factors influencing growth and development Flashcards
recall the 12 factors affecting growth and development
primary product dependency
saving gap: Harrod-Domar model
foreign currency gap
capital flight
demographic factors
debt
access to credit and banking
infrastructure
education/skills
absence of property rights
corruption
vulnerability to external shocks
what is primary product dependency?
- primary products → raw materials in industries such as agriculture, mining
- several developing countries rely on these primary products as a part of their economy
what are the issues with primary product dependency?
- one issue with this is the volatility of commodity prices
- makes it hard for workers to plan for the future
- incomes of farmers are hard to predict
- fall in price leads to a fall in export incomes, making it hard to fund their infrastructure and education
- relying on primary products isnt sustainable as they can be over extracted and run out
- inelastic supply
- non renewable so country will suffer when they run out of product
- natural disasters can wipe out production so farmers left with no income
if income increases, demand will stay the same
what is the saving gap?
- in many developing countries there is limited wealth so money cant be put aside for the future
- can only afford to spend in the short run
- consumers focus on immediate needs e.g food and water to ensure they can survive
- without sufficient savings there inadequate capital accumulation
what does the Harrod-Domar model state?
- the Harrod-Domar model states that investment, saving and technological change are required in an economy for economic growth and investment requires saving
- rate of economic growth inc if saving ratio inc
- leads to inc investment and technological progress
- leads to higher productivity
how is the rate of growth calculated?
- rate of growth calculated by savings ratio/capital output ratio in the Harrod-Domar model
- growth inc with more saving/ small capital output ratio
what are the limitations of the Harrod-Domar model
- low marginal propensity to save (MPS) in some countries or poor financial system due to little income
- funds might not lead to investment
- may have to borrow from overseas to invest -> debt
- inefficiency in the workforce
- paradox of thrift
- an inc in savings could lead to an inc in investment
- however inc in savings means theres a dec in spending which leads to a fall in AD
economic growth isnt the same as economic development
what is the foreign currency gap and how does it affect growth and development?
- this exists when the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments (exports<imports)
- value of current account deficit is greater than the value of capital inflows
- so country may not have enough foreign currency to import raw materials, food, medicines or to repay debt
what is capital flight and how does it affect growth and development?
- when capital and money leave the economy through investment in foreign economies rather than being left in the country for people to borrow and invest
if money was left in the banks within the country, then credit could be created by bans for consumers and businesses - triggered by hyperinflation of rising tax rates
- can worsen economic crisis and cause a currency to depreciate
how do demographic factors affect growth and development?
- population can impact growth and development
- could lead to hunger, environmental damage
- rapid population growth has complicated efforts to reduce poverty
- increases number of dependents in a country but doesnt immediately increase those of working age
how does debt affect growth and development?
Govt has to borrow more
Reduce investment
May lead to increased tax which would decrease spending
Limit govt ability to implement reforms
high levels of interest repayments
therefore they have less money to spend on services for their population
how does access to credit and banking affect growth and development?
secure and stable banking system needed for there to be a lot of saving in a country
without this, people have limited access to credit and banking compared to developed countries
this means those in developing countries can access funds for investment and they struggle to save for their future
how does infrastructure affect growth and development?
- poor infrastructure discourages foreign companies from setting up in a country
- production costs increase where basic infrastructure isnt available
how do education/skills affect growth and development?
- educated workforce= more skilled workforce
- improve productivity
- can produce goods and services high in quality
- helps generate employment and raise living standards
how do absence of property rights affect growth and development?
- means that entrepreneurs cant protect their ideas
- dont have the incentive to innovate or where individuals are allowed to own and decide what happens to certain resources
means that individuals can use laws to protect their assets which leads to a decrease in investment
will be unwilling to buy machinery, build factories or establish brands
