4.3.2 - Factors influencing growth and development Flashcards
(33 cards)
Blurt all the economic factors (not explain) all the factors influencing growth and development.
- Primary product dependency.
- Volatility of commodity prices
- Savings gap : Harrod-Domar model
- Foreign currency gap
- Capital flight
- Demographic factors
- Debt
- Access to credit and banking
- Infrastructure
- Education/skills
- Absence of property rights
Example of a country that is primary product dependent ?
Zambia :
- In 2022 copper exports accounted for 70% of their trial exports.
What type of elasticities do primary products have ?
- Demand inelastic (So even if price rose by 20% people will still demand these primary products as they are needed for the manufacturing of value added products) : They are NECESSITIES
- Income inelastic supply (e.g gold is hard to find and mime, they are also finite resources contributing to their inelastic supply)
- Income inelastic demand
What type of primary products are hard to store
- Also if primary products become hard to store they will go off quickly, this means that producers can’t easily store them up and then increase supply when they price increases
Why is the demand for primary products income inelastic ?
Also if incomes decreased since they are necessities with few substitutes people will still have to continue buying them even if their income changes
What is meant by when we say the prices of primary products are highly volatile.
- This is because of the how inelastic demand and supply is so even small shifts in supply and demand will cause there to be large changes in the price of the products.
- E.g during the 2008 financial crisis demand for primary products decreases which had huge impacts on price.
Why are Prices for primary products being highly volatile a problem for countries, and firms ?
- Changes in prices will significantly affect export revenue, this will affect profits and so can harm future investment by firms it will also which will affect government corporation tax revenue (affecting the budget balance) as well as expenditure on welfare and health care.
- Also there will be be very little FDI bc investors will find it hard to predicted future prices which will make it hard for them to predict future revenue and profits and so it will be hard to predict if their investments will be profitable so they just wont take the risk and so there will be little investment. Then explain the effects of no investment on LRAS and AD and the economy.
What type of elasticity does manufactured goods have ?
Income elastic of demand. This means as incomes rises there will be a greater rise in the quantity demanded for manufactured goods.
How can we add value to primary products ?
To evaluate the prebisch-singer hypothesis we can talk about diversification or how firms can add value to primary products by processing pimrary products e.g agricultural products into finished goods or exporting refined minerals instead of raw materials.
What is a savings gap ?
The gap between the current level of domestic saving and the level of saving required for new capital investment and to fund economic growth.
When ever we are speaking about the savings gap what should we always remember ?
It’s usually always to do with low income counties/developing countries.
Draw the Harrod-domar model
How does having a low mps affect a country ?
- The banks wont have any money to lend to individual and firms to invest and spend into the economy.
- This will affect LRAS which means there is low economic growth.
Why is there a low marginal propensity to save in low income countries ?
This is because any income they do get is spent on basic necessities like water and food.
- There’s also lack of access to banks (having to travel many miles to access banks) They don’t have a solid banking system.
Just some application
How can we evaluate a savings-investment gap constraint growth for developing countries.
- “The extent to which the savings gap constrains economic growth and development depends on a country’s ability to attract FDI. If a country successfully attracts foreign investors (e.g., Vietnam’s manufacturing sector receiving investment from multinational corporations like Samsung), this can lead to an outward shift in LRAS by increasing the capital stock. Higher investment improves productivity, leading to economic growth and a rise in GNI. As incomes increase, households have more disposable income, which boosts savings and helps reduce the savings gap over time.
- The importance of human capital
The use of advanced capital requires skilled labour. Developing countries lack this due to low tax revenue resulting in the under provision of merit goods such as education. Even if advanced capital can be purchased it may not increase incomes as either labour cannot use it, or it replaces the labour that used to manually perform the job.
Name some ways that the government can use to overcome a saving gap.
What is a foreign currency gap ?
When currency outflows are persistently higher than foreign currency inflows
How do foreign currency gaps affect growth and development ? 2 point chain of analysis ad 2 Evals
- Eval application for export diversification (takes time so will only be seen in LR) :
3. United Arab Emirates (UAE) – Reducing Oil Dependence- Before (1980s): 85% of GDP was from oil and gas.
- Now: Diversified into finance (Dubai), tourism, logistics, and aviation (Emirates Airlines).
- How? Created free economic zones, tourism hubs (Burj Khalifa, Expo 2020), and a strong financial sector.
- This has increased demand for exports = Increase demand for currency = more foreign reserves = reduced currency gap
Final judgment :
- Diversifaction requires gov intervention and investment
Application of foreign currency reserve affecting development
What are capital flights
Rapid outflow of assets or money due to uncertainty in the economy.
How does being landlocked affect growth and development in a country ?
A country is completely surrounded by land/does not have access to the ocean e.g South Sudan.
Another Eval : Is debt relief, example in 2009 burindi £833m debt was relifed
- Under the heavily indebted poor countries initiative the IMF allows for countries who are indebted to be relived from their debt meaning they don’t have to pay it off and are able to start spending in other countries areas of the economy. link
Final judgement : Depends on the level of corruption as even if countries are relifed from debt, gov spending on education and healthcare may still not occur do to corrupt government(As they use the extra money saved from the debt for personal benefits) so there will be no growth or development.
How does infrastructure affect growth and devlopment ?
Another Eval :
- Successfully promoting FDI e.g India 2015 who was able to receive an estimated amount of $31B in FDI, Inestmet will help improve quality of supply LRAS shifts. As well as ivenstemy in India (high-speed rail line (bulletin trains) which will connect Mumbai with ahembadada)- Less travel time = more productivity
These policy changes played a significant role in boosting investor confidence and positioning India as a leading FDI destination in 2015.
- Countries can do this by reducing copration tax rev
