LS14- Factors of Development

Question 1

Result of primary product dependency on an economy

Answer 1

• LEDCs are dependent on primary products which have volatile prices
• value of exports fall over time so TOT falls
• harder to import capital goods as less income to invest into capital
• economic growth falls as output is lower due to less FoP
• less improvement of SoL so SoL falls

Question 2

Terms of trade

Answer 2

• the ratio of a country’s average price of exports to the country’s average price of imports
• can have a direct bearing on the standard of living within a country

Question 3

Foreign currency gap

Answer 3

• refers to a situation where a country’s expenditures in foreign currency, such as payments for imports or servicing foreign debt, exceed its foreign currency earnings from exports or other sources such as foreign investment

Question 4

Why it is beneficial to have a higher savings ratio

Answer 4

• able to fund investment projects

Question 5

What the economic growth of a country is determined by the level of

Answer 5

• savings and capital output ratio i.e. the efficiency of capital

Question 6

Issues with primary product dependency

Answer 6

• natural disasters can wipe out produce
• low YED
• Prebisch Singer hypothesis suggests the long run price of primary goods decline relative to manufactured goods
• e.g. Dutch Disease- Nigeria

Question 7

Capital flight

Answer 7

• lack of confidence in a country’s stability so large amounts of money are taken out of the country

Question 8

Explain how speculation can cause a currency to depreciate + evaluation

Answer 8

• interest rises, foreign economies out currency into that economy to earn from interest and leave before it goes back down
• may not last long, all currencies may be depreciating, may have insignificant impact

Question 9

How foreign currency gap constraints the development of LEDCs

Answer 9

• having insufficient currency to import capital stock means they will struggle to raise output

Question 10

Explain why a country with a relatively high inflation rate is likely to have a current account deficit + evaluation

Answer 10

• higher cost of production which is reflected by higher prices, making domestic goods less competitive
• however, the country may have comparative advantage so still competitive, all countries may be facing high inflation, the size of the inflation is important

Question 11

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

Answer 11

• apart from net trade, there could be a fall in returns from investment made overseas, or income repatriated by foreign workers to their home countries
• as a result, a greater amount of money is flowing outside the country from economic agents of the said country to agents of foreign ones, thus widening the current account deficit