OCR A Level Economics: The financial sector in developing and emerging economies (H460) – Revision Notes

These notes condense the topic The financial sector in developing and emerging economies from the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessed in 2021. It sits in Component 2, Macroeconomics (H460/02). Full explanations and longer worked examples are in the study guide. Test yourself with the practice set, then use the OCR Economics hub, the printable checklist and the free diagnostics. All figures are invented for illustration.

Key terms

Term	Meaning
Financial sector	Institutions and markets that move funds from savers to borrowers
Financial exclusion	People or small firms with no access to formal finance
Savings ratio (s)	Saving as a proportion of national income
Capital-output ratio (k)	Extra capital required for each extra unit of output
Savings gap	Investment needed for a target growth rate minus domestic saving
Microfinance	Small loans, savings and insurance for poor people and tiny firms
Portfolio investment	Buying shares or bonds abroad
Foreign direct investment	Buying or building productive assets abroad
Sudden stop	A sharp fall in capital inflows
Debt service ratio	Debt repayments (principal and interest) as a share of export earnings
Remittances	Money sent home by migrants working abroad

1. Role in development: five points

1. Mobilise saving in safe, convenient forms.
2. Allocate funds to the most productive investment.
3. Provide credit to households and small firms.
4. Spread risk through insurance and diversification.
5. Provide payments and links to foreign finance.

Limits. Financial exclusion, informal lending at high rates, lending concentrated on the government or a few large firms, weak regulation and crises.

Chain. More safe saving, then more lending, then more investment, then a bigger capital stock, then higher potential output, then incomes and jobs. Development also needs fair access and gains in health and education.

2. Harrod-Domar

Formula	Rearranged
g = s / k	s = g × k
Investment needed = g × k × income	Savings gap = investment needed − saving

Method in steps

1. Write g, s and k as decimals.
2. Use g = s / k to find growth, or s = g × k to find the saving needed.
3. For a gap, find investment needed and subtract saving.
4. State how the gap could be filled (aid, FDI, borrowing) or reduced (lower k, higher s).

Reminder. If s = 10% and k = 2.5, then g = 0.10 / 2.5 = 4%. To reach 7% the economy needs s = 0.07 × 2.5 = 17.5%.

Strengths and weaknesses. It is simple and shows the role of saving. But it assumes all saving is invested, ignores skills, institutions and infrastructure, and treats k as fixed.

3. Microfinance

• Features: small loans, group guarantees instead of collateral, frequent repayments, often aimed at women.
• For: access to credit, income smoothing, micro-enterprise investment, a route into the formal sector.
• Against: high interest rates, over-indebtedness, loans used for consumption, little growth in tiny firms, no substitute for infrastructure or jobs.

Method for judging a loan. Compare the return on the project with the cost of the loan. Reminder: a rate of 2% a month is 24% a year if simple, and 26.8% a year if compounded (1.02 to the power 12 is 1.268). Always state whether a rate is monthly or annual.

Judgement line. Useful where there is real demand for small-scale capital and fair terms, but not a main route to economy-wide development.

4. Capital flows and international financial markets

Form	Stability	Main risk
FDI	Most stable	Profits sent abroad, foreign control
Portfolio investment	Volatile	Quick withdrawal, bubbles
Bank lending	Often cut quickly in a crisis	Debt, sudden stop

• Pull factors: high expected returns, growth, stable politics, open markets.
• Push factors: low returns and interest rates in rich economies, investors’ appetite for risk.
• Inflow gains: finance, technology, deeper markets.
• Inflow costs: currency appreciation, asset bubbles, external debt.
• Outflow effects: currency falls, foreign-currency debt costs more, interest rates may rise.

Reminder. Foreign debt is 10 units. The exchange rate moves from 4 to 5 local units per unit of foreign currency. Local-currency cost rises from 40 to 50, up 25%.

Judgement line. Global markets strongly influence the size and timing of flows, but domestic institutions, policy credibility and reserves decide who benefits and who is hurt.

5. Public and private sector debt

Measure	Formula
Debt-to-GDP ratio	Debt / national income × 100
Debt service ratio	Repayments / export earnings × 100
Interest burden	Interest payments / government revenue × 100

Reminder. Debt of 80 and income of 200 gives 40%. Interest of 4 on revenue of 25 is 16%.

Rule of thumb. With no primary surplus, the debt ratio rises when the interest rate is above the growth rate of national income.

• Public debt: can fund infrastructure; heavy debt service crowds out health and education, may force tax rises or cuts.
• Private debt: can fuel booms and banking crises; the government may take on the losses.
• Currency of borrowing: foreign-currency debt is exposed to depreciation.
• Judgement line: debt is a problem when its cost is above the growth it creates.

6. Remittances

• Definition: transfers from migrants abroad to households at home.
• Benefits: raise recipients’ income, may fund education, health and small businesses, help the balance of payments, often steadier than portfolio flows.
• Costs: currency appreciation, dependence, brain drain, transfer fees, falls in a downturn abroad.

Reminder. An 8% fee on a transfer of 150 costs 12, so 138 arrives.

Judgement line. Most important where remittances are a large share of national income and reach poor households.

Evaluation toolkit

Use these questions to turn description into judgement on any topic above.

• Time. Is the effect short run or long run? Capital inflows help investment at once, but reversal can hurt later.
• Size. Is the flow large relative to national income? A remittance share of 9% matters more than one of 1%.
• Form. Is the debt in local or foreign currency, and is the inflow FDI or portfolio?
• Use. Was the money spent on investment that raises output, or on consumption?
• Who gains. Do the poor, women and small firms benefit, or only large firms and city residents?
• Institutions. Are regulation, property rights and policy credibility strong enough to turn finance into development?

End with a judgement that names the condition on which it depends, for example: “microfinance supports development where loan returns exceed the interest rate and repayments are affordable”.

Must-know distinctions

• Savings ratio versus savings gap. The ratio is a rate; the gap is a quantity of investment not funded by domestic saving.
• FDI versus portfolio investment. Productive assets and long term versus shares and bonds that can be sold quickly.
• Public versus private debt. Owed by government versus owed by firms and households.
• Debt-to-GDP versus debt service ratio. Size of debt relative to income versus the burden of repayments relative to export earnings.
• Remittances versus aid. Private transfers between people versus official transfers between governments.
• Growth versus development. Higher output versus wider gains in living standards.

Quick self-test

1. An economy has s = 20% and k = 4. What is g?
2. With k = 4, what savings ratio is needed for 5% growth?
3. National income is 300, target growth is 6%, k = 2.5 and s = 12%. Find the savings gap.
4. Debt is 90 and national income is 150. What is the debt-to-GDP ratio?
5. Repayments are 12 and export earnings are 80. Find the debt service ratio.
6. Remittances of 15 reach an economy with national income of 250. What share of income?
7. A 5% fee is charged on a transfer of 300. How much arrives?
8. Foreign debt of 10 units; the exchange rate moves from 4 to 5 local units. By what percentage does the local cost rise?
9. Define microfinance in one sentence.
10. Give one push factor behind capital flows to emerging economies.
11. Why is FDI usually more stable than portfolio investment?
12. When does the debt ratio rise if there is no primary surplus?

Answers

1. 0.20 / 4 = 5%.
2. s = 0.05 × 4 = 20%.
3. Investment needed = 0.06 × 2.5 × 300 = 45. Saving = 0.12 × 300 = 36. Gap = 9 units.
4. 90 / 150 × 100 = 60%.
5. 12 / 80 × 100 = 15%.
6. 15 / 250 × 100 = 6%.
7. Fee = 15, so 285 arrives.
8. Cost rises from 40 to 50: (50 − 40) / 40 = 25%.
9. Small loans, savings and insurance for poor people and tiny firms that banks usually exclude.
10. Low interest rates or weak returns in advanced economies (or investors’ greater appetite for risk).
11. It is tied to productive assets such as factories, which cannot be sold quickly, whereas shares and bonds can.
12. When the interest rate is above the growth rate of national income.

Where marks are usually lost

• Writing g = s × k, or forgetting to turn percentages into decimals.
• Giving the savings gap as a percentage when the question asks for units, or the reverse.
• Mixing monthly and annual interest rates.
• Calling the debt-to-GDP ratio high or low without the interest rate, growth rate and currency of borrowing.
• Listing benefits of capital inflows with no mention of reversal risk.
• Treating all capital flows as the same, with no distinction between FDI and portfolio flows.
• Describing remittances as aid.
• Ending evaluation with “it depends” and no stated condition.

Official syllabus

These notes follow the OCR A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, published by OCR (Oxford Cambridge and RSA Examinations).