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Macroeconomics > Factors of Development > Flashcards

Factors of Development Flashcards

1
Q

Terms of Trade Index Formula

A

(Average export index / Average import index) x 100

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2
Q

What does a rise in Terms of Trade mean

A

A country needs to export less to import the same amount as in the base year

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3
Q

What does a fall in Terms of Trade mean

A

The country needs to export more to import the same amount as before

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4
Q

What is a primary product

A

Products that do not undergo a manufacturing process - they are taking directly from the earth

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5
Q

Which economies depend on primary products

A

Developing countries

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6
Q

Downsides to falling terms of trade

A

Imports becomes more expensive

Country must export more to afford a given basket of imports

If demand for X and M is inelastic - Net trade will fall - leads to a decrease in economic growth

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7
Q

What happens to economies dependent on primary products when terms of trade deteriorate over time

A

Living standards fall
Economic growth fall
Harder to import capital goods

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8
Q

What is a commodity

A

A basic good which is interchangeable with another product of the same type

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9
Q

Why do demand for commodities tend to be price inelastic

A

They tend to be necessities

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10
Q

Why does supply for commodities tend to be price inelastic

A

It takes time to grow or extract them

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11
Q

What happens when an economy is dependent on primary products and export prices are volatile

A

Changes in firms revenue are also volatile

This large degree of uncertainty makes investment unattractive - lower investment limits growth and development

There’s increased volatility in economic growth

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12
Q

What happens when an economy is dependent on primary products and MEDCs use protectionist measures to support domestic agriculture

A

Agricultural producers in LEDCs struggle to compete

Harder to pursue to export led growth in these sectors

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13
Q

What does a tariff lead to for LEDCs

A

A reduction in demand which leads to lower export revenues for LEDCs in these markets

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14
Q

What are the three methods of calculating GDP

A

Measuring output in an economy
Measuring income in an economy
Measuring expenditure in an economy

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15
Q

What is the savings ratio

A

Proportion of the income that is saved

Expressed as a percentage

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16
Q

Why do LEDCs have low savings ratios

A

Most people have low incomes and have to spend most if not all of their incomes to survive

The financial system is likely to be weaker than MEDCs and retail banks may be far away for people living in remote areas - makes saving hard

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17
Q

What does the Harrod-Domar model state

A

Economic Growth is dependent on the savings ratio

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18
Q

Boxes in the Harrod Domar model with order

A

Savings Ratio -> Investment -> Capital Stock -> Output -> Income 🔄

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19
Q

How does the Harrod-Domar model explain why investment tends to be low in LEDCs

A

Savings ratio tends to be low in LEDCs which limits the amount of investment the financial sector can provide to firms

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20
Q

What does the Harrod-Domar model suggest LEDCs need to do to develop

A

Improved their savings ratio which leads too greater investment

This would cause an improvement in economic growth and incomes

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21
Q

What is the Savings Gap

A

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

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22
Q

Equation for rate of growth of GDP using Harrod Domar Model

A

Rate of growth of GDP = Savings Ratio / Capital Output Ratio

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23
Q

Capital Output ratio equation

A

Value of capital equipment / Annual output

24
Q

What is the capital output ratio

A

Amount of capital needed in the economy to produce a given quantity of goods

25
Q

How can the rate of growth in an economy be increased according to the Harrod Domar model

A

Increased level of savings
Reducing the capital output ratio

26
Q

What difficulties are there in closing the savings gap

A

There is a low level of MPS and a high level low MPC

Lack of a sound financial system

Capital Flight

Weakness in human capital - inefficient use

27
Q

What is capital flight

A

When a large amounts of financial capital leaves a country due to an event(s) that makes investors lose confident in an economy

28
Q

Potential solutions for a low savings ratio

A

Borrow from abroad
Reform financial sector
Microfinance
Aid

29
Q

Why are foreign currencies important for economic development in LEDCs

A

In the initial stages of industrialisation importing capital goods is vital for success

Foreign currency is also important for importing raw materials unavailable domestically

30
Q

Why might some LEDCs face a shortage of financial currency

A

LEDCs often don’t export enough to earn the foreign currency required to import their desired level of imports

31
Q

Causes of a foreign currency gap

A

Relatively low export earnings
High oil prices
Underperforming agricultural sector
Large foreign debt

32
Q

Solutions of a foreign currency gap

A

Debt relief from IMF and World Bank
Aid for development
Development of primary sector
Development of tourism

33
Q

What type of capital is the capital in capital flight

A

Financial

34
Q

Why does capital flight negatively impact economic growth and development

A

Less money available for investment

Capital flight leads to a depreciation of the exchange rate because inward investment falls and outward investment rises

Currency speculators sell the currency to make profit from then movements

Foreign currency gap occurs

Inflation increases as rise of depreciation of exchange rates raises import prices

FDI becomes less attractive to foreign investors

35
Q

Define Demography

A

The composition of a human population

36
Q

What is the dependency ratio

A

Number of dependents in a population divided by the number of working age people

37
Q

Relationship between working population and the productive capacity of an economy

A

Larger the working population - the greater the productive capacity of the economy

38
Q

Why does an ageing population limit economic growth

A

Large sections of society must now be supported either privately or publicly

Reduces size of workforce and limits government finances that could be used in more productive ways

39
Q

How can high birth rates help an LEDC develop

Eval?

A

High birth rates result in increases in the working age population over time

There needs to be an effective development strategy to ensure there is a sufficient amount of jobs

40
Q

Define Principal

A

Value of the original loan

41
Q

What is a country’s debt service ratio

A

The ratio of its debt service payments to its export earnings

42
Q

Debt Service Ratio Formula

A

Debt service payments (principal + interest) / export earnings

43
Q

When is debt sustainable

A

When someone can meet its current and future debt service obligations in full, without use of debt relief, rescheduling or accumulation of debts

44
Q

High debt service ratios hinder economic growth chains of analysis

A

High debt burden -> Large amount of government spending used to service debt -> Less available to spend in other areas -> infrastructure, labour force is weaker -> weaker economic growth

45
Q

Why will a rising debt service ratio limit government spending in other areas

A

More government expenditure must be focused towards the debt service ratio - limits the amount government can spend in other areas

46
Q

How can currency speculation cause a currency to depreciate plus eval

A

Speculation is a major factor in short term movements in an exchange rate

If currency speculators believe the value of a currency will fall - they will sell the currency

This increases the supply of the currency on the market which causes a depreciation of the exchange rate

Eval

High interest rate could attract hot money

Relatively low inflation may increase demands which increases the value of a currency

47
Q

How does a lack of access to credit and banking hinder development

A

Firms - Less likely to be able to obtain loans to finance their business operations

Individuals - Discourages savings due to insecurity of cash

48
Q

What does a country’s infrastructure play a role in

A

Determining the efficiency and quality firms produce at

49
Q

Define Collateral

A

An asset that a lender accepts as security for extending a loan

50
Q

What is a home equity loan

A

A type of loan in which the borrower uses the equity of his or her home as collateral

51
Q

Property Rights in LEDCs

A

Weak legal systems and poor record-keeping means land and other assets may not be fully established - documentation for land may not exist - restricts ability to obtain loans - harder to invest - limits economic growth

52
Q

Define Governance

A

How a country is run and whether authorities manage scarce resource well

53
Q

Define Corruption

A

Abuse of entrusted power of private gain

54
Q

What does war result in

A

Death and Destruction - Causes deterioration in the FOP and a countries infrastructure - economy is likely to get smaller and development is made harder

55
Q

Impact of Political Instability

A

Increases uncertainty - makes it less likely that firms will invest and entrepreneurs will set up new business - deters domestic investment and FDI which hinders economic growth

56
Q

Importance of a geography of a country

A

Plays a role in economic growth and development - rivers and flat land can help with transport - good weather conditions help with agriculture - ineffective government policies means a country wastes its natural advantages

Macroeconomics (45 decks)

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