Edexcel A Level Economics A:复习笔记4.3.2 Factors Influencing Growth & Development

Primary product dependency

• In 2022 copper exports from Zambia accounted for 70% of their total exports & primary products in excess of 90%. They are suffering from over-specialisation
• Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less than proportional increase in demand
  • This means that there is limited scope to continue increasing demand
• Primary products have very little added value
  • Exporting manufactured products raises the added value, incomes & profits

Volatility of commodity prices

• Due to the inelastic nature of both the demand & supply of commodities, small changes in demand or supply can lead to large changes in price
• In 2020, 25% of Bolivia's GDP was generated by exports. Commodities accounted for 60% of its exports
  • When commodity prices rise, GDP rises - & vice versa
• A more diversified range of exports prevents this

The savings gap: Harrod-Domar model

• In the 1950's two economists identified the savings gap as a major constraint on growth
• The Harrod-Domar model identified the following benefits of increased savings
  • Increased savings → increased investment → higher capital stock → higher economic growth → increased savings
• Based on this, any intervention (foreign or governmental) to increase the capital stock in an economy will lead to growth
• There are many criticisms of the model including
  • It does not account for many other factors such as labour productivity, corruption, technological innovation
  • It was created based on data from wealthier industrialising nations as opposed to very poor undeveloped countries
  • It focused only on physical investment & ignored other types such as investment in human capital (labour)

The foreign currency gaps

• Foreign currency gaps develop for a number of reasons
  • Oil importing countries have to pay more (reserves decrease) when world oil prices rise whereas oil exporting countries receive less (less flowing in) when world oil prices fall
  • Large international debt payments may require continual outflows of currency
  • Capital flight due to uncertainty or sanctions
• This means that central banks are forced to use their reserves to buy vital imports
• Developing a diversified, healthy export market prevents foreign currency gaps from developing

Capital flight

• Occurs when money or assets rapidly leave a country
• This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates)
  • Sanctions applied to Russia in 2022 resulted in $75 billions of capital outflows
• Capital flight reduces the money available for investment, reducing growth & development

Demographic factors

• If the dependency ratio is high it means there is less money available for savings & investment
• Many developing countries have high dependency ratios

Access to credit & banking

• Financial institutions enable individuals & firms to borrow money which can be used for investment or to generate growth
• A lack of financial institutions prevents this from happening

Infrastructure

• Good infrastructure reduces business costs & attracts foreign direct investment
• Some developing countries have such poor infrastructure that it makes it difficult to generate economic activity
  • This is one reason why China has invested so heavily in infrastructure projects in Asia & Africa as it unlocks economic potential

Education & skills

• Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)
• Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

Absence of property rights

• In many countries, property is the main household asset which can be used to secure loans or generate income
• A lack of property rights in some developing countries prevents this from happening