Summary
Summary A Level - International Development Theory
- Institution
- PEARSON (PEARSON)
Summary of Theories and Conditions for international development relevant to the Edexcel economics A-level, A, specification.
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International EconomicsGlobalisation is increased economic integration between countries. It has been increasing at a
significantly faster pace over the last 50 years with the expectation of the period of the financial
crisis.
Foreign direct investment – when a company in one country establishes operations in another
country or when it acquires physical assets of stake in an overseas company.
There has been an increase in FDI in developing and transition economies with low change in
developed economies.
The savings gap – The harrod-domar model
The herodom model illustrates the probe of how countries with low GDP per capita wil experience
low savings rations. Low savings mean that it will be difficult to finance investments and therefore
capital accumulation will be limited. This will translate into low output and low GPD.
Primary Product dependency and commodity volitivity
Hard commodities are usually minor or extracted and are a type of primary product. There
are also soft commodities such as agricultural goods.
For countries with a large proportion of the economy which is sectoral structured at
producing and exporting primary products, then it will suffer from:
Flu cations in foreign exchange earnings – revenues form exports of primary products will
fluctuates depending on exchange rates making it more difficult for the government to plan
economic development.
- They will face protectionism by developed countries which makes exporting relatively more
costly. This is because developed countries have higher labour costs which therefore make
them less agriculturally competitive for the most part. As a result there will be tariffs to
protect domestic farmers which will therefore reduce demand for imports of agricultural
products from developing countries.
- Shortages of supplies for domestic consumption – cash crops are usually exported meaning
that there is little left for domestic consumptions.
- Extreme price fluctuation – since both the supply den demand for primary products tend to
be inelastic any changes in supply conditions and conditions of demand will cause large price
fluctuations
- Fluctuations in producers revenues resulting form prices fluctuations – this makes it difficult
for the government to plan investment and development
The Prebisch-Siner hypothesis
The demand for primary products tends to be income inelastic whereas the demand for
manufactured goods is income elastic
Therefore, as real incomes rise, the demand for manufactured goods ill increase at a faster rate than
the demand for primary products. As a result the prices of manufactured goods will rise more quickly
than the prices of primary products and consequently the terms fo trade of developing countries will
fall relative to those of developed countries.
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