4.3.2 factors influencing growth and development Flashcards
(13 cards)
What are some economic 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
What is the impact of primary product dependency on growth and development?
Primary product dependency can be undesirable for several reasons eg. price fluctuations, low value of commodities, price inelastic demand for goods. As world incomes rise, the country’s terms of trade falls as prices of manufactured goods rise, relative to primary products (Prebisch-Singer hypothesis)
What is the impact of the volatility of commodity prices on growth and development?
Price inelasticity of demand and supply for commodities may result in price instability. This causes revenues of producers and foreign currency earnings to fluctuate. Uncertainty may deter investment, and producers may suffer from poverty if incomes fall rapidly.
What is the impact of the savings gap and level of investment on growth and development?
Developing countries have lower incomes and save less. A savings gap occurs when there is the difference between actual savings and the level of savings needed to achieve a higher growth rate. The Harrod-Domar model suggests inadequate savings lead to low investment. This means that capital accumulation is low, resulting in slow economic growth. However, the model focusses on physical investment only, ignoring other sources of investment
What is the impact of the foreign currency gap on growth and development?
This means that exports from a developing country are too low compared to imports to finance purchase of investment or other goods from overseas required for faster growth. Developing and emerging economies may face a shortage of foreign currency. This may be because earnings from exports are relatively low, or because world oil prices have increased, or because they have large international debts on terms they can’t afford to repay.
What is the impact of capital flight on growth and development?
The owners of any extra income that could be saved and used for investment often withdraw their money from the country in search of higher returns abroad. This may be due to lack of confidence in the country’s stability.
What is the impact of demographic factors on growth and development?
Many developing and emerging economies have high birth and death rates which result in high dependency ratios, leads to strain on the education system and youth unemployment. They may face ageing populations, eg. in China due to a one child policy in the past. Also, if there is a high rate of population growth, the economy needs to grow even faster to maintain living standards.
What is the impact of debt on growth and development?
Developing countries who have received loans from developed countries in the past now suffer from high levels of interest repayment, so money flows from developing to developed countries. They have less money to spend on services for their population and may need to raise more taxes, limiting growth and development. Firms may borrow in order to bring about growth, leading to high debt levels.
What is the impact of access to credit and banking on growth and development?
If individuals have no access to credit and banking services, they may not be able to secure loans to start new businesses, limiting scope for growth and development. They may be unable to access funds for investment and struggle for save for the future.
What is the impact of infrastructure on growth and development?
If infrastructure is inadequate, it is costly and difficult for businesses to trade. Also, poor infrastructure deters domestic investment and FDI. However, development of infrastructure may be expensive and can conflict with environmental aims.
What is the impact of education/skills on growth and development?
Countries which place emphasis on education and provide state funding are more likely to grow and develop. Human capital is improved, shifting the PPF outwards. Poor education means workers are low skilled and have low levels of productivity
What is the impact of the absence of property rights on growth and development?
If property rights are not established, it may be difficult for individuals to secure loans because they have no collateral. A lack of rights also means that individuals and businesses can’t use the law to protect their assets, reducing investment = they are unwilling to buy machinery, build factories or establish brands.
What are some non-economic factors that can impact growth and development levels?
- many developing countries suffer from corruption, meaning individuals make decisions which maximise bribes they receive as oppose to maximising output and development. leaders may make decisions to benefit themselves rather than the economy.
- diseases such as HIV/AIDS and malaria negatively impact economic growth
- countries with poor climate and geographical terrain may suffer from natural disasters, difficult for farmers and for individuals to set up businesses
- countries may suffer from civil wars, causing high levels of poverty and destroying infrastructure = difficult and costly for the country to rebuild
