E+D Economies - Price Instability

Question 1

Constrains because…

Answer 1

Price instability - constraints growth and development:
- Unstable prices - decrease investment from foreign investors as future prices are harder to predict and therefore harder to predict future revenue and profits &laquo_space;don’t take risk
- ^^ decrease AD - decrease real GDP
- ^^ decrease LRAS - decrease real GDP
- = government receives less corporation tax revenue, due to low profits
- ^^ government can’t invest - constraints development

Question 2

Fix

Answer 2

Buffer stock schemes:
Interventionist policy
- ^^ strategy to tackle price instability - reduce price instability for agricultural primary products
- Keep demand curve normal - have supply perfectly inelastic -
- Price fluctuates - extreme price instability

Question 3

Eval

Answer 3

• May not lead to growth and development
  
  • May give producers incentive to overproduce - knowing the government will buy them
  • ^^ this would make buffer stock schemes incredibly expensive for countries to run
  • ^^ opportunity cost of spending money on buffer stock schemes, decrease funds for development resulting in limited economic growth - constants growth
  • (e.g decrease funds for development, decrease pension schemes, decreasing spending, decrease consumption, decreasing AD and therefore constraining growth)