Theory of economic development model/financial market

Question 1

Explain Dutch Disease?

Answer 1

over-dependence of the sales of one export over a short period of time.
This causes an appreciation of a currency which harms the competitiveness of other exporting industries, harming the overall economy

Question 2

Application of Dutch disease (Chile)

Answer 2

60% of exports sales are coppers, copper makes up 20% of GDP

Question 3

Evaluation of the dutch disease

Answer 3

• need a sovereign wealth fund to invest in other industries leading to diversification

Question 4

Explain the model of Prebisch Singers Hypothesis (PSH)

Answer 4

• over dependence in the sales of primary export commodities lead to the fall in over time. This is due to the fall in demand of primary commodities as the demand of higher valued manufactured goods increase as countries develop. This worsen the terms of trade as the YED of primary exports is inferior. PED is inelastic.

Question 5

Explain the Harrod Domar model:

Answer 5

When closing the savings gaps, savings lead to increase investment, leads to increase in capital and technology which leads to higher output and growth

Question 6

Evaluation of the Harrod domar model?

Answer 6

• people do not have perfect information to invest
• there is leakages in the flow e.g natural leakages like corruption
• demography (ageing population and high unemployment)
• access the banking services
• source of finance

Question 7

Explain the Lewis model

Answer 7

Growth occurs in the duopolistic economy where workers move from the rural agriculture sector to urban manufacturing sector due to increased wages. This is due to higher valued manufactured goods is produced which require skilled labour so higher wages are offered. This is also due to diminishing marginal returns of labour in fixed land in the country side leading to falling levels of mrpl, excess supply and a fall in wages

Question 8

Evaluation of the Lewis Model

Answer 8

• Karl Marx argues that monopsonies exploit workers with lower wages, poor working environments and over crowdedness
• there are five parts to an economy instead of two
• 100% agriculture sector is not good
• movement of workers in china want to go back to the urban area