Growth & Development

Question 1

Define economic development.

Answer 1

When economic growth (increase in GDP/GNI/per capita) happens alongside a decrease in poverty, inequality, and better access to merit goods.

Question 2

How is HDI calculated?

Answer 2

Health (life expectancy)
Education (ag. school years/ expected school yrs for a 5 y/o.
Standard of Living (GNI per capita)

Question 3

What are the disadvantages of using HDI as a measure of development?

Answer 3

HDI doesn’t account for inequality, income distribution, access to clean water, quality of schooling, etc…

Question 4

What is primary product dependency?

Answer 4

When a country (low income) specialises in producing a narrow range of products (often primary commodities)

Question 5

How is primary product dependency a barrier to growth and development?

Answer 5

Most of their exports are primary commodities making their level of exports vulnerable to changes in world demand.

• The goods have inelastic PEDs & PESs causing price volatility.

(Draw inward demand shift or outward supply shift w/ steep D and S curve)

Question 6

What are the 5 consequences of primary product dependency?

Answer 6

Unstable export earnings (volatility)
Unstable incomes
Uncertainty to invest
Changes in unemployment (fluctuating demand)
Current account worsens - if exports drop (could lead to problems importing)

Question 7

What are the 4 sources of economic growth in ELDCs?

Answer 7

Increase in physical capital (LRAS shift)
Increase in human capital (health & ed)
Increase in technology
Institutional changes (tax system, or less corruption)

Question 8

What are 7 ways in which economic growth may not lead to development?

Answer 8

Increase in inequality
Low gvt investment
Tech leads to u/e
Discrimination
Lack of access to credit
Poverty cycle exists
Investment only occurs in certain areas

Question 9

What are the 8 characteristics of ELDCs?

Answer 9

Low GDP/ per capita
High birth rates
High levels of poverty
High u/e
High inequality
Poor health and education
Poor capital & tech -> low prod
Large agricultural sector

Question 10

What are the 4 ways in which good health & education can improve development?

Answer 10

Improves labour productivity - economic growth
Reduces unemployment
R&D improves - advances tech
Longer lives & less illness -> more contribution to economy

Question 11

What are the 4 advantages of better infrastructure in regards to development?

Answer 11

More reliable transport for G/S - lower costs
Access to clean water - improves health
Energy systems - improves productivity
Better telecommunications

Question 12

What are the 3 disadvantages of better infrastructure in regards to development?

Answer 12

High costs - due to installation & maintenance
Causes degradation - may be unsustainable
If the poor have less access - not development

Question 13

What are the terms of trade?

Answer 13

Terms of trade = (export prices/ import prices) x 100

• a price relationship between a country’s imports and exports.

Question 14

What is the Prebisch-singer model?

Answer 14

Global supply increases due to better tech - low PED of primary products, - large price drop - as PPD countries export lots of primary products - the price of exports falls - ToT deteriorates.

Also as world income rises - demand for inferior (low YED) goods fall causing export prices to fall further - worsens ToT.

Ev: If the tech advances increase demand for primary goods, export prices rise/ or demand for manufactured goods fall, import prices fall. Improves ToT.

Question 15

What are the 4 consequences of a worsening terms of trade?

Hint: countries now need to increase exports to keep the same imports.

Answer 15

Increased borrowing to pay for imports (debt rises)
Export earnings fall - causes poverty & inequality
Lower incomes - less gvt revenue (worse merit goods)
Economic growth falls - less development

Ev: Worsening ToT (due to fall in D) - less demand for currency, depreciation, exports cheaper (improves competitiveness)

Question 16

What is Dutch Disease?

Answer 16

Country discovers resources -> demand for their exports increases -> more demand for currency -> appreciation -> exports dearer (all sectors less competitive)

Question 17

What are Foreign currency gaps?

Answer 17

When a country’s currency outflows are consistently greater than its inflows - worsens the terms of trade.

Some countries with a FC gap may not have enough foreign currency to pay for essential imports. (slows growth & development)

Question 18

What are the 3 causes of foreign currency gaps?

Answer 18

Persistent current account deficit
Capital flight - investors shift money out of the country.
Inflows decrease from those overseas

Ev: some countries can devalue their own exchange rates to make exports cheaper and more competitive - but this may just cause more outflows if investors get uncertain.

Question 19

What is Value Added?

Answer 19

When a company adds an extra step in the production process to sell a good for more than they cost to produce.

eg. using cocoa beans to make chocolate and then selling it for a higher price.

Question 20

What are the 2 ways in which value-added can help growth and development?

Answer 20

More employment opportunities
New firms selling manufactured goods

Ev: activities to produce value-added goods require higher skill levels and better tech.

Question 21

What is a Savings Gap?

Answer 21

When a country with low incomes and therefore low savings leads to low investment, which hinders productivity and economic growth.

Question 22

What is the Harrod-Domar model?

Answer 22

The HD model suggests high savings are needed for investment and e-growth.

High savings - capital investment rises - more and better capital stock - productivity improves - LRAS improves - Real GDP rises - e-growth.

Question 23

What is the Rate of GDP growth formula? (Harrod-Domar)

Answer 23

Rate of GDP growth = MPS/ capital-op ratio

Eg. growth rate can be increased by improving savings rate or by reducing capital-op ratio (technology -> productivity)

Question 24

What are 4 issues with the Harrod-Domar model?

Answer 24

Capital flight may occur (can’t be used for investment)
Difficult to increase savings - MPC is high & MPS is low in low income countries.
Savings may not be availible to borrowers & investors in ELDCs.
Diminishing marginal retuns may mean each extra unit of investment is less productive (cap-op ratio falls)

Question 25

What is Capital Flight?

Answer 25

When money and assets flow out of a country to seek a safe haven.

Question 26

What are the 4 causes of Capital Flight?

Answer 26

Unstable currency - people move their money to elsewhere
Political corruption
Increased taxation
Currency devaluation

Question 27

What are 2 consequences of Capital Flight?

Answer 27

Can’t be used for development - if money is not in the country
Lower gvt revenue - money not in country can’t be taxed (leads to worse merit goods, lower wages/ poverty)