macro 31 Growth and development

Question 1

Define growth?

Answer 1

Increase in the value of goods and services adjusted for inflation measured by the change in GDP.

Question 2

What are the 5 benefits of economic growth?

Answer 2

1. Lower unemployment.
2. More tax revenue.
3. Increased productivity - investment.
4. Improved living standards.
5. Reduces poverty.

Question 3

What are 3 benefits of economic growth to developing countries?

Answer 3

1. Access to healthcare.
2. Access to education - Instead of going to work.
3. Brings people out of absolute poverty and can afford nutritious meals with protein.

Question 4

Define development?

Answer 4

Growth in the value of goods in services produced plus other non-monetary aspects of life including wellbeing.

Question 5

Why does increasing GDP differ to economic welfare?

Answer 5

• Inequality- benefits of growth are unequally distributed.
• Environmental degradation.
• Access to human rights.

Question 6

Define HDI?

Answer 6

composite indicator of the level of a countries development varying between 0 and 1.

Question 7

What 3 things is HDI constructed of?

Answer 7

1. Life expectancy at birth.
2. Mean years of schooling.
3. GNI per capita.

Question 8

What is GNI?

Answer 8

GDP + net investment income + remittances.

Question 9

What are 3 benefits of using HDI as a measure of development?

Answer 9

1. Focuses on other things besides GDP such as healthcare and education.
2. Allows comparison between countries - a country might have a high GNI per capita but low HDI because of bad quality services.
3. Can be used to direct aid to countries.

Question 10

What are 2 disadvantages of using HDI as a measure of development?

Answer 10

1. Doesn’t measure indicators like happiness, environment and inequality.
2. Doesn’t tell us quality of services.

Question 11

What are the main sources of revenue for less developed countries?

Answer 11

• Agriculture- low value items so they have low productivity because gdp is not high.
• Manufacturing.

Question 12

Why does a government start to prioritize non-economic indicators when the economy grows?

Answer 12

Because industrialization (growth) means that the government can now collect tax revenue that they couldnt from the informal sector of agriculture. This way, they have enough money to spend on improving services like schools and hospitals

Question 13

What do economists say is the main reason for lack of growth, which eventually slows development?

Answer 13

Investment - this problem is mostly faced by developing countries.

Question 14

If investment is the barrier to development, why dont developing countries target investment?

Answer 14

Savings gap - firms can’t take out loans if individual people don’t save money in banks.

Question 15

What does the Harrod-Domar emphasise?

Answer 15

The importance on savings and investment.

Question 16

Give the basic idea of the Harrod-Domar model?

Answer 16

Savings –> Investment –> Capital accumulation –> Growth.

People with excess income (MPC<1) save. Entrepreneurs can invest with that money. Leads to capital accumulation and better technology. Productivity and output rises and so workers get paid more. More savings and more, and so more savings and the cycle repeats.

The model states that the rate of GDP growth is determined by the savings ratio and the capital output ratio.

Question 17

What is the capital output ratio?

Answer 17

THe amount of money that has to be spent on capital to get 1 pound of economic growth.

Question 18

Does the country want a high or low capital output ratio?

Answer 18

LOW - produce a lot of output from a low amount of capital.

Question 19

Formula for the Harrod-Domar model?

Answer 19

Savings ratio / capital output ratio.

Question 20

What is the loanable funds theory?

Answer 20

The supply of finance is the level of savings in the economy.
When people deposit money in banks, these funds can be lent out to firms for investment in physical capital.
Higher interest rates will encourage people to save more.

ADD DIAGRAM FROM ECONOMICS HELP.

Question 21

Will savings lead to investment and the accumulation of capital?

EVALUATION

Answer 21

NO:
1. many low income people have an MPC of 1 - so no savings.
2. Interest rates on loans will be high - the lack of savings ill reduce the amount of loanable funds. Assuming IR is set by demand and supply, the demand for money will rise and supply will fall.
3. In these countries, they will prioritise growth, leading to low IR and so less savings.

Question 22

Will investment lead to higher output and income?

evaluation

Answer 22

NO:
1. There’s no capital in those countries - imports are leakages.
2. Capital is expensive.
3. Shrinking foreign reserves - OC.

Question 23

Do developing countries struggle to finance investment.

evaluation

Answer 23

YES:
1. Savings gap.

NO:
1. Assumes banks are willing to lend.
2. People don’t trust banks.
3. Traditional savings methods don’t work.

Question 24

What are 3 other barriers to growth and development?

Answer 24

1. Corruption.
2. Institutional factors - property rights. Developing countries don’t have strong laws, this prevents MNCs from investing.
3. Poor infrastructure.

Question 25

How does the UK plug the savings gap?

Answer 25

1. Beg for money from the IMF/world bank - borrow. 2. AID- receive money from countries. 3. MNCs- tax cuts to invest in their country.

Question 26

Explain and evalute "trade liberisation" as a policy to promote development? | MARKET

Answer 26

Lower tariffs Increases exports, revenue Increase, import of capital to improve productive capacity and create jobs. EVAL: - Creates dependancy on trade. - Unless a huge increase in trade value, a price fall may be bad as there are low value items. - Revenue from tax may be the largest source of income.

Question 27

Explain and evaluate "FDI" as a policy to promote development? | MARKET

Answer 27

Increase in FDI. Capital investment is an injection into the economy. AD increases. EVAL: - Poor infrastructure disincentivises MNCs. - Profits are sent back. - Usually bring their own labour. - Avoid taxes. - Monopoly creation.

Question 28

Explain and evaluate "privatisation" as a policy to promote development? | MARKET

Answer 28

Sell national assets to private sector. There is now a profit incentive leading to greater effeciencies. Profits are used to reinvest and buy more capital. Labour is a complement to more income. More kids go to school. EVAL: - Worsening inequality. - Capital could replace labour.

Question 29

Explain and evaluate "removal of subsidies" as a policy to promote development? ASK RAHMAN and FINISH | MARKET

Answer 29

Subsidy removed (fuel subsidy). Supply shifts left. COP rise as fuel is an input in the production process, particularly energy intensive industries. Increase prices and lowers quantity. FINISH

Question 30

Explain and evaluate "floating exchnage rate" as a policy to promote development? | MARKET

Answer 30

Lowers interest rate. Hot money flows out becuase less returns. Demand for pound falls, then depreciation. Net exports rise, AD increases. Labour is derived demand, so more income. More school. EVAL:

Question 31

Explain and evaluate "micro finance" as a policy to promote development? | MARKET

Question 32

Finish rest of the strategies.

Question 33

Why is it risky to borrowm money to use for gowth and development?

Answer 33

Becuase you have to pay it back. If borrowed in dollars, the problem is that the fed could increase its interest rates. The country borrowing will have to pay back more in interest payments, which increases the chance of defaults.

Question 34

What is the problem for many developing countries who borrow money for growth and development?

Answer 34

They dont only use it for development. Instead they try to increase AD, and look for short term gain instead of long term. Becuase they want to win votes for politics.

Question 35

What is the heavily indebted poor countries initiative (HIPC)?

Answer 35

Debt forgiveness for developing countries.

Question 36

Why is the west hesitant on debt forgiveness for poorer countries?

Answer 36

1. Moral hazard - countries will keep doing it again. 2. countries know that they are unable to pay it back, so interest rates are extremely high on borrowing.

Question 37

What conditions are incorporated for the countries debt to be forgiven?

Answer 37

1. Privatisation 2. Deregulation. 3. Diversify exports base (more valuable items). 4. Market based SS policies. 5. Less protectionism.

Question 38

Define aid?

Answer 38

Money, goods/services and government loans given by the government of country/multilateral institutions such as the world bank or an NGO to help another country.

Question 39

Explain and evaluate "build infrastructure" as an advantage of aid?

Answer 39

Poor countries will have aid money to spend on builidng schools or other projects. This will create jobs, leading to higher incomes. Eval: - Western countries have pressure to spend on defence. So they will cut from the aid budget as its an easy target. - Creates dependancy. No incentives to correct any institutional issues - Aid has to go insustainable projects as this will increase revenue in the long run. Salary increases are only short term gains. - Might not be interested in development.

Question 40

Explain and evaluate "capital aid" as an advantage of aid?

Answer 40

Aid can also come in the form of specialist machinery or people who have high level of technical skills such as irrigation systems or tractors. Improve efficiency and yield and reduce shortages. Decreased dependancy on imports and lead to more exports. Improve productive capacity. Eval: - Lewis model.

Question 41

Explain "root cause" as a disadvantage of aid?

Answer 41

The root cause for low levels of growth and development is the savings gap.

Question 42

Explain "well targeted" as a disadvantage of aid?

Answer 42

Aid only works if it is well targeted. Countries will need to trust the government and must have low HDI scores for aid to have an impact. EVAL: - Hard to decide which country is worthy.

Question 43

Explain "tied aid" as a disadvantage of aid?

Answer 43

Countries provide aid on conditions. Some countries provide aid on conditions. For example, the recipient country must buy the exports of the country with the money given to them. This form of aid is seen as exploitative and has no long-term benefit. Americans want african comodoties/resources.

Question 44

Explain and evaluate "More growth and income" as an advantage of trade?

Answer 44

Lower tariffs. Price of exports fall. More demand for exports. Net exports is a compoent of AD. Derived deamnd so incomes rise. EVAL: - Exports tend to be low value and imports high value. The effect on net exports may not be significant as this assumes that the level of imports dont rise after trade liberilisation. - Unemployment becuase domestic demand may fall. - Pollution

Question 45

Explain and evaluate "intraregional trade" as an advantage of trade?

Answer 45

If intraafrican tade increases, which is very low, then countries can import raw materials for cheapers. Reducing costs. Eval: - Even in protectionsim is reduces, infrastructure is really bad.

Question 46

Explain and evaluate "competition" as a disadvantage of trade?

Answer 46

Coutries dont want to open up industries like agriculture to competition. As it creates dependancy and they may be in toruble if a war breaks out - risking food supply.

Question 47

Why is development most difficult to achive in developing countries?

Answer 47

Cultural thing - people dont trust banks, so savings gap.