eco development Flashcards
savings gap and HARROD DOMAR THEORY
Trees by there is limited wealth, money can’t be saved it can only be spent in the short run to be able to survive therefore there is insufficient savings which means that it’s more expensive for the public and private sector to get funds because borrowing costs are high therefore there is limited investment for example in infrastructure The model suggests that investment, saving, technological change are required in an economy for economic growth increases in growth occur if savings ratio increases increases because investment and technological progress increases productivity.
Savings Ratio (S)
This represents the proportion of national income that is saved rather than spent on consumption.
A higher savings ratio means more funds are available for investment, which can boost economic growth.
Marginal Efficiency of Capital (Capital-Output Ratio, v)
This measures how much additional output (GDP) is produced per unit of additional capital investment.
A lower capital-output ratio means capital is more productive, leading to faster economic growth.
t.
Capital Depreciation (δ)
Over time, capital assets (machines, buildings, etc.) wear out or become obsolete, requiring replacement.
If depreciation is high, more investment is needed just to maintain the existing capital stock before achieving growth.
The net investment required for growth must exceed depreciation for the economy to expand.
It depends on how savings have been generated if borrowing then this will increase the debt to GDP ratio damaging economic development in the long run due to greater debt repayments loss of resource ownership and increased tax rates and low investor confidence -fiscal policy Would be better
Paradox of thrift if savings increase spending decreases lowering aggregate demand and growth
limitations
Although there is issues with this model as in countries where there is limited wealth there is a low margin of an city to save, and often a poor financial system therefore Funds might not need to borrow that also maybe inefficiencies in the workforce
…. The paradox of thrift may a also be considered an increase in savings means that reduction in spending which leads to fall in a day so therefore not necessarily an increase in savings leading to an increase in investment
resource curse
paradox of the plenty- failure of resource rich countries ti benefit fully from natural resource wealth and for governments in these countriess to respond effectively
resource rich countries tend to have high conflict and authoritarianism conpared to non resource rich
such disease can occur in resource rich countries, the =s us where due to having a large natural resource revenue it harms export in other sectors such as services and manufacturing
this occurs because: countries with rich resources are likely to specialise in exporting natural resource, decreasing incentive to diversify unto different industries
this has negative impacts….
labour is low skilled as mostly work in primary sector
- become reliant on demand and price for commodity- if runs out- low scope ofr growth
- primary products have low income elasticity than 2 and 3
natural resources are often owned by firms with large monopoly / monopsony power - global MNC’s such as BP, Esso, SHELL, , profits taken by foreign shareholders and back to country of MNC not directly benefiting developing econ, as well as low tax laud if any as weak legal sector
- appreciated ER making imports cheaper- important if reliant on importing food but also damages exports- leading to unbalenced economy an only sector which ca thrive is resource - dutch disease
such as mini oil boom- 1979-81 Mexico, Venezuela, APP of ER due to new discovery of oil leaving no other industries competitive which is damaging in LT
evaluation ….
resource is nit the issue but quality of institutions
countries like Russia Iran and venezual have stunted manufacturing which could be minimised if country hs absporative capacity to transform resource revenue to investments on e.g. roads an electricity such as chilly and Norway who used to generate no. resource sector growth who have overcome Dutch disease
reasons fr barriers to growth/ development
- primary product dependancy
- savings gap + Harrod domar model
- foreign currency gap
- capital flight
-denographic factors- population
- education and skills
- infastructure
- poor governance
vunrabulity to external shocks
- corruption- what % tax rates are actually spent on public services
- ;labour immobility
market orientated policies promote eco development
- promotion fdi
-micro finance schemes
- privitisation/ deregulation
- removal gov subsidies
interventionist policies
- development human capital- move away from primary sector- diversify
- protectionism
-infastructure development
other
industrialisation- diversification away from agricutlrue - the LEWIS MODEL
-development of tourism - diversification
- diversification
- aid
