primary Flashcards
what is primary product dependancy?
developing and emerging countries depending on exporting primary products/ commodities
what are the problems with primary products?
- demand is price inelastic
- supply is price inelastic
- demand is income inelastic
what is price instability?
a slight increase in supply/demand for primary products causes a really big change in price
coz primary products are supply and demand inelastic
define a primary product
a product made from raw materials
why does price instability constrain growth and development?
- harder for invstors to predict profit and so investment decreases
- Unstable prices -> Low levels of investment -> Keeps AD left -> Limits real GDP -> Limits economic development
- Unstable prices -> Low levels of investment -> Decreases productivity -> Left shift of LRAS -> Decrease real GDP -> Limits economic development
- Unstable prices -> Low levels of investment -> Decrease productivity -> Increase unit costs -> Increase prices -> Less competitive -> Less profit -> Less corporation tax revenue -> Less government spending on development
how do buffer stock schemes reduce price instability?
in times of good harvest:
govevrnment buy up the commodity and store it in reserves, decreasing supply of commodity on the market, increasing price, towrads average
in times of bad harvest, the government release commodity from buffer stock reserves to the market,increasing market supply, decreasing price, towards average
* floor price and ceiling price set as limits
define buffer stock schemes:
A scheme where the government buys and sells primary products from a market in order to reduce price fluctuations.
how do buffer stock schemes encourage devlopment and growth?
less price instability, so investors are able to predict future profits more easily, so they are more likley to invest
* More stable prices→ Higher levels of investment →Shifts AD right → Increases real GDP→Increases economic development
* More stable prices →Higher levels of investment → Increases productivity →Right shift of LRAS→ Increases real GDP→Increases economic development
* More stable prices→Higher levels of investment → Increase productivity →Decrease unit costs →Decrease prices→More competitive → More profit →More corporation tax revenue →More government spending on development
why may buffer stock schemes not lead to growth and devlopment ?
Buffer stocks may not lead to growth and development because farmers have an incentive to overproduce. This is because the government has guaranteed to buy any excess stock. This means that buffer stocks can quickly become very expensive to run, meaning the government has less money available to spend on developemnt
what is the prebisch- singer-hypothesis?
As world income grows, there will be a small increase in demand for primary products, but there will be a large increase in demand for manufactured
products. This means that the price of
manufactured products will increase by much more than the price of primary products. This will worsen the terms of
trade for countries who depend on exporting primary products and importing manufactured products.
why does the prebisch- singer hypothesis constrain growth and devlopment?
- Worsening terms of trade -> Can afford fewer capital imports -> Low levels of investment -> Keeps AD left -> Limits real GDP -> Limits economic development
- Worsening terms of trade -> Can afford fewer capital imports -> Low levels of investment -> Decreases productivity -> Left shift of LRAS -> Decrease real GDP -> Limits economic development
define the prebisch-singer hypothesis?
An increase in world incomes will lead to a deterioration in the terms of trade for developing countries
what is industrialisation?
industry shift from producing primary goods to manufactured goods in a country
what is the lewis model?
As countries industrialise, manufacturing firms will make more profit and increase investment. This will increase their demand for labour which will increase wages and attract even more workers into the manufacturing sector.
why may industrialisation not lead to growth and development?
Transfer pricing occurs where the firm in one country might “sell” the product to the same firm in a different country at a very low or a very high price. This doesn’t affect the overall firm’s profits but it means that they can declare all of their profit in whichever country has the lowest rate of corporation tax.
