Recap 4 ( Constraints on growth)

Question 1

What is primary product dependancy

Answer 1

When countries value of production of primary products accounts for a large proportion of their GDP

Question 2

Issues with being PPD

Answer 2

1. Susceptible to extreme price fluctuations
   - > from external factors like the weather -> affecting the supply -> reduces certainty -> decreases investment
2. Low value added -> small markup on c.o.p
3. Often operating at subsistence output
4. Countries put high protectionism on foreign primary goods to protect their own industries
5. Low skill needed -> low pay

Question 3

What is the Prebisch Singer Hypothesis

Answer 3

Demand for primary products is income inelastic
-> e.g. and increase in income will lead to a less than proportionate change in quantity demanded

Whilst manufactured goods, e.g. cars from Germany are income elastic,
-> as world incomes rise, will lead to an increase in quantity demanded

So, there will be an increase In inequality between the countries who. produce at PPD and manufactured goods

Question 4

How can the savings gap be modelled ?

Answer 4

Harrod domar Hypothesis

Question 5

Reasons for having a savings gap

Answer 5

1. Lack of established property rights ( De soto)
2. Corruption
3. Inflation
4. Poor financial infrastructure
5. Harrod domar model

Question 6

What is the foreign currency gap

Answer 6

The inability to earn/ purchase foreign currency

Question 7

Why would a country have a foreign currency gap

Answer 7

1. Goods are low value added, so don’t earn a lot
2. Often operating a subsistence so can’t export the good
3. Inflation is erroding the value of the currency
   - >nobody wants to buy it because its not worth as much

Question 8

Issue with having a foreign currency gap

Answer 8

Cant access world markets to buy capital goods, as they don’t have the foreign currency .

Question 9

What is capital flight

Answer 9

When your best skilled workers leave the economy

-> where taxes/ regulations are lower

Question 10

What is the problem with capital flight

Answer 10

1. Remaining workers a low skilled
2. Government revenue falls
3. Reduced skills/ technology transfer from reduced fdi
   All leading to economic growth falling

Question 11

How does debt constrain growth

Answer 11

1. Opportunity cost, can’t spend elsewhere
2. Become dependant on the loans -> more susceptible to changes in the interest rate
3. Loose market disipline

Question 12

What did De Soto theorise

Answer 12

A strong market economy depends on property ownership rights and the rule of law.
-> E.g if a person has no garuntee that there house/ business won’t be taken away from them, then they’ll be less likely to invest/ spend.

Question 13

How can corruption prevent growth

Answer 13

De Soto -> stop people saving/ people investing
Reduced FDI
Aid may be taken buy the gov instead of helping the country

Question 14

How can issues with the population affect growth

Answer 14

If the population is made up with old people who do not contribute to the economy, then theyll be taking ( pensions/ healthcare etc ) but not putting in

Question 15

How can inadequacies in human capital affect growth

Answer 15

If there are only low skill workers in the economy -> then the goods they produce will be low value added.
FDI will be deterred, from the poor workers/ cost to train

Low skill workers increases the incentive for capital automation

Question 16

How can poor infrastructure limit growth

Answer 16

Poor physical/ technological infrastructure will make it harder for buyer and seller to meet -> this decreasecd consumption and investment

Harder for FDI to set up

Goods more expensive -> increased unit costs for transporting