LS14 Flashcards
Why do terms of trade deteriorate for economies that are dependent on primary products?
- Primary products are income elastic and have volatile prices so they have little control over export prices
- Will have to import manufactured goods as they have more value
Why does a deterioration in terms of trade limit economic growth?
- They are dependent on low value goods so profits fall
- Hence standard of living falls as well
How could diversification towards manufacturing help LEDCs prevent TOT from falling?
- Shift to manufactured goods
- Reduces risk by being involved in diff markets + selling high value goods
Why does demand for commodities tend to price inelastic?
Because they are necessities
Why does supply for commodities tend to price inelastic?
They take a long time to grow and extract and depend on weather conditions
What is the link between uncertainty and investment?
- Increase in uncertainty, decrease in investment
- As they believe there is a risk or don’t have enough information to make a fully informed decision
Common Agricultural Policy (CAP)
CAP is a system of agricultural subsidies + programmes covering farming environmental measures + rural development
Why is the volatile nature of commodity prices harmful to economies?
- Less income for farmers + negatively affect agricultural sector
- More uncertainty, less confidence and less investment
How could diversification help LEDCs overcome challenges presented by volatile commodity prices?
- Reduce vulnerability to external factors
- Less reliance on primary products + allows income stability as other sectors may still provide revenue
- Leads to industrialisation as they buy more capital goods
Savings ratio
The ratio of personal saving to disposable income
Why do LEDCs have low savings ratio?
- They have low MPS
- They get a small income which is mainly spent on necessities + hence less is saved as they don’t have much disposable income
How does the Harrod-Domar model explain why investment tends to be low in LEDCs?
- It has an unstable economic environment e.g. fluctuations in inflation etc which discourage private and foreign investment
- Low savings + limited access to financial institutions + limited resources
What are the disadvantages of using HDI to measure economic development?
- Doesn’t take environment, corruption and inequality into account
- Doesn’t measure the quality of health + education
- Ignores income distribution
Why does a foreign currency gap constrain the economic development of LEDCs?
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What happens if a country undergoes capital flight?
- If a country undergoes capital flight economic development is constrained
- This is because the owners of any extra income that could be saved + therefore used for investment ins not longer available
Explain how speculation can cause a currency to depreciate.
- An increase in speculation, traders anticipate more and hence currency decreases
Explain why low levels of spending on education and training may result in a current account deficit.
- Lack of skills + lack of productivity + lack of innovation
- Less output and hence they will have to imports more (than exports) which will lead to the current account deficit
- Ev: reduce international barriers to allow for immigration of better skilled workers
Why will a rising debt service ratio limit a government’s ability to spend in other areas such as public goods and infrastructure?
- Increased in gov spending to service debt
- Leads to an opportunity cost
Why do rising interest rates make debt servicing more difficult?
- Harder to repay debt as there is a higher cost of borrowing (interest rates)
Trade liberalisation can help to overcome the foreign currency gap. Explain how.
- By increasing exports
Why is access to credit and financial services limited in LEDCs?
- Higher risk to lend
- Don’t have a high savings ratio so won’t be able to repay it back
If an LEDC attempted to diversify its economy, this would help prevent the terms of trade from falling. Explain why.
- Industrialisation which allows them to sell high value goods (manufacturing) which leads to more trade
- They are not affected by fluctuations in commodity prices
Explain how the foreign currency gap constrains the development of LEDCs.
- They have a lot of debt so they sell their foreign currency reserves to get their own currency back
- Hence they can’t import capital goods to manufacture
The success of a cap and trade scheme depends on the level of information available to those responsible for running the scheme. Explain this statement.
- Imperfect information as they may set it too high or too low
- Firms may disclose their information
