LS14 - Factors Influencing Growth And Development (Part 1)

Question 1

What is a primary product?

Answer 1

• a product that can be extracted or used to make other products
  e.g. agriculture, fishing, mining & forestry

Question 2

what is a LEDC

Answer 2

less economically developed country

Question 3

which countries are more dependent on primary products

Answer 3

LEDCs as they have more natural resources e.g. crops, cocca, metals

Question 4

what types of goods are more income elastic

Answer 4

• 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

Question 5

Terms of Trade

Answer 5

(index of export prices)/(index of import prices) x 100

Question 6

downside to falling terms of trade

Answer 6

• 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

Question 7

what happens if an economy is dependent on primary products?

Answer 7

• 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

Question 8

what is the problem if an economy exports primary products mainly

Answer 8

• 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

Question 9

difference between currency depreciation and devaluation

Answer 9

• 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)

Question 10

difference between common market and customs union

Answer 10

• 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

Question 11

managed vs fixed exchange rate system

Answer 11

• 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

Question 12

what is a commodity and why is demand usually price inelastic

Answer 12

• a good from fisheries/metals/agricultural markets - has physical presence
• tend to be/majority are necessities e.g. steel

Question 13

what do MEDCs do

Answer 13

• 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

Question 14

What does savings ratio mean

Answer 14

• refers to income not spent
• the proportion of income that is saved

Question 15

why do LEDCs tend to have low saving ratios

Answer 15

• 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

Question 16

How are investment and savings connected

Answer 16

• inversely, when investment is high savings are likely to be low
• except when interest rates are high - incentive to save more

Question 17

what is the Harrod-Domar model

Answer 17

• 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

Question 18

Harrod-Domar model

Answer 18

• 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

Question 19

potential solutions to low savings ratios

Answer 19

• 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

Question 20

why are foreign currencies important for economic development in LEDCs

Answer 20

• 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

Question 21

why might some LEDCs face a shortage of foreign currency

Answer 21

• don’t have the savings in the currency
• due to price volatility of primary products they don’t earn enough of it through exports

Question 22

causes of a foreign currency gap

Answer 22

• 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

Question 23

solutions to foreign currency gap

Answer 23

• 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

Question 24

what is capital flight

Answer 24

when assets leave a country as a result of a loss of confidence, due to a(n) event(s)

Question 25

what type of capital is in capital flight

Answer 25

financial assets or money

Question 26

why does capital flight negatively impact economic growth and development

Answer 26

• FDI withdraws,
• falls due to various reasons such as lack of confidence, appreciation, corruption, stalling economy, interest rates rising

Question 27

why does capital flight affect econ growth and development

Answer 27

• 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

Question 28

capital flight example

Answer 28

• 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