Development Economics

Question 1

Primary Product Dependancy

Answer 1

Developing Countries may have exports that are primary products (agriculture, mining and forestry)

If they have a comparative advantage, they can use this to develop a strong industry
If they export high amounts, there is an inflow of money into the economy

However, commodities have very volatile prices, meaning if prices are low, the exports value will decrease

In the long term, extracting resources becomes more difficult as they begin to run out

Question 2

Savings Gap

Answer 2

Savings are required for loaning out to firms for investment projects

In Developing Countries, lack of income means consumers have to focus on immediate needs and have little to save

Low savings = low levels of loanable funds = higher interest rates = less borrowing for investment from firms

Think PPF

Question 3

HARROD-DOMAR MODEL

Answer 3

Savings Ratio/ Capital Output ratio = Growth Rate

Therefore, foreign aid can be used to fill the savings gap, which will increase growth

Can also be filled through remittances

Increased Savings = Increased Investment = Increased Capital Production = Increased Economic Growth = Increased Savings

Ignores Labour Productivity and Corruption and Technological Development - model is extremely oversimplified and may not be accurate

Question 4

Risk Of Corruption

Answer 4

In Sub-Saharan Africa, money lost from corruption could fund 10 million children’s education

Question 5

Lack Of Access to Capital

Answer 5

Many developing countries have unstable financial systems, preventing individuals from accessing loans to start up companies, therefore preventing full employment of enterprise. Preventing a country from producing at its full output potential.

Question 6

How can the lack of capital access be overcome?

Answer 6

Microfinance Schemes

Providing small loans to individuals

But as very few pay back their microfinance loans, the interest rates are very high to allow the lender to profit

Question 7

VIETNAM CASE STUDY

Answer 7

GINI COEFFICIENT- 0.361
HDI VALUE - 0.726

Question 8

What is the Lewis Model?

Answer 8

In an economy that is purely agricultural based, diminishing marginal returns set in.

This causes a surplus of Labour which attracts these individuals to the manufacturing sector (with higher wages)

Therefore, more workers start entering the manufacturing sector as they incentivised by higher wages, causing the manufacturing sector to grow and making the economy industrialised