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Economics Unit 4 > 4.3.6 Limits to Growth > Flashcards

4.3.6 Limits to Growth Flashcards

1
Q

What are the three key economic models of development?

A
  • Harod-Domar
  • Prebisch-Singer
  • Lewis
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2
Q

what is the harod-domar model of development?

A

-Savings enable investment, which enables capital accumulation, which leads to rise in output and incomes, which increases flow of savings, and the cycle repeats

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3
Q

What are the causes of the savings gap?

A
  • Low Incomes
  • Debt
  • Absence of FDI
  • Capital Flight
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4
Q

Why do low incomes cause a savings gap?

A

When incomes are low, incomes will not be significantly above the cost of living, so households wont have disposable income to save

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5
Q

What is the problem in LEDCs of increasing saving to increase investment, under the Harod-Domar Model?

A
  • LEDCs do not have developed financial markets for investors to borrow the saved money, as most people do not save in a bank.
  • Entrepreneurs are rare in LEDCs because of the risk
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6
Q

-What is the Foreign Exchange Gap and how does it cause problems for the process of investment in capital in the Harod-Domar Model?

A

LEDCs need foreign currency to buy the capital. LEDCs need capital to manufacture goods to export in order to earn foreign currency. Vicious Cycle.

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7
Q

What is wrong with the assertion that capital accumulaion will directly cause an increase in incomes and output under the Harod-Domar Model?

A

Human Capital needs to be of high enough quality to operate the producer capital. If education is bad, the capital is useless

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8
Q

What external factors can help to reduce the savings gap in LEDCs?

A
  • Aid
  • FDI
  • Borrowing from the IMF + Debt Cancellation
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9
Q

What is the problem of FDI in reducing the savings gap?

A

TNCs repatriate the profits generated to the owners in a foreign country

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10
Q

What are the causes of Foreign Exchange Gaps?

A
  • Dependence on primary products for export earnings
  • Dependence on importing capital goods
  • Servicing Debt
  • Capital Flight
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11
Q

What is the Prebisch-Singer Model of Development?

A

-In the long run, ToT for export led economies with PPD will decrease, but there are short term swings in the ToT so the increased revenue from upswings should be used to break the economy away from PPD

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12
Q

How does the Prebisch-Singer Hypothesis relate to low income elasticity of demand for primary products? In other words, why do the terms of trade for primary products decrease in the long run?

A

Primary Products are more income inelastic than manufactured goods. If you only sell primary products but you buy manufactured goods, as incomes increase, the value of imports will increase much faster than the value of exports so you have to export much more to maintain imports

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13
Q

How would you evaluate the prebisch-singer hypothesis?

A
  • Between 2000-2014 commodity prices rose and manufactured good prices fell.
  • Food commodity prices will increase as populations increase
  • It’s better to focus on commodities if you have comparative advantage in the production of that good.
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14
Q

What are the factors which limit growth and development?

A
  • Savings Gap
  • Foreign Exchange Gap
  • Debt
  • Civil Wars/Corruption
  • Poor Infrastructure
  • Primary Product Dependency (PPD)
  • Population Issues
  • Poor Human Capital
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15
Q

How is debt a limit on growth and development?

A

LEDC have decreased government spending because they have to finance the debt but sometimes they don’t even generate enough revenue to pay it back

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16
Q

Why has debt become an issue for LEDCs?

A
  • Value of currency decreases, making repayments more expensive
  • Took out loans when prices for their exports were high which have now dropped
17
Q

What are the evaluation points for debt being an issue for LEDCs, and the evaluation point for that?

A

-Debt cancellation
(However, the money saved by debt cancellation may not be spent on good things like improving health or education due to corrupt governments)

18
Q

How is Corruption a limit of growth and development?

A

-Corruption causes inefficient allocation of resources and deters FDI.

19
Q

Define Corruption (As a limit to growth and development)

A

The use of power for personal gain such as diversion of resources to the governing elite.

20
Q

How does poor governance limit growth and development?

A

-Causes policies to be adopted that result in inefficient allocation of resources

21
Q

How do Civil Wars limit growth and development?

A
  • Damage to infrastructure

- Death

22
Q

What is a potential solution to corruption? Evaluate that solution

A

Democracy; however it might not change anything because the dictator can just force everyone to vote for them, or have no opposition

23
Q

How is poor infrastructure a limit of growth and development?

A

-Makes it hard to attract both domestic and foreign investment

24
Q

In what situations may poor infrastructure not be as big of a limit to growth and development?

A

If the country is rich in natural resources, because TNCs will build infrastructure to facilitate their business investment

25
Q

What is PPD (Primary Product Dependency)?

A

When a large proportion of GDP or Export Earnings comes from the export of raw materials and primary commodities

26
Q

What issues arise due to PPD in terms of growth?

A
  • Falling prices of PP
  • Depletion of PP
  • Slowing down of demand for PP
  • Price Fluctuations
  • Limited access to global markets
  • Prebisch-Singer Hypothesis
27
Q

How is falling prices of PP a problem for growth in countries with PPD?

A

Decreases export revenues, which decreases incomes and profits for firms.

28
Q

How is depletion of PP a problem for growth in countries with PPD?

A

When PP run out, all exports will stop and all export earnings will too. It’s unsustainable

29
Q

How is price fluctuations a problem for growth in countries with PPD?

A

Demand for and Supply of PP/Commodities is very inelastic so a shift in either curve causes a huge price change

30
Q

How do countries with PPD have limited access to global markets?

A
  • Protectionism on PP, e.g. US Corn Subsidy
  • Tariff Escalation
  • Non-convertible currencies
31
Q

How is tariff escalation a problem for growth in countries with PPD?

A

Tariff escalation is when tariffs are higher on manufactured goods so there is no incentive to move to manufactured good production

32
Q

How is ‘non-convertible currencies’ a problem for growth in countries with PPD?

A

No one wants to hold their currency because they fluctuate so much and so frequently, so no one buys their exports.

33
Q

How is ‘Population Issues’ a limit on growth and development? Evaluate

A

Rapid population growth creates a high dependency ratio (so many more babies) BUT creates a larger workforce in the long run so increases aggregate supply

34
Q

How is poor human capital a limit on growth and development?

A

-Low quality of health and education means lower productivity which means lower growth, and deters TNCs.

35
Q

How is HIV/AIDS a limit to growth and development?

A

IF someone gets AIDS they can’t work, so productivity goes down. Their kids will also probably have to leave school, so poor human capital in the future. If a teacher gets AIDS, then they also have to quit leading to poor human capital

36
Q

What is an evaluation point for why poor human capital might not be a limit to growth and development?

A

-Automation and technology makes human capital less and less important in manufacturing process

Economics Unit 4 (9 decks)

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