Theme 4: Factors influencing Growth and Development

Question 1

Name as many as you can of the factors influencing growth and development?

Answer 1

1. Education
2. Political factors
3. Infrastructure
4. Technology
5. Absolute poverty
6. Income distribution
7. Access to credit and banking (inc microfinance)
8. Demographic
9. Trade
10. Commodities
11. Savings Gap
12. Debt
13. FDI
14. Remittances
15. Gender issues

Question 2

Why does a poor education constraint growth?

Answer 2

Poor education means they have low levels of human capital which makes them less productive. Low productivity will shift the long run aggregate supply curve to the left which will limit economic growth.

Question 3

What are the two impacts of a poor education?

Answer 3

1. Low productivity
2. Low incomes for workers

Question 4

What are the effects of higher productivity?

Answer 4

1. Shift to the right LRAS
2. increasing economic growth
3. increase tax revenue
4. Increase government spending

Question 5

Why might increasing years of education not cause economic growth?

Answer 5

They wont work for their families decreasing income. Reducing consumption which will decrease AD.

Those in higher education might not be able to get a higher education job.

Question 6

Human capital?

Answer 6

When workers don’t have the necessary knowledge, skill or assets to be productive.

Question 7

Why does corruption contribute to low level of development?

Answer 7

As there will be lower levels of investment and so lower output. If widespread better to seek a position where you can take bribes than one where there is genuine output of goods and services.

Question 8

What is rent seeking?

Answer 8

Behaviour that attempts to gain a share of an existing pot of income or wealth rather than creating higher income or wealth.

Question 9

Why can improvements in infrastructure contribute to economic growth?

Answer 9

It means more goods and services can be produced increasing output.

Question 10

Why might the effects of improving infrastructure not be entirely positive?

Answer 10

It conflicts with environmental goals.

Building infrastructure eg building a new motorway, will leave less land available for agriculture or other uses.

Question 11

What are the 2 ways technology impacts level of development?

Answer 11

It can improve many aspects

eg flushable toilets, so improves health and living standards

eg machinery, so improve productivity.

Question 12

Why might improvements in technology not always lead to improved development?

Answer 12

Individuals need sufficient human capital to use the machinery.

Question 13

Why is absolute poverty a hindering factor to development?

Answer 13

Malnutrition can lead to early death and therefore loss of any potential output and a waste of any skill or education.

Malnutrition can also inhibit brain development which would likely lead to loss of human potential.

Easily preventable deaths can also lead to more complex issues eg HIV/AIDs can have a severe effect on the economy.

Question 14

Why does income inequality often lead to low levels of development?

Answer 14

Fewer children will go to school so they will have lower human capital.

Reduced incentive to work as those at the bottom of the income range will receive less.

Question 15

Why could it be argued that lower incomes will encourage saving and therefore investment?

Answer 15

As the marginal propensity to save increases as their incomes rise, as more at top end more savings.

Question 16

Why is access to credit and banking finance important to developing countries?

Answer 16

As without a banking systems they may be reliant on loan sharks which with their high interest rates. Leading to people being permanently in debt.

Question 17

How has the growth of microfinance lead to development?

Answer 17

Very small loans are given to individuals who would otherwise not have access. In the situation of a group so peer pressure encourages them to use the loan responsibly. Allowing them to start up businesses or invest in ones they already own.

Question 18

How can a high birth rate lead do low levels of development?

Answer 18

As the large number of young people puts a pressure on the education system often leading to under skilled workers.

Question 19

How has international trade influence growth and development?

Answer 19

Developing countries have been able to produce and trade goods they have a comparative advantage in due to their lower cost of labour.

Question 20

What is the resource curse?

Answer 20

When there is an abundance of natural resources in a country and they are exploited, but where there is consequently little increase in economic development.

Question 21

Why can reliance on commodities cause constricted economic growth?

Answer 21

1. Fluctuating commodity prices- difficult for firms and governments to predict their revenues in the short and long term. Which can discourage investment.
2. As world incomes rise, demand for manufactured goods and services will rise faster than for commodities.
3. The Dutch Disease- When demand for one export in a country increases significantly leading to the currency to appreciate however, this means that other goods become less internationally price competitive.

Question 22

What are the key variables in economic growth according to the Harrod-Domar growth model?

Answer 22

Investment, saving and technological change.

Question 23

What are the 2 policy implications of the Harold-Domar model?

Answer 23

1. Increase the savings ratio which will increase the rate of economic growth.
2. Increase technological progress that allows more output to be produced from a single unit of that capital.

Question 24

What is the savings gap?

Answer 24

The difference between the actual levels of saving in an economy and the level of savings needed to finance the investment required for a higher rate of economic growth.

Question 25

How can developed countries help developing countries out of the cycle of low savings, low investment and low economic growth.

Answer 25

Foreign countries can give foreign aid to help fill the savings gap

Question 26

What can foreign aid be used to do?

Answer 26

1. Fill the savings gap
2. Fill a foreign exchange gap

Question 27

What is a foreign exchange gap?

Answer 27

The difference between the actual level of exports and the level of exports needed to create higher economic growth in an economy.

Question 28

What is capital flight?

Answer 28

When savings are sent abroad by citizens and firms of a country to another country which is either seen as more secure or where money can be hidden from government authorities.

Question 29

Why might foreign aid not always benefit those who need it?

Answer 29

Due to corruption through the bribery of officials or used to finance arms rather than something that would improve productvity.

Question 30

How can international debt be harmful and counter the initial intention?

Answer 30

As if the country in which they borrowed from’s currency appreciates those countries may end up paying much more than they borrowed in the other countries currency.

Question 31

What is an advantage and a disadvantage of FDI to growth and development?

Answer 31

1. Advantage- Creates jobs and improves knowledge and skill in a country
2. Disadvantage- become dependant on the activity of foreign firms

Question 32

How can remittances impact growth and development?

Answer 32

They can increase the GDP within a country and act as a form of Aid. They allow otherwise unemployed workers to have a job.

Question 33

Why are remittances the second best solution in an economy?

Answer 33

Workers being employed in high value jobs in their own countries is the best option. As it shows major labour market problems in an economy.

Question 34

Why are gender issues a problem for growth and development?

Answer 34

1. Reduced GDP from what it could otherwise be.
2. Disempowers so they play a less effective role in the home or in the workplace.
3. If the mother is more educated she can teach her children and they will be educated to a similar standard.