Theme 4: Emerging and Developing Economies

Question 1

What is the Human Development Index?

Answer 1

Developed by the United Nations to measure and rank countries’ levels of social and economic development. Used to gain a fuller picture about the quality of life in a country.

Question 2

What are the 3 components to the HDI?

Answer 2

1. Health- life expectancy
2. Education- average and expected years in schooling
3. Standard of Living- real GNI per capita using PPP

Question 3

Advantages of using the HDI to compare levels of development between countries/over time?

Answer 3

• Data is easy to collect and is standardised across nations
• Easily track levels of development over time
• HDI gains an insight into well-being, which is a growing concern

Question 4

Disadvantages of using the HDI to compare levels of development between countries/over time?

Answer 4

• Long life expectancy is not the same as high quality of life. Western nations may live longer but may have greater levels of stress and mental illness.
• Number of years in school is a poor indicator of the quality of the education.
• HDI does not measure the level of inequality in a nation.
• Two countries can achieve the same HDI but have very different profiles.

Question 5

What is primary product dependency?

Answer 5

Many developing nations are dependent on primary products that are extracted from the earth. The demand for most commodities is price inelastic, therefore any changes in global demand will have a significant impact on price.

So any economies reliant on these industries may find it more difficult to encourage economic development.

Question 6

What factors create a disincentive for investment in primary industries?

Answer 6

• Value added on primary products is low- farmers and miners make little profit when exporting
• Agricultural products can be easily damaged by natural disasters.
• Volatility of commodity prices means incomes fluctuate, therefore earnings are uncertain.

Question 7

What is the Harrold-Domar Model

Answer 7

Growth rate of an economy is directly linked to:

• The levels of saving in an economy
• The efficiency with which capital in an economy can be deployed

Question 8

What is the savings gap?

Answer 8

In many low income countries, high levels of poverty make it almost impossible to generate sufficient savings to make fund investment projects. This increases reliance on high interest borrowing to finance capital investment.

Question 9

Foreign currency gap and what causes it?

Answer 9

When capital outflows from a country are greater than capital inflows.

Caused by:

• Dependency on exports of primary products (low value added) and import of manufactured goods (high value added).
• High proportion of income servicing debt (borrowing instead of saving for investment.)

Overall, low income countries receive less for their exports and have to pay a premium for the goods they import

Question 10

What is capital flight and what are the reasons for it?

Answer 10

Capital flight refers to the problem of people moving their savings abroad instead of holding them domestically.

This might occur because:

• Lower tax rates and/or higher interest rates abroad.
• Political instability
• Absence of property rights- without clear laws and legal controls, property rights may be uncertain.

Question 11

What is the impact of capital flight?

Answer 11

1. Governments don’t receive taxes from savings abroad
2. People less willing to risk investment
3. Lower levels of development.

Question 12

What topic does the savings gap and level of investment link to?

Answer 12

Propensity to save

Question 13

What topic does the foreign currency gap link to?

Answer 13

The circular flow of income, as foreign currency gap is an example of a leakage or a withdrawal from the circular flow of income.

Question 14

What demographic factors have a significant impact on the development in a country and why?

Answer 14

Fast growing population- As an increase in the number of children puts pressure on the education system and fewer children may receive a good education.

Aging population- Greater proportion of dependants vs the working population putting a pressure on social benefits and healthcare.

Poverty- As many children have to go to work rather than go to school.

Question 15

Why might international debt have an impact on growth and development?

Answer 15

International debt becomes a flow of money out on an economy. If the currency used to take the loan appreciates in value then the country might struggle to pay it back and therefore cannot invest money in their economy but rather on paying back the loan.

Question 16

How can access to credit and banking impact an economy’s growth?

Answer 16

In developed countries people have more access to saving and borrowing mechanisms. So they can grow their investments and borrow money on good terms.

In developing countries these may not be available or may be harder to access and therefore restrict the opportunities for savings, investment and growth.

Question 17

Investment in ………. can help economic growth such as roads, ………….

Answer 17

Infrastructure

Eg ports, airports, railways, utilities and broadband

Question 18

What are 4 non-economic factors that may also restrict the levels of development in a country?

Answer 18

1. War
2. Geographical
3. Corruption
4. Disease

Question 19

6 Market orientated strategies to encourage growth and development?

Answer 19

1. Trade liberalisation
2. Promotion of foreign direct investment
3. Removal of government subsidies
4. Floating exchange rate system
5. Micro finance schemes
6. Privatisation

Question 20

What is trade liberalisation?

Answer 20

Opening an economy up to a free market philosophy and the opportunities of open trade with other nations. Its the opposite of protectionism.

Question 21

What is the purpose of market orientated strategies?

Answer 21

They promote market forces and create incentives for investment.

Question 22

Benefits and Drawbacks of trade liberalisation

Answer 22

1. Creates the opportunity to exploit a country’s comparative advantage through export led growth.
2. Firms are encouraged to invest and seek new export markets
3. Increased efficiency of industries and competitiveness
4. Only the most efficient industries will survive and which could lead to job losses in industries that cannot compete.

Question 23

What are the difficulties and drawbacks of government subsidies?

Answer 23

They are intended to reduce poverty and correct market failure.

However,

• Allocating the subsidy correctly is very difficult.
• They encourage inefficiency.
• Huge opportunity costs for the government.

Question 24

How does the removal of subsidies encourage growth and development?

Answer 24

As subsidies make the market price artificially low and encourage inefficiency. Therefore through removing them it encourages a market to become more efficient.

Question 25

How does microfinance schemes encourage growth and development?

Answer 25

Microfinance is the availability of small scale loans to be available to entrepreneurs and businesses. In developing countries they do not have access to loans which doesn’t allow growth. So the availability does the contrary.

Question 26

What are 6 interventionalist strategies to encourage growth and development?

Answer 26

1. Development of human capital
2. Protectionism
3. Managed exchange rates
4. Infrastructure development
5. Promotion of joint ventures with global companies
6. Buffer stock schemes

Question 27

How does the government encourage growth and development using human capital and infrastructure?

Answer 27

The private sectors is unlikely to invest in the development of human capital and infrastructure if it isn’t profitable despite having significant economic and social benefits. Therefore, the government is the principal builder of those.

Question 28

How do protectionism methods encourage growth and development?

Answer 28

Protectionism methods such as quotas or tariffs supports the development of domestic industries and protect them from international competition. Therefore, fuelling growth.

Question 29

How do joint ventures with global companies support economic development?

Answer 29

Foreign direct investment can support economic development through:

• capital inflows which creates jobs and higher national output.
• Higher wages and better working conditions
• improved knowledge and expertise- transfer of human capital.

Question 30

How do buffer stock schemes help developing countries to grow?

Answer 30

Buffer stock schemes aim to protect buyers and sellers through maximum and minimum prices.

During periods of excess supply the government will buy up the excess supply and stockpile it. During a period where there is a shortage of supply, the government releases the buffer stock to increase supply and maintain a stable price for producers and consumers.

Question 31

Draw a diagram illustrating the effects of a buffer stock scheme on price?

Answer 31

Inbetween the max and min price no intervention is required but out of those boundaries governments must intervene.

Question 32

What is the Lewis model?

Answer 32

The Lewis model assumes that there is excess labour in sector A (the same output could be achieved with with fewer workers) Therefore, there is no opportunity cost of these workers moving from sector A to sector B

Question 33

What are some of the criticisms of the Lewis model?

Answer 33

• Transferring jobs is not easy and requires investment in education and training.
• Industry can be capital intensive and not create many jobs.
• If applied to agriculture, the demand is seasonal and therefore fluctuates during the year.

Question 34

How might development of primary industries help the growth of a country?

Answer 34

Developing countries may use the incomes generated from the exports of commodities to diversify their industries so they’re less reliant on markets where value added is low and prices can fluctuate.

Question 35

What are the potential pros and cons to tourism for a developing country?

Answer 35

Pros:

• Create significant inflows of income as it is an export.
• Creates jobs
• Encourages FDI

Cons:

• Extremely seasonal
• Increase in imports as a result
• Environmental damage

Question 36

What is Aid and what are the benefits?

Answer 36

Aid involves transferring resources from one country to another. Aid can reduce absolute poverty, the savings gap and foreign exchange gap. It can also create a multiplier effect directly increasing aggregate demand.

Question 37

What are the downsides of Aid?

Answer 37

The savings gap can lead to many countries having high levels of debt. Large amounts of income is then spent of paying off interest.

Question 38

What is debt relief and what are the possible downsides of it?

Answer 38

Debt relief involves cancelling a country’s debt.

This could lead to a dependency culture when in the future they anticipate future debts will be also be cancelled.

Also the danger of corrupt governments using aid inappropriately or the donor nation using it to secure favours in the future.

Question 39

What does Fairtrade do?

Answer 39

Producers in developing countries receive a fair price for their good and that production is sustainable.

Question 40

What 2 goals has the world bank group set for the world to achieve by 2030?

Answer 40

1. Decrease the % of people living in extreme poverty ($1.90) to no more than 3%
2. Fostering the income growth of the bottom 40% for every country

Question 41

What does the World Bank do to promote economic development?

Answer 41

They provide:

1. Low interest loans
2. Interest free credit
3. Grants for developing countries to support industry development, healthcare and education.
4. The development of infrastructure and capital investment to encourage international trade.

Question 42

What is the purpose of the world bank?

Answer 42

Promote economic development

Question 43

What is the purpose of the international monetary fund (IMF)

Answer 43

To ensure the stability of the international monetary system.

Question 44

What does the IMF do?

Answer 44

Each member has a quota on the amount of financial resources they have to make available to the IMF.

These resources are then used to offer loans to poor countries in order to fund/support projects that fight poverty and improve living standards.

They also provide guidance do developing countries on policies that maintain economic stability.

Question 45

What are NGOs and what is their purpose?

Answer 45

They are private organisations and charities that support similar objectives of:

• reducing poverty
• protecting the environment
• creating equality
• supporting sustainable economic growth

Question 46

What does the WTO do?

Answer 46

Promotes the liberalisation of trade and fair trade across the globe.

Acts as a forum to support governments in negotiating trade deals and removing trade barriers.

Question 47

What are some of the criticisms of these international organisations?

Answer 47

The policies they set do not act in the interest of the developing world but rather the developed world. And actually lead to further inequality.