E+D Economies - Prebisch Singer Hypothesis Flashcards
1
Q
Constrains because…
A
- Deterioration of terms of trade = afford fewer imported capital goods
- ^^ less investment - decreasing AD and LRAS, decreasing economic growth and restraining economic development
- Furthermore, less investment = lower profits = decrease corp tax revenue = less money to spend on funds for development
- Government stock could also run out if multiple bad harvests in a row
2
Q
Fix
A
- Stop producing primary products and start producing manufactured goods - only way to fix Prebisch-Singer hypothesis
- How industrialisation moves agricultural workers into industrial jobs:
- First, if there is practically only one manufacturing firm in a developing country, they are a monopsony and can therefore pay very low wages
- these firms can then make supernormal profits as their labour costs are very low
- They can then invest - resulting in expansion of their firm and therefore an increased derived demand for labour
- This will therefore push up wages
- People working in the agricultural sector will therefore be more inclined to work in the industrial sector
- This will continue until a large population works in the industrial sector and everyone has higher incomes than before, resulting in growth and development and countries being less dependent on primary products
3
Q
Eval
A
- Doesn’t necessarily lead to growth and development
- Global financial integrity research group claims - several hundred billion dollars of tax are lost each year through transfer pricing
- ^^ avoid paying corporation tax by passing profits on to other daughter companies e.t.c
- Transfer profits out of developing countries to other countries with lower corporation tax rates - keep as much profit as possible
- With no profit remaining in the developing countries, governments will collect little corporation tax, decreasing investment and therefore growth and development
- ^^ less spending on education and healthcare will also prevent development
