Factors influencing growth and development Flashcards
list the factors that impact growth and development
- primary product dependency
- volatility of commodity prices
- savings gap: Harrod-Domar model
- foreign currency gap
- capital flight
- demographic factors
- debt
- access to credit and banking
- infrastructure
- education/skills
- absence of property rights
summary;
cost, productivity and investment
Explain how primary product dependency limit development/growth
According to Prebisch Singer Hypothesis, terms of trade worsen for primary products as they have income inelastic demand.
Global income rise -> price for manufactured imports rises (income elastic), terms of trade worsen -> current account deficit -> AD decreases -> Real GDP decreases -> hinder economic growth
cost rise -> primary product producers make less profit -> less corporation tax revenue -> fiscal deficit -> less funding for economic development
Explain volatility of commodity prices and how that limits growth and development
explanation:
primary products have price inelastic supply and demand as they are a necessity and take time to grow. A small shift in demand leads to a significant decrease in price. Making price unstable
Limit on growth:
Price instability hinders investors from investing -> less investment -> LRAS and AD shift left -> Real GDP decreases
Limit on development:
investment decreased -> productivity decreased -> profit decreased
-> less corporation tax -> less funding for healthcare -> limits economic development
Explain how education and skills limits development/growth
less education/training -> lower human capital -> lower productivity -> lower output -> lower profit -> lower corporation revenue to government -> lower government spending/funding for economic development
or
less education -> lower human capital -> lower productivity -> LRAS shift left -> real GDP decreases, limit economic growth
Explain how Savings Gap limit growth/development
Harrod Domar model
Low savings in banks -> fewer capital for banks to lend money to firms -> lower investment -> lower productivity -> lower profit -> lower corporation tax revenue -> less funding for economic development
Define savings gap
Gap between amount of money saved at banks,
and amount of money firms want to borrow from banks.
Explain how foreign currency gap limits development/growth
Lack of foreign currency -> restricted imports of capital tool - > capital depreciation -> decrease in productivity -> output decrease -> profit decrease -> tax revenue decrease -> spending on infrastructure decrease
Explain how capital flight limits development/growth
Owners may withdraw extra profit to abroad for more stable, developed economies to invest instead of their own country
Thus, reducing investment…
Explain how demographic factors limit growth/development
A large aging population -> strain on government spending on healthcare than investment -> lower productivity …
Explain how debt limits growth/development
Government may strain themselves by overborrowing -> paying debt in LR instead of investment…
Explain how access to credit and banking limit growth/development
Lack of access to borrowing -> less firms can invest -> productivity drops -> output drops -> profit drops -> corporation tax revenue drops -> funding/government spending drops
Explain how infrastructure limits growth/development
Lack of infrastructure -> productivity decreases -> output drops -> profit drops -> less corporate tax revenue -> government spending/funding decreases
Explain how absence of property rights limits growth/development
Lack of property rights -> dead capital -> banks refuse to offer loans to firms due to lack of property rights to accept them as collateral -> less investment -> LRAS shift left, AD left -> Real gdp drops -> economic growth hindered
less investment -> less productivity -> less output -> less profit -> government receive less corporation tax from firms -> funding for development drops
