4.3.2A - Factors influencing growth and development

Question 1

economic factors affecting growth and development

Answer 1

o primary product dependency
o volatility of commodity prices
o savings gap: Harrod-Domar model
o foreign currency gap
o capital flight
o demographic factors
o debt
o access to credit and banking
o infrastructure
o education/skills
o absence of property rights

Question 2

Define primary product dependency

Answer 2

• Heavy dependence measured as a share of GDP, total exports or employment from the extraction / cultivation of primary commodities such as copper and oil.

Question 3

Define terms of trade

Answer 3

• ## The terms of trade measures the rate of exchange of one product for another when two countries trade

Question 4

Examples of primary products

Answer 4

Primary products include agriculture, mining etc. A large amount of most developing country’s economic activity is based on a primary product.
- crude oil, coal, copper or iron ore, rough diamonds, and agricultural products such as wheat, coffee beans or cotton

Question 5

Issues with primary product dependency

Answer 5

• Natural disasters can wipe out production of the primary product = farmer no income.
• commodities often non-renewable, which means the = country will suffer when they run out of the product

Question 6

Why is YED of primary products an issue?

Answer 6

• They tend to have a low-income elasticity of demand , which means as people get
  wealthier, they don’t continue to increase the amount of primary products they buy
• whereas they are likely to increase their demand for manufactured goods.
• eval: diamond doesnt have low YED

Question 7

What is prebisch singer hypothesis

Answer 7

• the long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their terms of trade.
• However, in recent years, there has been
  a rise in the prices of some key commodities , such as food and a fall in prices of some manufactured goods due to the expansion to places like China.

Question 8

Terms of trade formula

Answer 8

index of export prices/index of import prices x100

Question 9

prebisch-singer hypothesis

Answer 9

• countries relying on export of primary products suffer from a long term decline in TOT bc
• export of natural resources are quite income inelastic (necessity) meaning as people get richer, demand for them wont increase massively
• but imports of manufactured goods are income elastic so as income within country rises, demand for manufactured goods alos rises quickly
• over time, global incomes have risen so demand for manufactured goods has risen, pushing their price relative to natural resources up meaning TOT for developing countries deteriorate as import rises rise muhc faster
• developing country need to export a lot more to fund higher prices of imports so development suffers as they afford fewer imports

Question 10

Describe the dutch disease

Answer 10

• country becomes a significant commodity producer in a short amount of time, causing an increase in demand for the currency (to enable people to buy the goods) which pushes its value
  up.
• This increases export prices and leads to a reduction in competitiveness of the
  economy, causing a fall in output in other areas. This occurred for the non-oil sectors
  in Venezuela and Nigeria.

Question 11

evaluate primary product dependency

Answer 11

• Some countries have been able to use primary products to develop, for example
  Saudi Arabia and oil . It is suggested that countries should use primary product
  revenue to invest in manufacturing et
• diversify towards manufacturing; lessens reliance on primary products so growth of the manufacturing industry increase export prices and TOT improves, increasing incomes and growth

Question 12

Why is primary product dependency bad for TOT

Answer 12

• price of pimary products are VOLATILE AND LOWER than that of other manufactured and tertiary sector goods so income earnt from primary sector is low
• less funds to invest in industrialisation so SOL and economic growth are slower to improve

Question 13

Why is volatility of commodity prices a barrier to development

Answer 13

• Primary products tend to have inelastic demand and supply hence small changes in S or D = huge fluctuations in price.
• large changes in price mean that producers’ income and the country’s
  earnings are also rapidly fluctuating, making it difficult to plan and carry out long
  term investment as well as meaning that producers can see their income fall very
  rapidly, causing poverty

Question 14

Why does volatility of commodity prices limit growth

Answer 14

• volatile export prices mean changes in firm total revenues are volatile so greatery uncertainty makes investment less attractive, thus limiting growth and development
• also producers may leave market or earn less so less gov revenue

Question 15

Why is PED and PES inelastic for commodities

Answer 15

PED
- necessities
- lack of good substitutes

PES < 1
- large production lag: growing crop, long time to extract minerals
- hard to store; agricultural produce is perishable minerals are expensive to store so limited stocks

ALSO:
regular demand and supply shifts: weather and macropernance

Question 16

Evaluate prebisch singer hypothesis

Answer 16

• as world popualtion grows, greater demand for agricultural products to eat may push prices up
• demand for some primary products is income elastic (e.ggold or oil)
• if a country has comp advant in producing primary product, mkaes sense to make most of these resource it can produce