Factors Influencing Growth & Development
Factors Influencing Growth & Development
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Factors influencing Growth & Development
1. Savings Gap – the Harrod-Domar Model
The Harrod-Domer Model illustrates how countries with a lower GDP per head are likely to experience more difficulty in financing investment due to their low savings ratio. This results in a reduced capital accumulation.
However, this model focuses on physical capital and disregards the significance of human capital. It also bases its theory off the assumption that there is a constant relationship between capital and output
2. Primary Product Dependency and Commodity Price Volatility
Primary Product Dependency occurs in countries where a large proportion of its GDP is made up from its primary products.
There are two types of primary product which are Hard Commodities and Soft Commodities.
The Prebisch-Singer Hypothesis – suggests that the demand for primary products tends to be income inelastic in comparison to the demand for manufactured goods which is income elastic. Consequently, an income rise will lead to the demand for manufactured goods increasing at a much faster rate than the demand for primary products. This results in the price of manufactured goods rising.
3. Foreign Currency Gap
Countries may face a shortage of foreign currency which will restrict them purchasing imported capital goods needed to increase productive capacity.
Insufficient foreign currency may be caused as a result of dependency on the export of primary products, dependency on the import of manufactured goods, or capital flight which occurs when assets or money are taken out of a country.
4. Volatility of Commodity Prices
Small changes in the demand and supply of primary products tend to lead to huge price fluctuations due to inelastic demand and supply curves
Consequently, producer’s income and a country’s earning will fluctuate rapidly, making it difficult to plan ahead and consider long-term investment
5. Education / Skillsets
Levels of literacy and numeracy are likely to be low if the School Enrolment Ratio is low which will act as a deterrent to FDI and result in a lower productivity of the workforce
6. Demographic Factors
GDP per head is likely to decline in areas where the growth of population is greater than the growth of GDP
7. Infrastructure
Poor infrastructure is likely to discourage Domestic Investment and Foreign Direct Investment from occurring
8. Debt
The burden of debt will increase if the value of currencies in developing countries decrease
9. Capital Flight
Instead of large amounts of money being left in banks for people to borrow / invest, they are taken out of the country, as an indication of the country’s poor economic stability
10. Access to credit and banking
Less developed countries have restricted access to credit and banking in comparison to developed countries. Consequently, it can be harder for developing countries to access funds for investment as well as save for the future
11. Absence of Property Rights
A lack of Property Rights indicates that it is harder for individuals and businesses cannot protect their assets using the law, leading to reduced investment
The Impact of Non-Economic Factors in different countries
- Corruption – which causes an inefficient allocation of resources, capital flight, a decrease in the FDI and an increase in the cost of doing business in the country
- Poor governance, civil wars and political instability – a weak government is likely to cause government failure and an inefficient allocation of resources, resulting in a net welfare loss
Quick Fire Quiz – Knowledge Check
1. Identify seven factors affecting Growth and Devlopment (7 marks)
2. Explain how the ‘Savings Gap’ theory affects Growth and Development (4 marks)
3. Explain how the ‘Primary Product Dependency and Commodity Price Volatility’ theory affects Growth and Development (6 marks)
4. Explain how the ‘Foreign Currency Gap’ theory affects Growth and Development (3 marks)
5. Explain how a lack of education affects Growth and Development (3 marks)
6. Explain how infrastructure affects the Growth and Development in a country (2 marks)
7. Explain how demographic factors affect the Growth and Development in a country (2 marks)
8. Explain how debt affects the Growth and Development in a country (2 marks)
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