Factors Influencing Growth and Development

Question 1

What factors influence growth and development?

Answer 1

1) Education 📚 and skills
2) Capital flight
3) Infrastructure
4) Demographic factors- e.g. mean age of population
5) Level of savings and investment
6) Access to banking and credit 💵
7) Primary product dependency
8) Non-economic factors
9) Volatility in commodity (e.g. oil ⛽️) markets
10) Absence of property rights

Question 2

What issues do countries who are dependent on primary products face?

Answer 2

1) Fluctuations in export earnings- demand for primary products inelastic- … ⬇️ in price-> ⬇️ in export revenue-> deterioration in country’s trade balance
2) Natural disasters 🌪- extreme weather e.g droughts, 🌪 etc can disrupt production of primary products especially agricultural products 🥕
3) Dutch disease- country well endowed with natural resource in ⬆️ global demand may face ⬆️ in exchange rate … ⬇️ competitiveness of other 🚘 and 🧹
4) Price fluctuations- uncertainty-> ⬇️ investment-> ⬇️ output

Question 3

What is the Prebisch-Singer hypothesis?

Answer 3

Explains primary product dependency as a factor influencing growth and development
Countries that export primary products (commodities ⛽️, food 🥕 etc) able to import less ⬇️ and ⬇️ (manufactured goods) for given level of exports (… price of imports ⬆️ at faster rate than price of exports hence ⬇️ in terms of trade)

Question 4

What is the explanation behind the Prebisch-Singer hypothesis?

Answer 4

YED for manufactured 🚘 ⬆️ than YED for primary products e.g. food 🥕, oil ⛽️ etc (because primary products necessities … YED between 0 and 1 and manufactured 🚘 luxuries … YED ⬆️ than 1)
… as incomes ⬆️, demand for manufactured 🚘 ⬆️ more rapidly than demand for primary products (people can afford to buy ⬆️ manufactured 🚘 now)
… prices of manufactured 🚘 ⬆️ relative to price of primary products
… imports ⬆️ price and exports ⬇️ price-> ⬇️ terms of trade

Question 5

How can the Prebisch-Singer hypothesis be criticised?

Answer 5

1) Some countries have developed on basis of primary products e.g. Botswana 🇧🇼 and diamonds 💎
2) If developing country has comparative advantage in primary product then resources used ⬆️ efficiently by specialising in production of that product
3) Primary product prices ⬆️ sharply until mid 2008 WHILE prices of many manufactured 🚘 ⬇️

Question 6

What are projections of some primary products for the future?

Answer 6

1) Food 🥕- prices likely to ⬆️ as 🌎 population ⬆️ AND as incomes in countries such as 🇮🇳 and 🇨🇳 ⬆️-> ⬆️er demand for foods traditionally eaten in developed countries
2) Lithium- used to make batteries 🔋 for hybrid and electric ⚡️ vehicles 🚗- … prices likely to ⬆️ given environmental concerns and regulations- nearly half of known reserves located in Bolivia 🇧🇴 … 👍 outlook for 🇧🇴’s future