L14- – Factors Influencing Growth and Development Flashcards
what are primary products?
raw materials in industries such as agriculture, mining and forestry.
what happens when the economy is dependent on primary products? (TOT)
- terms of trade deteriorate over time = living standards, economic growth falls and harder to import capital goods
what is the terms of trade
- relative price of exports in terms of imports
-TOT= index of export prices/ index of import prices x100
what happens when an economy is dependent on primary products (volatility)
- export prices are volatile
- changes in firms revenue also volatile= uncertainty makes investment less attractive, increased volatility in economic growth, lower investment limits growth and development (cannot fund infrastructure and education)
- not sustainable to rely on primary products- over- extracted and run out
what happens when an economy is dependent on primary products? (MEDCs + LEDCs)
- MEDCs use protectionist measures to support domestic agriculture
- Agricultural producers in LEDCs struggle to compete = harder to pursue export-led growth in these sectors
reasons for low savings in developing countries
- limited wealth- only afford to spend in short run on immediate needs- food, water, clothes
- africa’s savings rate = 17%, middle income countries= 31%
potential solutions to low savings ratios
- borrow from abroad
- reform financial sector
- microfinance
-aid
What is a foreign currency gap?
- exists when country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments.
- value of the current account deficit is larger than the value of capital inflows.
What does the Harrod- Domar model state?
- investment, saving and technological change are needed in an economy for economic growth
- rate of growth increases if savings ratio increases= increased investment and tech progress= higher productivity
solutions to foreign currency gap
- debt relief
-aid
-development of primary sector
-development of tourism
what is capital flight?
-When a large number of people in a country move capital and assets from one country to another. Usually in response to a political and/or economic crisis.
- triggered by economic threat (hyperinflation, rising tax rates)
-can worsen an economic crisis and cause a currency to depreciate
how does foreign currency gap constrain the economic development of LEDCs
- nation does not have enough foreign currency to pay for essential imports such as medicines, foods and critical raw materials and replacement component parts for machinery.
-severely hamper Short run economic growth
relationship between size of working age population and productive capacity of an economy
- larger working age population, greater productive capacity= larger potential size of economy
- not always- depends on technology, capital stocks, infrastructure etc
- germany (92m) has larger economy than brazil (192m)
why does gov spending increase as ageing population increase
more money spent on healthcare, social care than other age groups- if has public health and social care systems
demographic impact on MEDCs
ageing populations= dependency ratio to rise = more govt spending= less spending available for supply side policies and public services= lower economic growth
demographic impact on LEDCs
- high birth rates= youthful populations with larger workforces= greater potential for economic growth
- BUT rapid population growth has complicated efforts to reduce poverty and eliminate hunger = needs to be sustainable population growth
how to calculate debt service ratio
debt service payments (principal + interest)/ export earnings
how do high debt service ratios hinder economic growth
high debt burden = lots of govt spending used to service debt = less available to spend on other areas ( education, public goods)= infrastructure and labour force weaker= weaker economic growth
how can a lack of access to credit and banking hinder economic development?
- firms- borrowing from banks is an important means of financing their business operations
- individuals= ability to access banking services allows for security and encourages savings
how does infrastructure limit economic growth
-quality of country’s infrastructure plays a role in determining the efficiency and quality firms produce at
-acts to limit economic growth- LEDCs tend to have weaker infrastructure than MEDCs
- weaker infrastructure also discourages MNCs setting up premises in country- production costs increase as things like continuous supply of electricity is not avaialible
why do education systems in LEDCs hinder economic growth
-Access to education is limited + quality is low 9 large classes, teacher shortages) = no, of years ppl spend in education is therefore low= quality of workforce is low = productivity is limited= hinders economic growth as labour is factor of production and is likely very important in capital-light countries
how does an absence of property rights hinder economic development?
- land-owning farmers unable to use land as collateral = struggle to obtain loans to finance investments that could increase production and efficiency- limits profit
- entrepreneurs unable to use property as collateral = struggle to obtain loans to finance investment and expansion is harder= reduces likelihood of successful businesses= innovation and competition constrained (+ cannot protect ideas, no incentive to innovate)
what is corruption
the abuse of entrusted power for private gain
what is governance
refers to how a country is run and whether the authorities manage scarce resortes well
- good governance improves economic outcomes and the quality of life for a country’s people
