LS18 - Strategies Influencing Growth And Development (Part 1)

Question 1

Why is trade liberalisation likely to result in greater trade?

Answer 1

Trade liberalisation makes trading goods and services between nations easier. Therefore, the amount of trade taking place should increase.

Question 2

What are the advantages and disadvantages of trade liberalisation for firms?

Answer 2

Advantages
Greater market access potential for greater sales & opportunity to expand and benefit from increase economies of scale.
Cheaper raw materials and capital goods (for those that source inputs from abroad)

Disadvantages
Greater level of competition
Risk of dumping

Question 3

What are the advantages and disadvantages of trade liberalisation for economies? & eval

Answer 3

Advantages
Removing trade barriers exposes firms to greater levels of competition. Domestic industries will therefore be under more pressure to increase efficiency and quality in order to remain profitable. Those firms which are unable to do so will be outcompeted and likely go out of business. Resources can then be allocated to industries in which the country has a comparative advantage. This increases efficiency and economic growth.

For developing countries, there are likely to be labour-intensive (because the population is youthful) and basic in terms of technology (because skill levels and infrastructure are also likely to be basic).

Evaluation: infant industries are unlikely to survive the competition brought about through trade liberalisation. This can hinder a country’s efforts to move up the value chain into more advanced goods and services. Therefore, a period of protectionism may be needed before trade liberalisation is fully implemented to give a country the best chance of achieving economic development.

Question 4

What is the savings gap?

Answer 4

In developing countries, savings tend to be low due to low incomes and weak financial systems. This means that savings rates are low. Therefore, the amount of financial capital in the financial system is limited. This thereby restricts the amount the amount of finance that the financial sector can provide to firms seeking to invest. The amount of capital goods in the country is limited as a result. This results in low economic growth which means that incomes are likely to remain low.

Question 5

Why does the savings gap hinder economic development?

Answer 5

As a result of the savings gap, the amount of financial capital in the financial system is limited. This thereby restricts the amount the amount of finance that the financial sector can provide to firms seeking to invest. The amount of capital goods in the country is limited as a result. This results in low economic growth which means that incomes are likely to remain low.

Question 6

What is the foreign currency gap?

Answer 6

In developing countries, the amount of foreign currency available is not enough to meet the demand for imports.

Question 7

Why does a foreign currency gap hinder economic development?

Answer 7

Imported capital goods are vital to industrialisation. If a LEDC lacks foreign currency, this limits the ability of firms to import capital goods. As a result, productivity growth is also limited. Consequently, the economic development of LEDCs is constrained.

Question 8

Advantages of trade liberalisation

Answer 8

• greater foreign current earned —> helps to overcome foreign exchange gap, funding imports of capital increasing economic growth
• higher levels of employment and wages - helps overcome savings gaps, increasing economic growth
• greater levels of completion —> promotes innovation and efficiency, increasing economic growth

Question 9

Disadvantages of trade liberalisation

Answer 9

• difficult for infant industries to become competitive if not subsidised
• risk of structural unemployment in some industries as may expose them to competitive rivals e.g. steel
• some LSDCs specialise in primary products, may limit Econ development in long-run according to Prebisch-Singer hypothesis
• price volatility may negatively impact export revenue, esp. for LEDCd specialising in primary products

Question 10

Prebisch-singer hypothesis

Answer 10

• primary sector/product dependency
• volatile prices, income will stay low
• lack of economic development

Question 11

Problems facing LEDCs

Answer 11

• foreign exchange gap
• savings gap
• low levels of tech
• limited tax base
• limited capital stock
• low human capital

Question 12

How can FDI provide a solution

Answer 12

MNCs setting up in the country provides external funding.
2) MNCs are likely to train local workers and suppliers.
3) MNCs are likely to bring more advanced forms of capital.

Question 13

Advantages of FDI

Answer 13

1) Injection into circular flow
2) Potential for transfers of technology and skills
3) Higher economic growth
4) Capital inflows can be used to finance a current account deficit
5) Long-term FDI can lead to higher exports from the host country which improves the position on the current account
6) FDI generates tax revenue for the host country
7) FDI could lead to higher wages and improved working conditions, especially if TNCs take corporate social responsibility seriously → helps to raise living standards and overcome the savings gap.
8) Greater competition lowers prices helps to raise living standards

Question 14

Disadvantages of FDI

Answer 14

1) TNCs may only hire local workers to a limited extent as low-skilled work may be left to locals and high-skilled (and higher paid work) is done by expats. This limits the degree to which FDI will improve the skills of the local labour force.
2) The amount of tax revenue raised may be small as some LEDCs use tax breaks as an incentive for TNCs to enter their economy. Additionally, MNCs may use accounting tricks to minimise their tax bill. For example, imagine an LEDC has a corporation tax rate of 20%. If the MNC has a subsidiary in a country with a lower tax rate, it could manipulate its accounts to record profits there rather than in the
3) TNCs are likely to be able to outcompete local rivals through superior quality.
This may lead them to obtain monopoly status within the country.
4) TNCs may choose to operate in LEDCs to take advantage of weak environmental regulation. The external costs will be borne by the host country.

Question 15

Disadvantages of FDI

Answer 15

1) TNCs may only hire local workers to a limited extent as low-skilled work may be left to locals and high-skilled (and higher paid work) is done by expats. This limits the degree to which FDI will improve the skills of the local labour force.
2) The amount of tax revenue raised may be small as some LEDCs use tax breaks as an incentive for TNCs to enter their economy. Additionally, MNCs may use accounting tricks to minimise their tax bill. For example, imagine an LEDC has a corporation tax rate of 20%. If the MNC has a subsidiary in a country with a lower tax rate, it could manipulate its accounts to record profits there rather than in the
3) TNCs are likely to be able to outcompete local rivals through superior quality.
This may lead them to obtain monopoly status within the country.
4) TNCs may choose to operate in LEDCs to take advantage of weak environmental regulation. The external costs will be borne by the host country.

Question 16

How does FDI affect current account & balance of pay,ents

Answer 16

• FDI is part of primary income, reduces deficit
• FDI makes exports more competitive, so exports increase in long run improving balance of payments

Question 17

Why is there a savings gap in developing countries?

Answer 17

Savings are low and financial systems are weak

Question 18

Why do people in developing countries struggle to access financial services

Answer 18

They live in rural locations that the financial system does not cover.

Question 19

What effect does a savings gap have on economic growth and economic development?

Answer 19

As a result of the savings gap, the amount of financial capital in the financial system is limited. This thereby restricts the amount the amount of finance that the financial sector can provide to firms seeking to invest. The amount of capital goods in the country is limited as a result. This results in low economic growth which means that incomes are likely to remain low.

Question 20

What is a loan shark?

Answer 20

• A person who charges large amounts of interest for lending money to someone, especially when their financial position means they cannot borrow money from a bank.is not paid back

Question 21

What is collateral?

Answer 21

Valuable property owned by someone who wants to borrow money, that they agree will become the property of the company or person who lends the money if the debt

Question 22

Micro finance features

Answer 22

1)smaller scale
2) women tend to be the main beneficiaries
3) people often borrow as a group which provides a peer support network that increases the chance of repayment
4) interest rates tend to be much lower than those of loan sharks

Question 23

Advantages of micro finance

Answer 23

• fills savings gap —> higher income, reduces poverty, higher capital accumulation, increases economic growth and chance of economic development
• empowers women, lowers poverty, utilises more available factors of production, causing higher economic growth and chance of economic develop

Question 24

Disadvantages of economic growth

Answer 24

1. Some lenders are profit orientated rather than motivate to improve the lives of the poor. This has led to reckless lending and unsustainable debt.
2. Some microloans have exorbitant interest rates → greater chance of failure and leads to higher levels of indebtedness.
3. Without increase in productivity and growth through industrialisation impact on per capita incomes is likely to be low.

Question 25

What is privatisation & Which period in UK history associated with?

Answer 25

The transfer of economic activity from the public sector to the private sector. - 1980s under Prime Minister Thatcher.

Question 26

What are the advantages and disadvantages of privatisation?

Answer 26

Advantages: 1) introducing the profit motive incentivises managers to increase productive efficiency 2) producers are more likely to be responsive to the needs of the consumer if competition is also introduced.
Disadvantages: 1) depends on effective regulation 2) if the business involved is a natural monopoly, privatisation is unlikely to improve price or quality. Examples of natural monopolies: water and rail.

Question 27

What is the difference between a floating exchange rate and a fixed exchange rate?

Answer 27

Market forces determine exchange rates in a floating exchange rate system. In a fixed exchange rate, the government sets the exchange rate.

Question 28

What are the advantages of a floating exchange rate?

Answer 28

1) The government/central bank does not need to hold large reserves of gold or currency to defend the currency 2) If a country has a current account deficit, this should act to depreciate the currency. This will make exports more competitive which should lead to a reduction in the deficit (depending on the PED of exports and imports. 3) Interest rates can be used to target macroeconomic objectives such as inflation and economic growth.

Question 29

What are the disadvantages of a floating exchange rate?

Answer 29

1) Countries lose a means of protecting their industries: deliberately maintaining a weak currency. 2) Volatility can affect investment.

Question 30

Why is use of monetary policy constrained by a managed exchange rate system?

Answer 30

It is used to support the exchange rate. For example, if the currency fell outside target range, the country could raise interest rates in an attempt to bring it back into range (through raising demand from foreign investors).

Question 31

Advantages of floating exchange rate

Answer 31

1. Exchange rate may be overvalued under a fixed or managed exchange rate system. This would act to reduce the competitiveness of imports.
2. No need for LEDCs to hold large reserves of foreign currencies or gold. This means there is more foreign currency to use on imported capital goods.
3. Monetary policy is freed up to target macroeconomic objectives.
4. Can help remove or reduce a deficit on the current account.

Question 32

Disadvantages of floating exchange rate

Answer 32

1.LEDCs lose the ability to support infant industries through undervaluing the currency.
2. LEDCs lose the ability to pursue import substitution industrialisation.
3. Exchange rate volatility can create instability that undermines investment.