Chapter 7 - Growth and Development Flashcards
What is economic growth?
The growth in the productive capacity of the economy which would be represented by an outward movement of the PPF or a rightward shift in the LRAS curve.Usually measured by the growth in GDP so it is a positive concept.
What is economic development?
A positive economic concept which refers to an increase in living standards and welfare over time
How can economic development be measured?
The HDI (consisting of GDP per head, health and education). The HDI ignores other factors though such as the proportion of the population with access to clean water, employed in agriculture, the internet. Also energy consumption per head and number of mobile phones per thousand.
Name a minimum of 5 limits to growth and development.
Historical factors, geography, primary product dependency, savings gap, foreign currency gap, debt, corruption, poor governance and political instability and civil wars, population issues, human capital problems.
What effect do geographical factors have on development and growth?
Some are land-locked, lack infrastructure, be located far away from markets.
What effects does the history of a country limit growth and development?
Some argue that colonialism encouraged a culture of dependency, leading to exploitation of resources by rich countries. Others argue colonialism increased growth and development due to the money spent on infrastructure etc.
What is primary product dependency?
Where production of primary products contribute for a large protection of a country’s GDP.
What are the two categories for primary products?
Hard-commodities (Mined or extracted) and soft-commoditises (usually agricultural goods).
Name 5 countries with primary product dependency and give examples.
Chile: Copper, fruit and frozen juices Peru: Fish products, minerals, agricultural. Ghana: Cocoa, coffee, oil Kenya: Tea, horticulture Nigeria: Oil
What are the disadvantages with Primary product dependency?
Extreme price fluctuations, fluctuations in producers’ revenues (difficult to plan investment, fluctuation in foreign exchange earnings (more difficult for governments to plan investment), protectionism by developed countries, Shortages of supplies for domestic consumption (cash crops usually exported), appreciation of the currency reducing competitiveness and falling terms of trade
Why do primary products suffer from extreme price fluctuations?
the elasticity of both demand and supply tend to be inelastic. Meaning both demand-side and supply-side policies can have huge impacts on price
Terms of trade?
Measures the average price of a country exports relative to the average price of its imports.
Terms of trade are measured as follows:
(Index of export prices % Index of import prices) x 100
What are the key elements of the Prebisch-Singer hypothesis?
Demand for primary products is income inelastic whereas manufactured goods tend to be income elastic demand. Therefore as incomes increase the demand for primary products rises to lesser extent than manufactured goods. Thereby, the terms of trade for developing countries will fall relative to those of developed countries.
What are the criticisms of the Prebisch-Singer Hypothesis?
Countries have developed off of primary products. If developing countries have a comparative advantage in producing primary products resources will be more efficiently used if they specialise. During 2000-2008 demand for primary products rose much more than manufactured products.There is a belief that as real income increase in sub-Saharan Africa, India and China, food and commodity prices are expected to continue to rise. FDI has increased in recent years encouraging G&D.
What countries have developed based on primary products?
Botswana: Diamonds
Chile: Copper
Bolivia have over half the world supply of lithium meaning demand is likely to rise.
What is the savings gap?
An investment savings gap means there is a lack of capital accumulation, thereby a lack of investment into an economy.
Why is there a savings gap within less developed countries in general?
A high propensity to consume (% of any income increase that is spent) means that countries with low GDP per head have low savings ratios, making it difficult to finance investment and thereby resulting in low capital accumulation (additions to capital stock of a country). This results in low output and GDP.
What is the Harrod-Domar model?
Low incomes and output - Low savings - Low investment - Low capital accumulation
What is capital accumulation?
Capital accumulation involves acquiring more assets that can be used to create more wealth or that will appreciate in value.
What is capital accumulation?
Capital accumulation involves acquiring more assets that can be used to create more wealth or that will appreciate in value.
What are the criticisms of the Harrrod-Domar Model?
It focuses on physical capital and ignores human capital
it assumes a constant relationship between capital and output
The savings gap can be filled by other means.
Why do many developing countries have debt?
Primary product dependency and a fall in the terms of trade. Borrowed money while interest rates were low but no longer able to service it. When oil prices increased such countries had to borrow to buy imports. Decisions to invest by borrowing Depreciation of the currency increasing the burden of the debt. Loans taken to finance expenditure on military equipment.
What is corruption?
The use of power for ones personal gain.
What is one main example of corruption?
Mugabe in Zimbabwe
