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Economics > LS14 > Flashcards

LS14 Flashcards

1
Q

Why do terms of trade deteriorate for economies that are dependent on primary products?

A
  • 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
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2
Q

Why does a deterioration in terms of trade limit economic growth?

A
  • They are dependent on low value goods so profits fall
  • Hence standard of living falls as well
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3
Q

How could diversification towards manufacturing help LEDCs prevent TOT from falling?

A
  • Shift to manufactured goods
  • Reduces risk by being involved in diff markets + selling high value goods
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4
Q

Why does demand for commodities tend to price inelastic?

A

Because they are necessities

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5
Q

Why does supply for commodities tend to price inelastic?

A

They take a long time to grow and extract and depend on weather conditions

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6
Q

What is the link between uncertainty and investment?

A
  • 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
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7
Q

Common Agricultural Policy (CAP)

A

CAP is a system of agricultural subsidies + programmes covering farming environmental measures + rural development

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8
Q

Why is the volatile nature of commodity prices harmful to economies?

A
  • Less income for farmers + negatively affect agricultural sector
  • More uncertainty, less confidence and less investment
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9
Q

How could diversification help LEDCs overcome challenges presented by volatile commodity prices?

A
  • 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
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10
Q

Savings ratio

A

The ratio of personal saving to disposable income

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11
Q

Why do LEDCs have low savings ratio?

A
  • 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
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12
Q

How does the Harrod-Domar model explain why investment tends to be low in LEDCs?

A
  • 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
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13
Q

What are the disadvantages of using HDI to measure economic development?

A
  • Doesn’t take environment, corruption and inequality into account
  • Doesn’t measure the quality of health + education
  • Ignores income distribution
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14
Q

Why does a foreign currency gap constrain the economic development of LEDCs?

A

-

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15
Q

What happens if a country undergoes capital flight?

A
  • 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
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16
Q

Explain how speculation can cause a currency to depreciate.

A
  • An increase in speculation, traders anticipate more and hence currency decreases
17
Q

Explain why low levels of spending on education and training may result in a current account deficit.

A
  • 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
18
Q

Why will a rising debt service ratio limit a government’s ability to spend in other areas such as public goods and infrastructure?

A
  • Increased in gov spending to service debt
  • Leads to an opportunity cost
19
Q

Why do rising interest rates make debt servicing more difficult?

A
  • Harder to repay debt as there is a higher cost of borrowing (interest rates)
20
Q

Trade liberalisation can help to overcome the foreign currency gap. Explain how.

A
  • By increasing exports
21
Q

Why is access to credit and financial services limited in LEDCs?

A
  • Higher risk to lend
  • Don’t have a high savings ratio so won’t be able to repay it back
22
Q

If an LEDC attempted to diversify its economy, this would help prevent the terms of trade from falling. Explain why.

A
  • Industrialisation which allows them to sell high value goods (manufacturing) which leads to more trade
  • They are not affected by fluctuations in commodity prices
23
Q

Explain how the foreign currency gap constrains the development of LEDCs.

A
  • 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
24
Q

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.

A
  • Imperfect information as they may set it too high or too low
  • Firms may disclose their information
25
Q

Using chains of analysis explain why a country with a relatively high inflation rate is likely to have a current account deficit.

A
  • Prices increase and consumers import more, leading to a current account deficit
  • Ev: export is price inelastic so exports remain more than imports
26
Q

Explain why a country may use a trade barriers as retaliation in response to trade barriers by other countries.

A
  • Products of the other country become more expensive and hence demand for them decrease + become less competitive
  • Sales collapse harming economic growth
  • Protect domestic industries
  • Ev: may lead to trade war
27
Q

Explain how a deterioration in elements other than the trade balance can lead to a deficit on the current account.

A
  • High consumer spending means I > M + more money going out
  • Value of foreign investment decreases + produce less output
28
Q

The UK introduced a price cap (another name of maximum price) on gas and electricity. Why might the government have done this?

A
  • Prevent exploitation of consumers by limiting prices as consumers have imperfect info
  • Ev: Less investment in the industry + excess demand
29
Q

Why is a highly corrupt society less likely to experience strong economic development?

A
  • Corruption leads to the misallocation of resources + can affect the efficient use of resources for productive purposes
  • Reduced foreign aid as investors may be hesitant as tuber money will not be used in the right way
  • Income inequality: rich get richer, widen the gap between the rich and poor
30
Q

In a perfectly competitive market, SNP can be earned in the SR. Explain why these SNP would disappear in the LR.

A
  • More firms are able to enter due to no barriers, perfect information + homogenous repo cuts
  • This increases supply
  • And prices fall back down to the equilibrium so they only earn NP
31
Q

A large number of small bakeries in a competitive industry are taken over + combined to form a single monopoly supplier. Assuming constant AVC what effect does this have on price and output?

A
  • Increased prices as they have the power to
  • Output decreases due to a lack of competition + inefficiencies
32
Q

Why might the political turmoil over Brexit have depressed investment into the UK

A
  • An increase in the uncertainty + risk of the political state can mean countries withdraw investment (FDI)
33
Q

Why might rivers and access to seaports be beneficial for a country?

A
  • Provide routes for international trade + efficient transportation + cost effective
  • Employment opportunities
  • Greater access to global markets

Economics (8 decks)

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