Factors influencing growth and development

Question 1

What are economic factors contributing to development in countries?

Answer 1

• Debt
• Primary Product Dependancy
• Volatility of Commodity prices
• Infrastructure
• Education
• Saving gap
• Foreign currency gap
• Access to credit/ banking
• Capital flight
• Demographic Factors
  *Absence of Property rights.

Question 2

Primary Product dependency?

Answer 2

• agriculture, mining
• a large amount of a developing countries economic activity is due to primary products, which can cause problems.

Question 3

How is natural disasters a problem for primary product dependency?

Answer 3

They can wipe out production of primary products, which will remove the income of farmers, especially as they are non-renewable.

Question 4

What elasticity are primary products?

Answer 4

Price inelastic.

Question 5

How does primary product dependency cause the dutch disease?

Answer 5

If a country becomes a significant commodity producer in a short time, this will increase demand for their currency driving up its value. This increases export prices.

Question 6

How is primary product dependency not negative to some extent?

Answer 6

• Has allowed countries to develop
• Not all are price inelastic, like diamond.

Question 7

Volatility of commodity prices?

Answer 7

Due to primary products being processed inelastic, changes to demand or supply will cause great fluctuations to price.

Question 8

What do these volatile prices mean?

Answer 8

• Producers income and country’s income rapidly fluctuate, making it difficult to plan and carry out long term investment, and cause producers poverty.
• When prices rise for a number of years, over-investment occurs causing long term risks when prices do fall.

Question 9

Savings gap?

Answer 9

The difference between actual savings and the level of savings needed to achieve a higher growth rate.

Question 10

What does a saving gap do to the economy?

Answer 10

Developing countries have lower incomes thus less saving. This means the bank has less money to lend which reduces borrowing thus reducing investment/ consumption.

Question 11

The Harris D’omar Model?

Answer 11

• Suggests savings provide the funds for investments, and growth rates depend on saving level and productivity of investment. Growth is heavily dependant on capital, which needs investment behind it.

Question 12

Limitations of Harrod Domar Model?

Answer 12

• Assumes full employment
• Assumes fixed capital to output ratio
• Neglects non economic factors.

Question 13

How does debt influence economic growth?

Answer 13

• High levels of interest rates means developing countries have less money to spend on services and may force them to raise taxes.

Question 14

How does absence to property rights influence economic growth?

Answer 14

• A lack of rights to own and decide what happens to resources means that individuals and businesses cannot use the law to protect their assests, leading to reduced investment.
• could lead to economic collapse like Zimbabwe.

Question 15

How does the foreign currency gap influence economic growth?

Answer 15

• When exports are too low compared to imports to finance the purchase of foreign investment or goods.
• Economic growth halted.

Question 16

How does capital flight influence economic growth?

Answer 16

• Large amounts of money are taken out of the country, rather than being kept there for people to borrow or invest
• This halts the credit that could be created
• this can happen due to a country’s lack of confidence in their stability, to hide it from gov authorities or for profit repatriation.