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

Economic Factors That Influence Growth & Development

  • Data shows that economic growth has a very positive impact on economic development
  • In most cases growth precedes development, but his is not always true e.g. Bangladesh used a range of strategies (including micro-finance) to transform the quality of life for many households
  • In some cases (usually in developing countries) economic growth is tied to one industry & generates so many negative externalities of production that the standard of living decreases for many even as growth increases

Economic factors That Influence Growth & Development

Factor Explanation

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




  • 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


Impact of Non-economic Factors

  • Aside from the economic factors discussed above, a range of non-economic factors can have significant influences on economic growth & development
  1. Corruption: this is a major problem in many countries. Often money intended for investment is siphoned off by corrupt politicians resulting in a lower level of investment. Corruption also diverts funds to certain groups who have bribed or lobbied officials (e.g. multinational firms) resulting in projects that deliver a low level of growth & development
  2. Poor Governance: leads to inefficient use of resources & poor decision-making. It may also result in laws/regulation which directly inhibit growth & development
  3. Wars: conflict destroys infrastructure, disrupts supply chains & often reduces the post war supply of labour. Conflict shifts the production possibility curve inwards
  4. Political instability: if governments keep changing, it results in constantly changing policies & priorities. It also reduces confidence in the economy & international investors are slower to invest as they are fearful of losing their investment
  5. Geography: it is harder for landlocked countries to generate economic growth. Often transportation & administration costs are higher than those with access to ports, which increases the costs of production & decreases international competitiveness. Natural terrain can also be a limiting factor e.g the arid, mountainous terrain of Pakistan