Macro 19 : Economic Growth and Development Flashcards
Common Characteristics of Developing Countries?
1) Low standards of living (low incomes, poor job creation, high poverty)
2) Low levels of productivity (lack of investment, lack of availability of capital)
3) Low levels of savings (lack of financial institutions, minimum understanding of where and why to save, also incomes are so low)
4) High population growth (more children working = more money for family)
5) Primary sector dominance –agriculture (cheaper capital needed)
6) Incomplete market (lack of property-rights “IRAN” + few financial sectors)
7) High unemployment / underemployment (low investment in primary sector, inadequate education,)
8) Low economic power on the international stage (can’t manipulate international situations to suit them: can’t find a way to reduce tariffs, advance trade relations, or gain financial help, etc)
Harrod-Domar model?
The Harrod-Domar model says that the growth rate of an economy is directly linked to:
- the level of saving in the economy,
- the efficiency with which the capital in the economy can be used.
If either of these factors can be increased , then economic growth should be faster.
Primary product dependency:
(effects developing countries)
- Low V/A (cannot charge a lot)
- Over-time the prices of commodities are falling.
- Resources may be finite
- High tariffs (effects export performance)
Regular demand shifts (macro performance) and Supply shifts (weather):
- PED is inelastic so change in demand has a big effect on price. (necessities, lack of subs)
- PES is inelastic (in S.R.). (hard to store, production lag)
^Volatile prices so earnings and incomes^ are volatile = uncertainty = planning difficulty = low FDI/investment.
Price rises are good for developing countries = more revenue for investors + more tax revenue.
Savings gap:
(effects developing countries)
In developing countries, achieving high rates of economic growth is crucial for reducing poverty and improving living standards. However, these countries often face a Savings Gap because their domestic savings are insufficient to finance the level of investment needed to achieve the desired growth rate.
Factors Contributing to the Savings Gap:
- Low Domestic Savings Rate: Developing countries often have low levels of domestic savings due to low income levels, limited access to banking services, and high MPC’s.
Dutch Disease:
(effects developing countries)
Refers to the problems that can be caused by the increased exploitation of natural (primary) resources which leads to a decline in other sectors of the economy.
Short term impact:
- Currency appreciation (increase in foreign investment + hot-money-flows)
- Loss of international comp.
- Increased imports of normal + luxury goods
- Increase in tax revenue
- Industrialization of other sectors
- Income inequality (caused industrialization + lack of price comp.)
Long-term impact:
- Unemployment
- Worsening fiscal budget
- Manufacturing sector diminishes
- Current account deficit
Diversification is needed to negate the negative impacts.
^This can be difficult if a developing nation has already focused it’s FOP’s on this commodity – factor immobility may make it difficult to develop other industries.
Aid versus Trade - model analysis and evaluation:
https://docs.google.com/document/d/1z3_tKmbBPCPtXw7fLoxHWCNc93mOf2-eKY6TLvjJEHg/edit
Trade Policies to promote Development?
1) Import controls (Tariffs)
2) Export promotion (Subsidies)
3) Artificially high exchange rate (selling reserves)
4) Bilateral Trade Agreement
5) Diversification
Import controls (Tariffs)? ADV/DVNTG
+ Protect infant firms
+ Reduces reliance on FDI
- Short term job creation vs Long-run unemployment + decreased growth –> (ledc’s require expensive cap.)
- Loss of comparative adv (if tariff on eff. country)
- Retaliation
Export promotion (Subsidies)? ADV/DVNTG
+ Exploit comparative advantage –> benefit of PPD
+ Rev generated = technological advancement = move away from PPD
- Protectionism abroad?
- Income inequality –> trickle down effect?
- Requires funds –> opportunity cost
Artificially high exchange rate (selling reserves)? ADV/DVNTG
+ Imports cheaper
- Need foreign currency
Bilateral Trade Agreement? ADV/DVNTG
+ Larger market access =
) eos –> greater specialisation
) increased comp –> efficiency
+ Low transport costs
- Coincidence of want’s (similar trade) = increased cost of production –> trade diversion
5) Diversification? ADV/DVNTG
+ Protect against volatile prices of primary products
+ New technology (emerging firms) –> diverse portfolio = reduce risk. + motivates high skilled labour + study.
- Tariff escalation (increases on tech)
- Highly skilled workforce needed
Whats is “Tied Aid”?
Aid sent on the condition that it is spent in a particular way (e.g. developing agriculture sector).
Different types of aid?
Humanitarian aid – Food, Medical, Emergency.
Development Aid – Loans, Tied aid, Project aid, Commodity aid, Technical.
Benefits of aid?
- Improvement in human capital
- Helps fill the savings gap + Meet Harrod-Domer model
- Multiplier effect
