4.3.2 Factors influencing growth and development Quiz: Pearson Edexcel Economics A, Unit 4

The 20 questions

1. What is meant by primary product dependency in a developing economy?

   • The share of the population working in government administration, which is measured as a percentage of total employment
   • A situation in which the economy has no primary sector at all and relies entirely on manufacturing exports
   • Heavy reliance on exports of a few raw materials or agricultural products, which leaves export income exposed to price shocks
   • A policy of importing all primary goods, so that domestic farms and mines are closed to protect consumers

2. Why is the volatility of commodity prices a problem for developing economies?

   • Volatile prices reduce the price of imports, which always makes developing economies more stable and predictable
   • Volatile prices always raise export revenue in the long run, since commodity prices tend to rise each year without fail
   • Unstable export revenues make it hard to plan investment, government spending and imports, and can cause sharp swings in income
   • Volatile prices have no effect on incomes, because commodity exporters are protected from all price changes by law

3. In the Harrod-Domar model, growth rate = s / v. If the savings rate s is 0.2 and the capital-output ratio v is 4, what is the growth rate?

   • 0.8 per cent, since 0.2 multiplied by 4 gives the growth rate directly in percentage terms
   • 20 per cent, since the savings rate of 0.2 is the growth rate when expressed as a percentage
   • 25 per cent, since 4 divided by 0.2 gives the growth rate of output in each period of the model
   • 5 per cent, since 0.2 / 4 = 0.05

4. A developing country needs an investment rate of 25 per cent of GDP to reach its growth target but saves only 15 per cent. What is its savings gap?

   • 15 per cent of GDP, since the savings gap is always equal to the domestic savings rate in the model
   • 40 per cent of GDP, since the savings gap is the sum of the investment and savings rates
   • 1.67 per cent of GDP, since the savings gap is the ratio of investment to savings in the economy
   • 10 per cent of GDP, since investment needed less domestic savings gives 25 - 15

5. What is a foreign currency gap in development economics?

   • A surplus of foreign exchange from aid, which causes the currency to appreciate too rapidly for exporters
   • A shortage of foreign exchange from exports, which limits the imports of capital goods needed for growth
   • A gap in the number of foreign students studying in the country, which affects the stock of human capital
   • A difference between the price of domestic goods and the price of goods in foreign markets each year

6. What is capital flight?

   • The movement of physical capital such as machinery between countries to take advantage of cheaper labour costs
   • The fall in the price of shares on a stock exchange when a company announces a large fall in profits
   • The rapid outflow of financial capital from a country, often due to political or economic instability
   • The rapid inflow of financial capital into a country, which is always accompanied by a rise in the exchange rate

7. Which demographic factor is most likely to slow growth and development in a low-income economy?

   • A very rapid rise in population that increases the number of dependants and spreads resources more thinly
   • A falling population, because a shrinking workforce always raises productivity and wages in the economy
   • A stable population with a high share of working-age people who are fully employed in productive activities
   • A large number of older people who are fully employed and who save a high proportion of their income each year

8. Why can high levels of foreign debt hinder economic development?

   • Debt always increases the productivity of the economy, because borrowed money is always invested in highly productive projects
   • Debt is repaid automatically by the lender, so it has no effect on the government's budget or its spending plans
   • Debt service absorbs export earnings and budget resources, leaving less for investment in health, education and infrastructure
   • Debt has no effect on development, because foreign loans are always recorded as income in the current account

9. Why is access to credit and banking important for development?

   • It always increases the risk of default for households, so it reduces the level of investment in the economy
   • It allows households and small firms to invest, smooth consumption and start businesses that raise productivity
   • It only benefits large foreign companies, because domestic households and small firms cannot access formal credit at all
   • It is unimportant for development, because all investment in a developing economy is funded directly by the government

10. Which factor is most likely to limit growth through poor infrastructure?

    • High transport and energy costs that raise the cost of production and make it hard to reach markets
    • Low costs of transport and energy, which make it cheap for firms to reach domestic and international markets
    • Good roads and ports, which allow goods to be moved cheaply and so raise the costs of production for firms
    • An abundance of power supply, which causes firms to waste resources and so reduces their productivity levels

11. Why is education and skills development important for economic growth?

    • It raises the productivity of the workforce, allowing firms to adopt better technology and produce higher value goods
    • It lowers demand for goods, because better educated workers save more and spend less in the domestic economy
    • It reduces productivity, because educated workers always demand higher wages that firms cannot afford to pay
    • It has no effect on growth, because productivity depends only on the number of machines a worker is given

12. What is the effect of an absence of property rights on development?

    • It has no effect on investment, because investment depends only on the price of goods and not on legal protection
    • Investors have a stronger incentive to invest, since there are no legal limits on what they may do with their assets
    • It raises the value of assets, because uncertain ownership always increases the price that buyers will pay for them
    • Investors have less incentive to invest, since they cannot secure returns from land, businesses or assets they own

13. Which non-economic factor can hold back growth in a developing country?

    • A high level of trust in public institutions, which allows firms to plan investment with confidence and certainty
    • Political instability and conflict, which can deter investment and disrupt production and trade
    • A stable democratic system with strong institutions, which reduces the risk to foreign investors in the economy
    • Low levels of corruption, which reduces the cost of doing business and so encourages firms to invest

14. Which is an impact of primary product dependency that makes export income volatile?

    • Export earnings are protected from all shocks, since primary goods are always sold on long-term fixed-price contracts
    • Export earnings depend on world demand and prices for a few goods, so swings in those markets feed directly into incomes
    • Export earnings have no effect on government revenue, since governments in developing economies never collect export taxes
    • Export earnings rise steadily each year, because demand for primary goods grows at a fixed rate in every market

15. What is the likely effect of a large foreign debt and falling export prices on a developing economy?

    • No effect on the economy, because debt and export prices are unrelated and never interact in any country
    • A rise in foreign exchange earnings, since falling export prices always increase the value of export revenues
    • A squeeze on foreign exchange, making it harder to service debt and import the capital goods needed for growth
    • A fall in the burden of debt, because lower export prices automatically reduce the interest the country must pay

16. Which statement best evaluates the Harrod-Domar model as an explanation of growth in developing countries?

    • It highlights the role of saving and investment, but it ignores technology, institutions and the efficiency of capital use
    • It is a complete model of growth, since it explains all differences in growth between countries using only the savings rate
    • It shows that growth depends only on population size, so saving and investment have no influence on output
    • It is unrelated to growth, because it deals only with the distribution of income in the economy and not with output

17. Which of these is a non-economic factor affecting growth?

    • The level of interest rates set by the central bank, which is determined entirely by domestic political concerns
    • The strength of institutions and the rule of law, which affect confidence in contracts and investment
    • The volume of exports of primary goods, which is always measured in economic rather than social terms
    • The rate of inflation, which is always a purely economic variable with no link to institutions or social factors

18. Which is an example of primary product dependency?

    • A country whose exports are mainly high-tech electronics produced by many firms across a range of sectors
    • A country whose export earnings come mainly from coffee and copper, with little manufacturing for export
    • A country whose economy is based mainly on financial services provided to businesses across the world
    • A country whose exports are largely tourism and education services delivered to foreign customers each year

19. A country's savings rate is 0.12 and its capital-output ratio is 3. Using the Harrod-Domar model, what is its growth rate?

    • 36 per cent, since 0.12 multiplied by 3 gives the growth rate directly in percentage terms
    • 4 per cent, since 0.12 / 3 = 0.04
    • 12 per cent, since the savings rate alone sets the growth rate in the Harrod-Domar framework
    • 0.25 per cent, since 3 divided by 12 gives the growth rate after converting the savings rate to a percentage

20. Why can a savings gap and a foreign currency gap bind at the same time in a developing economy?

    • Both gaps are closed automatically by a fixed exchange rate, which guarantees sufficient savings and export earnings
    • Both gaps are caused by a rise in government spending, which always removes all constraints on growth at once
    • Low domestic savings limit investment, while low export earnings limit the imports of capital goods that investment needs
    • High domestic savings always raise export earnings, so the two gaps can never exist together in one economy

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