4.3.2 - Factors influencing growth and development

Question 1

What are the Terms of Trade ?

Answer 1

It is the ratio of an index of a country export prices to an index of its import prices

Question 2

What is the equation for terms of trade ?

Answer 2

Terms of trade = (average export index price / average import index price) x 100

Question 3

How can you alter the terms of trade to see a greater improvement ?

Answer 3

• Increasing price of exports means we can import even more with our exports
• Price of imports fall

Question 4

What is the ToT like for developing countries ?

Answer 4

The ToT for these economies tend to fall over time because the price of agricultural products tends to rise at a slow pace

Question 5

What is the YED like for primary products ?

Answer 5

They have a low YED

As people get wealthier they do not continue to increase the amount of primary products they buy

Question 6

What are people likely to buy as they get richer ?

Answer 6

They are likely to increase their demand for manufactured goods

Question 7

How can a deterioration of the ToT in a primary product dependent country affect them ?

Answer 7

Living standards will fall

Harder to import capital goods

Economic growth falls

Question 8

What does volatility in export prices cause ?

Answer 8

Changes in firms revenue also volatile

Increased volatility in economic growth

Greater uncertainty makes investment less attractive

Lower investment limits growth and development

Question 9

In MEDCs what are the agricultural sectors supported by ?

Answer 9

They are supported by protectionist measures such as subsidies

Question 10

What are the downfalls of MEDCs using protectionist measures in agriculture for LEDCs ?

Answer 10

Agricultural producers in LEDCs struggle to complete

Therefore it is harder to pursue export led growth in these sectors

Question 11

What is protectionism ?

Answer 11

It involves any attempt by a country to impose restrictions on the open trade in goods and services with other countries

Question 12

What are some examples of protectionism ?

Answer 12

Tax

Quotas

Subsidies

Question 13

What are tariffs ?

Answer 13

They are taxes placed by the government on imports

Question 14

What do tariffs do ?

Answer 14

They raise the price for consumers, lead to a decline on imports, and can lead to retaliation by other countries

They restrict free trade

Question 15

What is a savings ratio ?

Answer 15

The proportion of income that is saved is referred to as the savings ratio

Question 16

Why do LEDCs have low savings ratios ?

Answer 16

• Most people in LEDCs have low income
• As a result they need to spend the majority of their income (they have a high MPC)

Question 17

What is the Harrod-Domar model ?

Answer 17

It was an early model of economic growth that states economic growth is dependent on savings ratio

Question 18

Explain what the Harrod-Domar model shows

Answer 18

In the theory, a higher saving ratio should lead to higher level investment in capital → large capital stock in the country → more total output is created → citizens become more efficient and earn higher income from capital.

Question 19

What is the equation for rate of growth of GDP ?

Answer 19

Rate of growth of GDP = Savings ratio / capital output ratio

Question 20

What is the capital output ratio ?

Answer 20

Capital output ratio is the amount of capital needed in the economy to produce a given quantity of goods

Question 21

What is the equation for capital output ratio ?

Answer 21

Capital output ratio = value of capital equipment / annual output

Question 22

What is the correlation between the capital output ratio and economic growth ?

Answer 22

The smaller the capital output ratio, the greater the economic growth

Question 23

What is the correlation between the savings ratio and economic growth ?

Answer 23

The larger the savings ratio, the greater the economic growth

Question 24

How can the rate of growth in an economy be increased ?

Answer 24

• Increased level of savings
• Reducing the capital output ratio i.e. increasing the quality/productivity of capital inputs

Question 25

What are the current difficulties in closing the savings gap ?

Answer 25

- Extra income gained is often spent on increased consumption rather than saved - Lack of a sound financial system - Savings can be sent abroad - This is called capital flight

Question 26

Savings ratio of a poor country

Answer 26

poor countries have low savings ratios … this results in low levels of investment … if investment is low, the amount of new capital goods and the overall capital stock will be limited … as a result, this also limits economic output … income growth is also limited which causes savings ratios to stay low thereby repeating the cycle

Question 27

What are some potential solutions to low savings ratios ?

Answer 27

Borrow from abroad Reform financial sector Microfinance Aid

Question 28

Why are foreign currencies important for economic development in LEDCs ?

Answer 28

- In the initial stages of industrialisation importing capital goods is vital for success. - Foreign currency is also important for importing raw materials unavailable domestically

Question 29

Why might some LEDCs face a shortage of foreign currency ?

Answer 29

LEDCs often do not export enough to earn the foreign currency required to finance their desired level of imports

Question 30

When does a foreign exchange gap occur ?

Answer 30

It happens when currency outflows are greater than currency inflows

Question 31

What are the causes of a foreign currency gap ?

Answer 31

Relatively low export earnings Underperforming agricultural sector Large foreign debt

Question 32

What are some solutions to the foreign currency gap ?

Answer 32

Debt relief from the IMF Aid for development Development of primary sector Development of tourism

Question 33

What type of capital is the capital in capital flight ?

Answer 33

Financial

Question 34

What is capital flight ?

Answer 34

When a large amount of financial capital leaves a country due to an event, or events, that make investors lose confidence in the country

Question 35

Why does capital flight negatively impact economic growth and development ?

Answer 35

There is less money available for investment. Capital flight leads to a depreciation of the exchange rate because inward investment falls and outward investment rises. As a result, currency speculators sell the domestic currency and buy the foreign currency because the value will strengthen, from the movement in the exchange rates, because they predict the currency to fall rapidly. Consequently, the foreign currency gap problem is worsened as more money/currency flows out of the country.

Question 36

What is the dependency ratio ?

Answer 36

Dependency ratio is a measure of the number of dependents aged zero to 15 and over the age of 65, compared with the total population aged 16 to 65.

Question 37

Whats the relationship between the size of the working age population and the productive capacity of the economy ?

Answer 37

The larger the size of the working population the greater the productive capacity of the economy will be.

Question 38

Why is government spending likely to increase if a country has an ageing population ?

Answer 38

The elderly are more likely to require health care and social care than other age groups

Question 39

What does an ageing population cause in a MEDC ?

Answer 39

Ageing populations cause the dependency ratio to rise —> larger amounts of government spending and resources used to support elderly —> less available for supply-side policies and public services —> lower levels of economic growth

Question 40

What do higher birth rates cause in a LEDC ?

Answer 40

High birth rates —> youthful populations with larger workforces —> greater potential for economic growth However, this depends on the level of education and skills set by the country.

Question 41

What is debt servicing ?

Answer 41

Repaying both the principal and the interest

Question 42

What can a high debt burden lead to ?

Answer 42

An increase in government debt means a greater amount of government spending must be used towards repaying the debt … this reduces the amount that can be spent in other areas a high debt burden can therefore act to reduce economic growth

Question 43

What is the debt service ratio ?

Answer 43

A country’s debt service ratio is the ratio of its debt service payments to its export earnings

Question 44

How do high debt service ratios hinder economic growth ?

Answer 44

High debt burden Large amounts of government spending used to service the debt Less available to spend in other areas Leads to weaker economic growth

Question 45

What is access to credit vital for ?

Answer 45

on a micro level, access to credit is vital for firms to fund production and also expansion

Question 46

What can poor credit availability lead to in a developing country ?

Answer 46

developing countries often have weak financial systems that only a small portion of the population has access to … this makes it harder for individuals and firms to borrow from formal financial institutions … this limits consumption and investment which in turn limits economic growth.

Question 47

How can a lack of access to credit and banking hinder development ?

Answer 47

1. For firms, borrowing from banks is an important means of financing their business operations 2. For individuals, the ability to access banking services allows for security for cash and encourages saving

Question 48

What is micro finance ?

Answer 48

a type of banking service provided to unemployed or low income individuals, who have no other access to financial services.

Question 49

What can low levels of infrastructure lead to ?

Answer 49

- Low levels of infrastructure make it difficult for businesses to trade and set up within the country - However, the development of infrastructure can be expensive and can lead to conflict with environmental goals