Inward Oriented Growth Flashcards
Why can economies no longer depend on their private sector to grow their GDP?
- Principle of Supply and Demand.
When supply of primary goods rise, prices drop. Supply rises faster than demand (When price of sugar drops, people tend to only buy one more packet at most) - Primary Goods are perishable and expensive to store for long periods of time.
- Unstable Harvest: Primary Goods are undependable, production are usually at the whims of climate. (Growing rice in a drought)
- Primary Goods tend to take time to grow, even if prices rise, farmers cannot increase output readily. (A field of rice is still going to take half a year to grow even if you plant a lot)
What is the Dependency Theory?
Poor economies produce raw materials and sell cheaply to richer economies who use the raw goods to produce manufactured goods and sell at increased rates to poor economies.
Poor Economy > Sell Cotton at $1/kg > Rich Economy > Make T-shirt with cotton > Sell T-shirt to Poor Economy at $12/pcs
Causes poor economies to be unable to catch up with richer economies if relying on primary sector
What are the Key Characteristics of the Manufacturing Sector
- Usage of Harrod-Domar model(new equipment and factories), Technology increase = GDP growth increase faster (mitigate diminishing returns) = Labour Productivity increase.
- Creates Linkages
What are linkages?
- Backward linkages from a particular industry to its suppliers. (Production of coffee powder requires Packaging and Coffee Beans)
- Forward linkages from an industry to its users (Selling of Coffee beans requires marketing and advertisement)
Define Industrialisation
- Industrialisation occurs when a country moves large amount of labour out of its agricultural sector and into the manufacturing/industrial sector.
Name the two methods used by countries to industrialize
Structuralist Approach and Neo Classical Approach
Explain the Structuralist Approach
- The Structuralist Approach to Industrialisation. Emphasize on government directing the structural transformation of economy towards manufacturing sectors with a heavy emphasis on developing and protecting its own developing industries.
- Very heavy government involvement. (Emphasizes on the importance of government planning and control as a means of allocating resources.)
- Little to no trust in the free market, prefer to rely on domestic industries.
What are the tools/strategies used in the Structuralist Approach
Tariffs, Restriction of FDI, Overvaluation of Currency, Government Assistance
Explain Tariffs and its effects
A Tariff is a form of tax which can be a lump sum or a percentage, added onto the price of the imported good
- Aim to reduce imports by increasing domestic prices through tariffs.
- Reduces domestic demand
- Increases domestic supply
- Reduces import
- Loss of consumer sovereignty (customer no choice but to buy local as tariffs too expensive)
- Local firms become complacent due to lack of competition and begin producing lower quality goods.
- Government can also earn from collecting revenue from tariffs
Explain the Restriction of FDI, reasons for adoption and disadvantages
- Preventing MNCs from entering country to produce goods, instead relying on domestic industry instead.
- MNCs tend to exploit country for cheap labour then send profits back to their home country, leaving the host still poor
- MNCs bring expertise, knowledge, technology and equipment. Restricting them leaves host country at a disadvantage as it reduces the inflows of those assets into the country.
Briefly explain overvaluation of currency and its effects
- Sell USD, and buy up own currency, boosting the strength of domestic currency.
- Fall in exports as foreigners find local goods more expensive as domestic currency becomes stronger.
- A rise in imports where the strong local currency allows local firms to acquire intermediate goods , machinery for supporting the local production
- Requires countries to have a reserves to maintain exchange rate (need funds to buy local currency). Main issue faced by poorer economies.
Briefly explain Government assistance scheme as well as its effects
- Government helps out local firms through various methods.
E.g. Giving out cash grants, tax breaks and low interest loans. - Results in high government spending (increase debts) and could potentially increase corruption of local firms.
What is an infant industry?
The local manufacturing sector in the poor countries are usually small and undeveloped
This industry currently does not have comparative advantage and needs time to grow
The objective of an overvalued currency in the inward orientation growth strategy is to?
Allow local firms to import equipment and machinery.
The overvalued currency means the firms can obtain more foreign currency , making purchase of key equipment and technology more affordable sector
Which of the following is a strategy adopted under Structuralist growth strategies?
a.
Readily support prices of primary goods
b.
Set up Export Promoting Zone
c.
Promote joint venture between the State owned enterprise with MNCs
d.
Adopt import substitution Policies like levy or increase tariff and import quota
d.
Adopt import substitution Policies like levy or increase tariff and import quota
Correct
This will limit production and consumption within the country which can be controlled by the government
