Emerging and developing economies

Question 1

3 elements of HDI

Answer 1

1. GDP per head
2. Health
3. Education
   It tracks progress made by countries in these 3 areas to measure living standards (used in UN development report)

Question 2

Advantages of HDI (2)

Answer 2

1. Broader measure than GDP per capita
2. UN- 3 essential contributors to development are for people to lead a long and healthy life, acquire knowledge and have access to resources needed for decent standard of living

Question 3

Limitations of HDI (3)

Answer 3

1. Too narrow as only comprises 3 aspects of development
2. Only concerned with long term development outcomes
3. Average measure and so disguises disparities and inequalities within nations

Question 4

Other indicators of development (8)

Answer 4

1. Access to clean water
2. Male population employed in farming
3. Energy consumption per person
4. Population with internet access
5. Mobile phones/1000
6. Degree to which people are entitled to civil rights
7. Degree of democracy
8. Degree of inequality

Question 5

Factors influencing growth and development (11)

Answer 5

1. Non economic factors
2. Primary product dependency
3. Volatility of commodity prices
4. Savings gap
5. Foreign currency gap
6. Demographic factors
7. Debt
8. Access to credit and banking
9. Infrastructure
10. Education/skills
11. Absence of property rights

Question 6

Two types of primary products

Answer 6

Hard commodities and soft commodities

Question 7

Issues for countries depending on primary products (8)

Answer 7

1. Extreme price fluctuations
2. Fluctuations in producers’ revenue resulting from price fluctuations
3. Fluctuations in FE earnings
4. Protectionism
5. Shortages of supplies for domestic consumption
6. Finite supplies of hard commodities
7. Appreciation of the currency
8. Falling terms of trade

Question 8

Prebisch-Singer hypothesis (4)

Answer 8

1. Demand for PP tends to be income inelastic but demand for MG is income inelastic
2. As real incomes rise the demand for MG increase at a faster rate than the demand for PP
3. Prices of MG will rise more quickly than prices of PP
4. Terms of trade of developing countries will fall relative to those of developed countries

Question 9

Primary product dependency

Answer 9

In countries where value of production of primary products accounts for large proportion of GDP

Question 10

Criticisms of P-S hypothesis (3)

Answer 10

1. Developing country may have a comparative advantage on PP
2. Real price of PP may increase over time with rising world incomes and population
3. FDI has increased a lot in recent years in countries dependent on PP

Question 11

Harrod-Domar model

Answer 11

Illustrates problem of how countries with low GDP per head will have a low savings ratio

Question 12

Harrod-Domar criticisms (3)

Answer 12

1. Focuses on physical capital and ignores significance of human capital
2. Assumes constant relationship between capital and output
3. Savings gap may be filled by means other than domestic savings e.g. FDI

Question 13

Causes of foreign currency gap (4)

Answer 13

1. Dependency on export of primary products
2. Dependency on imports of oil and MG
3. Interest payments on debt to foreign countries
4. Capital flight (assets or money taken out of country)

Question 14

Demographic factors (2)

Answer 14

1. Malthus predicted famine as food production in geometric but population is arithmetic progression. Where population growth greater than GDP growth –> GDP per head will fall
2. Ageing population means smaller workforce

Question 15

Debt causes (6)

Answer 15

1. Dependency on PP and falling terms of trade
2. Developing countries borrowing money at times of low interest rates but struggling to service debt
3. Having to borrow to pay for imports when oil price increases
4. Loans to finance prestigious investment projects
5. Depreciation in value of currencies of developing countries which increases burden of debt
6. Loans to finance expenditure on military

Question 16

Access to credit and banking

Answer 16

Important for entrepreneurs and existing businesses to finance growth and expansion

Question 17

Infrastructure

Answer 17

If it is poor it will put off foreign and domestic investors

Question 18

Education/skills

Answer 18

If literacy is low productivity of workforce is low and will act as deterrent to FDI

Question 19

Absence of property rights

Answer 19

If a person owns no assets it will be very difficult to secure a bank loan as he/she will not have collateral

Question 20

Poor governance, political instability and civil wars (2)

Answer 20

1. Unlikely resources will be allocated efficiently and government market failure may occur and so a net welfare loss
2. Civil wars have devastating effect on infrastructure, deter investment and hinder G&D

Question 21

Corruption (4) Undesirable if it causes…

Answer 21

1. Inefficient allocation of resources
2. Increase in costs of doing business in country
3. Decrease in FDI
4. Capital flight

Question 22

Trade liberalisation (Market orientated strategy)

Answer 22

Refers to removal of trade barriers- results in an increase in trade and associated welfare benefits

Question 23

Promotion of FDI (4) (Market orientated strategy)

Answer 23

1. Trade liberalisation
2. Deregulation of capital markets
3. Measures to make it easier and cheaper for global companies to build factories in developing countries
4. Tax incentives

Question 24

Removal of government subsidies (Market orientated strategy)

Answer 24

Subsidies to domestics may result in inefficient allocation of resources as competition is reduced (less imports)

Question 25

Floating exchange rates (Market orientated strategy)

Answer 25

May depreciate ER so goods and services more internationally competitive

Question 26

Microfinance schemes (Market orientated strategy)

Answer 26

Give poor people small loans to help them engage in productive activities or grow small business

Question 27

Privatisation (Market orientated strategy)

Answer 27

Profit motive and competition more efficient (and in growth for economy) than public sector

Question 28

Development of human capital (Interventionist strategy)

Answer 28

Skills, knowledge and talents of workforce (investment in people such as training and education which increases productivity)

Question 29

Protectionism (Interventionist strategy)

Answer 29

Include tariffs, quotas and subsidies to domestics)

Question 30

Managed exchange rates (Interventionist strategy)

Answer 30

CB can engineer depreciation of currency- increases competitiveness of goods and services

Question 31

Infrastructure development (Interventionist strategy)

Answer 31

Vital to economic prosperity and development (can be funded private, public or p-p partnerships)

Question 32

Promoting joint ventures (Interventionist strategy)

Answer 32

Foreign investor & local partner business establish jointly owned firm in host country. Positives are reduction in costs and risks + less vulnerable to hostile actions in political instability. Problems for investor are possible loss of control of tech and expertise + possibility of partners having different strategic interests.

Question 33

Buffer stock schemes features (3) (Interventionist strategy)

Answer 33

1. Ceiling price 2. Floor price 3. Buffe stock which involves storage or release of stocks in order to reduce price fluctuations to agreed limits

Question 34

Buffer stock schemes critiques (4) (Interventionist strategy)

Answer 34

1. Floor price high means surpluses each year 2. Ceiling rice too low means inefficient stocks in shortage years 3. Costs of shortage 4. Cheating by one of the members