ?

Answer 5

Infant industries are unlikely to survive the competition brought about through trade liberalisation. This can hinder a country’s efforts to move up the value chain into more advanced goods and services.

Therefore, a period of protectionism may be needed before trade liberalisation is fully implemented to give a country the best chance of achieving economic development.

Question 6

What is the value chain ?

Answer 6

Added value to the product via production cost, marketing and the provision of sales services or after sales product warranty

Question 7

What is the savings gap ?

Answer 7

Savings gap is the difference between the level of savings of a country and the level of savings required to finance capital investment to improve development and growth of a country

Question 8

Why does the savings gap hinder economic development ?

Answer 8

In developing countries, savings tend to be low due to low incomes and weak financial systems.

This means that savings rates are low.

Therefore, the amount of financial capital in the financial system is limited.

This thereby restricts the amount the amount of finance that the financial sector can provide to firms seeking to invest.

The amount of capital goods in the country is limited as a result.

This results in low economic growth which means that incomes are likely to remain low.

Question 9

What is the foreign currency gap ?

Answer 9

In developing countries, the amount of foreign currency available is not enough to meet the demand for imports

Question 10

Why does a foreign currency gap hinder economic development ?

Answer 10

If a LEDC lacks foreign currency, this limits the ability of firms to import capital goods.

As a result, productivity growth is also limited.

Consequently, the economic development of LEDCs is constrained

Question 11

What are the disadvantages of trade liberalisation ?

Answer 11

• Difficult for infant industries to mature into competitive firms
• Risk of structural unemployment in some industries if trade liberalisation exposes them to more competitive rivals in foreign countries.
• Some LEDCs will be specialised mainly in primary products. This may limit economic development in the long-run according to Prebisch-Singer hypothesis
• Price volatility may negatively impact export revenue. Especially important for LEDCs specialising in primary products.

Question 12

What does the Prebisch-Singer hypothesis suggest ?

Answer 12

The Prebisch-Singer Hypothesis (PSH)suggests that over the long run the price of primary goods such as coal, coffee cocoa declines in proportion to manufactured goods such as cars, washing machines and computers.

Question 13

What is FDI ?

Answer 13

Foreign Direct investment

Money injected from abroad as a form of investment in another countries economy

Question 14

What are some problems facing LEDCs

Answer 14

• Foreign currency gap
• Savings gap
• Low level of technology
• Limited tax base
• Limited capital stock
• Low human capital

Question 15

What is a tax base ?

Answer 15

Tax base refers to what is taxed and who is tax

Question 16

What is the correlation between an economy’s activity and its tax base ?

Answer 16

If the economy’s activity is limited, the tax base is also limited and government can’t collect tax revenue to expand the economy via infrastructure projects, healthcare and education, training schemes, protect the environmental impact, as such.

Question 17

What can FDI provide for LEDCs ?

Answer 17

1.) Provide external funding via investment

2.) TNCs are likely to train local workers and suppliers.

3.) TNCs are likely to bring about a great quality/quantity of capital, that is more advanced.

Question 18

What are some advantages of FDI ?

Answer 18

Injection into circular flow

Potential for transfers of technology and skills

Higher economic growth

Capital inflows can be used to finance a current account deficit

Long-term FDI can lead to higher exports from the host country which improves the position on the current account

FDI generates tax revenue for the host country

FDI could lead to higher wages and improved working conditions, especially if TNCs take corporate social responsibility seriously → helps to raise living standards and overcome the savings gap.

Greater competition lowers prices → helps to raise living standards

Question 19

What are the disadvantages of FDI ?

Answer 19

• TNCs may only hire local workers to a limited extent as low-skilled work may beleft to locals and high-skilled (and higher paid work) is done by expats.
• The amount of tax revenue raised may be small as some LEDCs use tax breaks asan incentive for TNCs to enter their economy
• TNCs are likely to be able to outcompete local rivals through superior quality. This may lead them to obtain monopoly status within the country.
• TNCs may choose to operate in LEDCs to take advantage of weak environmentalregulation

Question 20

Why is there a savings gap in developing countries ?

Answer 20

Saving ratio is low and financial systems are weak

Question 21

Why do people in developing countries struggle to access financial services ?

Answer 21

They live in rural locations with lack of financial infrastructure which finance systems don’t cover.

Question 22

What effect does a savings gap have on economic growth and economic development ?

Answer 22

As a result ofthe savings gap, the amount of financial capital in the financial system is limited.This thereby restricts the amount the amount of finance that the financial sector can provide tofirms seeking to invest. The amount of capital goods in the country is limited as a result. Thisresults inlow economic growth which means that incomes are likely to remainlow.

Question 23

What is a loan shark ?

Answer 23

A person who charges large amounts of interest for lending money tosomeone, especially when their financial position means they cannot borrow money from abank.

Question 24

What is collateral ?

Answer 24

Valuable property/assets owned by someone who wants to borrow money, thatthey agree will become the property of the company or person who lends the money if the debtis not paid back.

Question 25

What are examples of microfinance ?

Answer 25

1. Micro-credit
2. Micro-savings
3. Micro-insurance
4. Remittance management

Question 26

What are the features of microfinance ?

Answer 26

• Smaller scale
• Women tend to be the main beneficiaries
• People often borrow as a group which provides a peer support network that increases the chance of repayment
• Interest rates tend to be much lower than those of loan sharks