Factors influencing growth and development

Question 1

PPD

Answer 1

Primary product dependency - proportion of exported goods that are primary products

Question 2

What are primary products

Answer 2

raw materials in industries such as agriculture, mining and fishing.

Question 3

PPD application

Answer 3

Richer countries have low reliance on primary products, poorer countries in Africa have over 70% dependency on Primary products (67% average), on average rich countries have a 6% dependency on primary products. Mining accounts for over 60% of South Africa’s exports so when the mining industry is not working South Africa cannot pay foreign debts impacting the economy

Question 4

Volatility of primary products issue

Answer 4

One issue with this is the volatility of commodity prices that can make it hard for workers to plan for the future, and it means incomes of farmers are fickle and hard to predict.
A fall in the price leads to a fall in export incomes, which can make it hard to fund their infrastructure and education. Moreover, relying on primary products is not necessarily sustainable, since they could be over extracted and run out.

Question 5

High global economic growth………primary products

Answer 5

High global economic growth increases the demand for primary products

Question 6

Why are LEDC’s conditioned for developing primary products

Answer 6

Low income countries rely on primary products but many rely on a single primary product. LEDC’s have perfect climate for PP and good access to raw materials encouraging mining. A lack of capital and large labour supply means that it is relatively cheap for poor countries to produce primary products which require relatively little capital or skilled labour. Also it’s cheaper for LEDC’S as less opportunity cost for them as they do not have to give up on other industries. By specialising to only PP it will make you more competitive as they’ll become more efficient

Question 7

What creates price volatility and why is it a barrier to development?

Answer 7

The elasticity of supply and demand has a large impact on the volatility of primary commodities. Generally, primary goods have relatively inelastic supply and demand causing huge fluctuations in prices of the commodities as supply and demand changes. This is a barrier to development because it makes it harder for producers to make future investments because they do not know as to whether they’ll earn enough to sustain an investment due to price volatility. The weather also leads to high volatility as affects supply. Inelastic supply because time lags of food growth. Inelastic PES and PED diagrams

Question 8

Low income elasticity of demand of primary products hinders development

Answer 8

Low income elasticity means there would be a decline in the terms of trade of primary product exporters resulting in a net flow of income from commodity producers to manufactured goods exporters

Question 9

Why as world income grows it becomes harder for poor countries to develop

Answer 9

Demand for secondary goods grows faster than demand for primary goods so poorer countries trade more and more goods for the same amount of secondary goods so become worse off
Low price elasticity’s for PP
As income increases, richer countries want less PP, poorer countries want more goods from MEDC’s
Manufactured goods from MEDC’s have higher YED’s
LEDC’s have to produce more PP to buy MEDC goods
EV: population growth will increase demand for primary products

Question 10

What has happened to world supply and how might dependence on coffee hinder development?

Answer 10

With inelastic demand, an increase in the supply of coffee leads to a loss in total revenue, as price falls more than demand increases. With an increasing population, the supply of coffee is likely to increase, continuing to reduce revenue generated by coffee production. Coffee has a low price elasticity because it is cheap

Question 11

Market structure (Perfect competition v Oligopoly) in a primary product hinders development

Answer 11

Coffee is a homogenous (perfect substitutes) good with thousands of suppliers in many different countries but the demand for coffee beans is dominated by a few large suppliers. This means the large coffee processing companies are able to extract the most value out of the supply chain. They can keep the price high to consumers in richer countries because of their monopoly power while driving down prices to the small scale farmers in poorer countries. Coffee companies exploit poor suppliers as large amount of suppliers and homogeneous good means companies can demand cheaper prices thus preventing producers from earning large amounts of money from it hindering development

Question 12

Savings gap

Answer 12

A savings gap is when LEDC’S do not have sufficient average incomes to enable high rates of saving so can only afford to spend in the short run, and therefore accumulation of capital stock through investment is too low to create economic growth

Question 13

Savings gap application

Answer 13

Africa’s saving rate is around 17%, whilst the average for middle income countries is around 31%. This makes it more expensive for the African public and private sectors to get funds since they have higher borrowing costs impeding capital investment.

Question 14

A savings gap hinders development because

Answer 14

the current level of savings is less than the level of savings needed to finance enough investment to create high enough economic growth to create development

Question 15

Why is it more expensive for African public sectors to get funds for investment

Answer 15

Low savings rates and poorly developed or malfunctioning financial markets make it more expensive for African public sectors to get funds for investment. Higher borrowing costs impede capital investment

Question 16

Why are levels of income, savings and investment linked

Answer 16

with higher levels of income, the opportunity cost of savings fall. As a result, investment increases leading to more economic growth and higher incomes

Question 17

Criticisms of savings gap model

Answer 17

The model implies poor countries should borrow to finance investment in capital to trigger economic growth; however, history has shown that this often causes repayment problems later

Question 18

The Harrod-Domar modal states that

Answer 18

saving and technological change are required in an economy for economic growth. The rate of growth increases if the savings ratio increases. This leads to increased investment and technological progress, which leads to higher productivity. The rate of growth is calculated by the savings ratio / capital output ration in the model, growth increase with more saving or a small capital output ratio

Question 19

Limitations of Harrod-Domar model

Answer 19

The limitations of the model are that there is a low marginal propensity to save in some countries, or that there might be a poor financial system. Funds might not lead to borrowing and investment – it could also be inefficiency in the workforce. Moreover, the paradox of thrift could be considered. An increase in savings could lead to an increase in investment. However, an increase in savings mean there is a reduction in spending decreases AD.

Question 20

Harrod-Domar model to explain growth in an economy has what key variables for determining growth

Answer 20

• Economic growth depends on the amount of labour and capital
• As LEDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development
• Net investment leads to more capital accumulation which generates higher output and income
• Higher income allows higher levels of saving

Question 21

Capital flight and foreign currency gap

Answer 21

capital and money leave the economy through investment in foreign economics; triggered by an economic threat such as hyperinflation or rising tax rates; it can worsen an economic crisis and cause a currency to depreciate. Capital flight occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength. This can result in what is referred to as a foreign currency gap. It is usually accompanied by a sharp drop in the exchange rate of the affected country leading to dramatic decreases in the purchasing power of the country’s assets and makes it increasingly expensive to import goods. Foreign investors panic that assets in other countries will devalue due to fall in exchange rate so take money out of the country.

Question 22

Demographic factors with application

Answer 22

Demographic factors – the population can impact the growth and development of a country. There is a link between keeping birth rates down and fighting hunger, poverty and environmental damage. Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa. The current population of 1.1 billion is expected to double by 2050, which is not sustainable

Question 23

Debt with application

Answer 23

the debt crisis emerging in the developing world threatens the fight against poverty and inequality. Developing countries’ debt is external debt incurred by the governments of third world countries generally in quantities beyond the governments’ political ability to repay. Unpayable debt is a term used to describe external debt when the interest on the debt exceeds what the country’s politicians think they can collect from taxpayers, based on the nation’s GDP thus preventing the debt from eve being repaid. South Korea’s household debt has grown from 7% to 10% in in recent months

Question 24

Access to credit and banking

Answer 24

without a safe, secure and stable banking system, there is unlikely to be a lot of saving in a country

Question 25

Infrastructure with application

Answer 25

Infrastructure – poor infrastructure discourages MNCs from setting up premises in the country. This is since production costs increase where basic infrastructure such as continuous electrical supply is unavailable. Can slow the rate of urbanisation in many parts of Africa for example.

Question 26

Education/skills –

Answer 26

this is important for developing human capital. Adequate human capital ensures the economy can be productive and produce goods and services of a high quality. It helps generate employment and raise standards of living

Question 27

Absence of property rights

Answer 27

weak or absent property rights mean entrepreneurs cannot protect their ideas, so do not have an incentive to innovate

Question 28

Corruption

Answer 28

in sub-Saharan Africa, the money lost from corruption could pay for the education of 10 million children per year in developing countries. Causes – aid is a source of government revenue worth winning power for because you can get the funds and you are not responsible to the people. If governments have to rely on taxes then they become accountable; political systems (dictatorship or democracy); natural resource windfalls are susceptible to theft. Costs EU economy £99bn annually.

Question 29

Conflict

Answer 29

Conflict has long been a barrier to sustained growth and development in Africa, leading to terrible consequences. Causes – religious conflicts, competition for control of resources, increasingly internal, feature of poor income distribution and poorer countries. Effects – output and growth: food production is drastically affected by armed conflict; FDI falls; wars create negative externalities for bordering countries; government finances are employed to resource wars and policing rather than development; education is often disrupted as schools close

Question 30

Poor governance

Answer 30

Poor governance e.g. property rights and political instability. Weak governance holds back infrastructure development much more in Asia than elsewhere. Poor governance/civil war – this could hold back infrastructure development and is a constraint on future economic development. It could destroy current infrastructure and force people into poverty

Question 31

Vulnerability to external shocks

Answer 31

Vulnerability to external shocks – an earthquake prone country is likely to find it hard to develop their infrastructure, and people might be pushed into poverty. Nepal was already one of the poorest countries in the world, but the Nepal earthquake in 2015 pushed more people into poverty.

Question 32

Foreign currency gap

Answer 32

exists when country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments i.e. the value of the current account deficit is larger than the value of capital inflows. An inflow of foreign exchange may enable LEDCs to import foreign capital which is considered necessary for economic growth and development

Question 33

FDI =

Answer 33

Foreign direct investment

Question 34

Dependence on primary product exports

Causes of foreign currency gap:

Reason why it creates gap

Example

Answer 34

Causes of foreign currency gap: Unionisation

Reason why it creates gap: All profits made are sent back to the host country leading to lost income for LEDC

Example: British companies in Africa owning mines generating large incomes

Question 35

Debt servicing costs

Causes of foreign currency gap:

Reason why it creates gap

Answer 35

Causes of foreign currency gap: High interest rates 10.75% in Uganda

Reason why it creates gap: Very high interest rates discourage foreign investments

Question 36

Capital flight

Causes of foreign currency gap

Reason why it creates gap

Example

Answer 36

Causes of foreign currency gap: Assets/money rapidly flow out of a country

Reason why it creates gap: As money rapidly flows out of a country it means that the outflow of currency > inflow of currency preventing…

Example: Black Wednesday: UK wanted to keep the £ at a fixed price meaning huge amounts of the £ have to be sold at times

Question 37

Trade sanctions

Example

Answer 37

Common agriculture policy makes it harder for LEDC’s to sell their goods to the EU. This subsidy therefore acts as a trade sanction

Question 38

Why do LEDCs have a small tax base

Answer 38

with lower levels of tax revenue available to governments of LEDCs, development of important infrastructure such as roads and railways are difficult to finance informal economy, self sufficiency, government, banking

Question 39

TNC’s do not want to invest in developing countries because

Answer 39

they do not want their reputation to be harmed if something goes wrong

Question 40

Why should Africa have a comparative advantage in manufacturing low tech goods and why does it remain uncompetitive

Answer 40

With labour costs at least as low as anything in SE Asia, Africa should have a comparative advantage in manufacturing low tech goods. However higher costs due to poor infrastructure means Africa remains uncompetitive and this hinders development.

Question 41

Why is low population density bad with application

Answer 41

Low population density makes it harder to provide infrastructure because the higher fixed costs are spread over fewer people – density decreases infrastructure decreases. Africa’s 1.1 billion is expected to double by 2050.

Question 42

More infrastructure means more jobs which means…

Answer 42

High multiplier effect
Increases productive potential
Increases foreign investment

Question 43

When is the HDI of an average person in a society less than the aggregate HDI

Answer 43

When there is inequality in the distribution of health, education and/or income

Question 44

The greater the difference between the IHDI and the HDI

Answer 44

the greater the inequality.

Question 45

The IHDI will be equal to the HDI when …. but less than the HDI

Answer 45

there is no inequality

as inequality rises

Question 46

The difference between IHDI and HDI represents

Answer 46

the loss in potential human development due to inequality and can be expresses as a percentage.

Question 47

An injection (increasing savings) will…

Answer 47

help to increase investment and stimulate the economy

Question 48

Transition mechanism for injection of increased saving

injections stimulate cycle

Answer 48

investment
capital 
economic growth
increases income
increased savings (back to start)

Question 49

LEDC’s have lots of____ but little ___

Answer 49

labour

capital

Question 50

Infrastructure transition mechanism

Answer 50

infrastructure gives jobs increasing multiplier effect increasing productive potential

lack of infrastructure discourages foreign investment