L14- – Factors Influencing Growth and Development

Question 1

what are primary products?

Answer 1

raw materials in industries such as agriculture, mining and forestry.

Question 2

what happens when the economy is dependent on primary products? (TOT)

Answer 2

• terms of trade deteriorate over time = living standards, economic growth falls and harder to import capital goods

Question 3

what is the terms of trade

Answer 3

• relative price of exports in terms of imports
  -TOT= index of export prices/ index of import prices x100

Question 4

what happens when an economy is dependent on primary products (volatility)

Answer 4

• 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

Question 5

what happens when an economy is dependent on primary products? (MEDCs + LEDCs)

Answer 5

• MEDCs use protectionist measures to support domestic agriculture
• Agricultural producers in LEDCs struggle to compete = harder to pursue export-led growth in these sectors

Question 6

reasons for low savings in developing countries

Answer 6

• limited wealth- only afford to spend in short run on immediate needs- food, water, clothes
• africa’s savings rate = 17%, middle income countries= 31%

Question 7

potential solutions to low savings ratios

Answer 7

• borrow from abroad
• reform financial sector
• microfinance
  -aid

Question 8

What is a foreign currency gap?

Answer 8

• 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.

Question 9

What does the Harrod- Domar model state?

Answer 9

• 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

Question 10

solutions to foreign currency gap

Answer 10

• debt relief
  -aid
  -development of primary sector
  -development of tourism

Question 11

what is capital flight?

Answer 11

-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

Question 12

how does foreign currency gap constrain the economic development of LEDCs

Answer 12

• 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

Question 13

relationship between size of working age population and productive capacity of an economy

Answer 13

• 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)

Question 14

why does gov spending increase as ageing population increase

Answer 14

more money spent on healthcare, social care than other age groups- if has public health and social care systems

Question 15

demographic impact on MEDCs

Answer 15

ageing populations= dependency ratio to rise = more govt spending= less spending available for supply side policies and public services= lower economic growth

Question 16

demographic impact on LEDCs

Answer 16

• 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

Question 17

how to calculate debt service ratio

Answer 17

debt service payments (principal + interest)/ export earnings

Question 18

how do high debt service ratios hinder economic growth

Answer 18

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

Question 19

how can a lack of access to credit and banking hinder economic development?

Answer 19

• 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

Question 20

how does infrastructure limit economic growth

Answer 20

-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

Question 21

why do education systems in LEDCs hinder economic growth

Answer 21

-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

Question 22

how does an absence of property rights hinder economic development?

Answer 22

1. land-owning farmers unable to use land as collateral = struggle to obtain loans to finance investments that could increase production and efficiency- limits profit
2. 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)

Question 23

what is corruption

Answer 23

the abuse of entrusted power for private gain

Question 24

what is governance

Answer 24

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

Question 25

how does corruption hinder economic development

Answer 25

• corruption rises= govt. more likely to pursue own interests rather than publics= decreases likelihood infrastructure projects will be completed in a timely and efficient manner= infrastructure likely to remain inadequate, limiting economic development
• still possible for countries with high corruption to have successful economic development ( china)

Question 26

how do political factors affect economic growth

Answer 26

• political instability can reduced economic growth and harm long term prospects of an economy
• in can cause reduced FDI and cause ppl to move to more stable countries, problematic esp if highly skilled as this can cause a brain drain
  e.g. failed coup in Turkey= president responded with purges in military, civil service and private sector

Question 27

how does poor governance/civil war affect economic growth

Answer 27

• hold back infrastructure development and is a constraint on future economic development
• could destroy current infrastructure and force people into poverty

Question 28

how does vulnerability to external shocks affect economic development

Answer 28

• e.g. earthquake prone country is likely to find it hard to develop their infrastructure and people might be pushed into poverty e.g. Nepal

Question 29

limitations of harrod domar model

Answer 29

• may be low marginal propensity to save
• poor financial system= funds may not lead to borrowing and investment
• inefficiency in workforce
  -paradox of thrift- savings up, investment up, but spending down, AD down, growth down

Question 30

causes of foreign currency gap and reason bhend it

Answer 30

• relatively low export earnings ( not competitive in international markets)
• high oil prices (not energy dependent)
• underperforming agricultural sector (inefficient farming sector)
• large foreign debt ( borrowed unsustainably from foreign creditors)