LS14 - Factors Influencing Growth And Development (Part 1) Flashcards
What is a primary product?
- a product that can be extracted or used to make other products
e.g. agriculture, fishing, mining & forestry
what is a LEDC
less economically developed country
which countries are more dependent on primary products
LEDCs as they have more natural resources e.g. crops, cocca, metals
what types of goods are more income elastic
- manufactured goods compared to agricultural goods
- as income rises, have more to spend on manufactured goods as to to be produced it needs skilled workers, knowledge, qualifications so have higher value
- when we have more income we buy higher value items to improve standard of living
Terms of Trade
(index of export prices)/(index of import prices) x 100
downside to falling terms of trade
- country has to export more to afford a given basket of imports
- if demand for exports and imports are price inelastic, net trade will fall, reducing economic growth
what happens if an economy is dependent on primary products?
- income fluctuates as the volume of exports does as it is set by the market
- if the income falls, then so does living standards
- also makes it harder to import capital goods to improve output so economic growth falls
- can’t move to manufacturing/secondary sector
what is the problem if an economy exports primary products mainly
- they are price volatile, causing changes to firms revenue
- also deteriorates terms of trade
- the greater uncertainty makes investment less attractive
- lower investment limits growth and development as well as improvement to living standards
- as less income can’t invest on capital so can’t increase output and living standards
difference between currency depreciation and devaluation
- depreciation - decrease in market value due to market (forces of supply and demand)
- devaluation - gov has intervened and devalued the currency (not in the UK as gov doesn’t manage currency)
difference between common market and customs union
- common market - trade without barriers, can move without visas
- customs unions - countries come together and form an agreement such as trade policy e.g. EU
managed vs fixed exchange rate system
- managed - when the gov intervenes and has to keep the currency within a certain value
- fixed - must stay at certain value - can’t go up or down
what is a commodity and why is demand usually price inelastic
- a good from fisheries/metals/agricultural markets - has physical presence
- tend to be/majority are necessities e.g. steel
what do MEDCs do
- use protectionist measures to support domestic agriculture
- makes it harder for agricultural producers in LEDCs struggle to compete due to protectionist measures
- MEDCs distort the market making it hard for LEDCs to compete
- harder to pursue export-led growth in these sectors and pursue manufacturing
What does savings ratio mean
- refers to income not spent
- the proportion of income that is saved
why do LEDCs tend to have low saving ratios
- tend to have low incomes so to survive they need to spend most of their income
- financial system is also likely to be weaker and they may not have banks nearby making it harder to save
How are investment and savings connected
- inversely, when investment is high savings are likely to be low
- except when interest rates are high - incentive to save more
what is the Harrod-Domar model
- an early model of economic growth - states it is dependent on the savings ratio
- now used to explain how low savings ratio are a barrier to LEDCs
Harrod-Domar model
- a country has a set savings ratio which allows them to invest in capital stock increasing output and income, allowing them to save more
- cycle repeats
- however LEDCs have low savings ratio so they can’t do this
potential solutions to low savings ratios
- borrow from abroad - China are the biggest lenders
- reform the financial sector - so less corruption and have more money to save
- microfinance - give opportunity to people to set up businesses and become self-sufficient
- aid - mostly through the IMF - try to encourage economies to develop - through diversifying for stability
why are foreign currencies important for economic development in LEDCs
- needed to trade for capital stock/goods to increase manufacturing and standard of living
- or can use to buy raw materials to make a product e.g. PPE as didn’t have some countries currency that produced it
why might some LEDCs face a shortage of foreign currency
- don’t have the savings in the currency
- due to price volatility of primary products they don’t earn enough of it through exports
causes of a foreign currency gap
- relatively low export earnings - due to falling terms of trade
- high oil prices - cause high costs for LEDCs when they could be saving money e.g. transport/manufacturing/agriculture
- underperforming agricultural sector -primary sector - due to war, weather, disease
- large foreign debt - have to pay back debt as well as interest, don’t have any money left to save
solutions to foreign currency gap
- debt relief - gets wiped (usually parts of it
- aid - money from the IMF - don’t pay back
- development of primary sector - other ways to earn income such as refining processes - using what’s already produced in other sectors to produce income
- development of tourism
what is capital flight
when assets leave a country as a result of a loss of confidence, due to a(n) event(s)
what type of capital is in capital flight
financial assets or money
why does capital flight negatively impact economic growth and development
- FDI withdraws,
- falls due to various reasons such as lack of confidence, appreciation, corruption, stalling economy, interest rates rising
why does capital flight affect econ growth and development
- less money for investment, leads to depreciation of exchange rate as inward investment falls and outward rises
- so currency speculators sell domestic currency in a big to profit from exchange rate movement, exacerbates foreign currency problem
- inflation likely to rise as depreciation as import prices rise
- inward FDI becomes less attractive as see country as a larger risk then before
capital flight example
- 1997 asian financial crisis, in 80/90s experienced high growth, capital inflows and accumulation of foreign debt
- US also started rising interest rates attracting hot money flows - earn more on money in US due to more in interest
- also excessive borrowing meant defaulting on debt repayments
- caused a loss of confidence and withdrawals of currency
