OxfordAQA A-level Economics: Factors that affect economic development (9640) – Revision Notes

Condensed notes for section 3.4.3.2, Factors that affect economic development, in the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. This is extra International A2 content (section 3.4, assessed in Unit 4). Full explanations and worked examples are in the study guide; test yourself with the practice questions. Also see the OxfordAQA Economics hub, the printable checklist and the free diagnostics. All figures are invented and illustrative.

Key terms

Term	Meaning
Physical capital	Machinery, buildings and infrastructure used to produce goods and services
Infrastructure	Roads, ports, power, water, communications that support many industries
Saving and investment	Saving is income not consumed; investment adds to the capital stock
Capital-output ratio (k)	Units of capital needed for one extra unit of output
Human capital	Skills, knowledge and health of the workforce
Dependency ratio	Non-working-age population per 100 of working age
Primary product dependency	Reliance on agricultural goods, minerals or fuels for most export earnings
Terms of trade	Export price index relative to import price index
Debt-service ratio	Interest and repayments as a percentage of export earnings
Property rights	Legally secure ownership that people can use, sell or pledge

Formulas

Measure	Formula
Harrod-Domar growth	g = s / k
Savings needed	s = g × k
Growth per head	about growth of GDP minus growth of population
Dependency ratio	(aged 0 to 14 + aged 65 plus) ÷ aged 15 to 64 × 100
Terms of trade	(export price index ÷ import price index) × 100
Percentage change in price needed	percentage change in quantity ÷ price elasticity (magnitude)
Debt-service ratio	debt service ÷ export earnings × 100
Debt to GDP	debt ÷ GDP × 100
Openness ratio	(exports + imports) ÷ GDP × 100
Top-to-bottom quintile ratio	share of top 20% ÷ share of bottom 20%

You do not need to derive the Harrod-Domar growth rate. You do need to use it and criticise it.

Method boxes

Harrod-Domar in steps.

1. Write g = s / k.
2. Put s and k in the same units (percent and a plain ratio).
3. Divide. To find the savings needed, multiply target g by k.
4. The savings gap is needed s minus actual s, times GDP.
5. State a limitation.

Reminder: s = 10% and k = 2.5 give g = 4.0%. If k falls to 2, g = 5.0%. For 4% growth at k = 2.5, s must be 10%.

Terms of trade in steps. Divide export index by import index, multiply by 100. Above 100 means each export buys more imports than in the base year; below 100 means less. For the volume needed to hold import purchases steady, divide the old ratio by the new.

A development factor chain. Factor → what it changes (saving, productivity, costs, risk, stability) → effect on output and incomes → effect on development (health, education, poverty, sustainability) → limits and conditions.

One page per factor

Capital and infrastructure. Raises productivity, lowers costs, attracts investment. Needs funding, maintenance and complementary skills. Poor transport can raise costs more than wages fall.

Saving and investment. Low income gives low saving, so low investment: a vicious circle. Ways out include foreign saving (aid, borrowing, FDI) and better financial systems. Saving must become productive investment.

Harrod-Domar. Growth rises with the savings rate and falls with k. Limitations: assumes fixed k, ignores technology, depreciation, skills and institutions, assumes saving becomes investment, and says nothing about distribution or the environment.

Financial services. Accounts, credit and insurance help households smooth income and firms expand. Limited access traps people in low-return activities. Over-borrowing and bank failures are risks.

Natural environment. Climate, land, water and minerals set opportunities; landlocked location raises trade costs. Natural disasters destroy capital. Resource wealth does not guarantee development.

Demographics. Dependency ratio, population growth, migration. Falling dependency may give a demographic dividend only if jobs exist. Fast growth dilutes capital per worker. Brain drain versus remittances.

Human capital and basic needs. Education and health raise productivity and earnings and are valuable in themselves. Returns are long-run; unemployed graduates waste the investment. Clean water and housing lift health and attendance.

Inequality. Can limit development by wasting talent, restricting credit-constrained investment, shrinking the market and fuelling instability. Counter: some inequality rewards effort and finances saving.

Kuznets curves. Inequality curve: Gini rises then falls with income. Environmental curve: pollution rises, peaks, then falls. Critiques: no automatic turning point; policy matters; pollution exported; some damage irreversible; mixed evidence.

Primary product dependency. Volatile prices (inelastic supply and demand) cause unstable incomes and tax revenue; low income elasticity limits long-run growth; few manufacturing spillovers.

Prebisch-Singer. Terms of trade of primary exporters fall over time because income elasticity of demand for primary products is lower than for manufactures. Critiques: mixed price data, commodity booms, diversification, low-value manufactures, the hypothesis is an average.

Foreign trade. Markets, technology, competition, foreign exchange; also exposure to world shocks.

Debt. Public and private. Helps if invested at returns above the interest cost; harmful with foreign-currency or variable-rate borrowing, falling export earnings, or waste. Budget deficit arguments for: investment, demand support. Against: interest costs, crowding out, inflation, debt trap.

Industrialisation and urbanisation. Higher productivity and agglomeration; risks are slums, congestion, pollution, informal work.

Institutions. Rule of law, property rights, governance, corruption, instability, war and conflict. Strong institutions make investment safe; corruption and conflict destroy capital and trust.

Evaluation prompts

• Short run or long run? Infrastructure and schooling take years; a debt crisis or crop failure acts at once.
• Size and scale: a small firm-level gain in finance access matters less than a national shock to export prices.
• Which is the binding constraint? If conflict stops investment, more saving changes little.
• Which country? A landlocked LEDC and a coastal emerging economy face different constraints.
• Who gains? Growth that leaves the poor behind may not count as development.
• Interrelated factors: better health raises the return on education, and secure property rights raise saving and borrowing.
• Sustainability: do gains today reduce well-being for future generations?

Answer structure for an extended question

1. Define the key term in one line.
2. Make a first point with a chain of reasoning: cause, mechanism, effect on development.
3. Add a second and third factor and link them.
4. Give a counter-argument or limitation with a reason, not just a word such as “however”.
5. Finish with a judgement tied to the case, saying what it depends on.

Must-know distinctions

• Savings rate (s) versus capital-output ratio (k): s is about funds, k is about efficiency.
• Capital widening (more capital as population grows) versus capital deepening (more capital per worker).
• Fluctuations in commodity prices (short run, supply shocks) versus Prebisch-Singer (long-run trend in relative prices).
• Growth versus development: a factor can raise GDP and still leave health, equality or sustainability behind.
• Debt level versus debt burden: compare debt-service ratio, interest rate and growth, not the raw total.

Quick self-test

1. A country has s = 24% and k = 4. Calculate the Harrod-Domar growth rate.
2. With s = 20% and a target of 5%, what capital-output ratio is consistent?
3. Calculate the dependency ratio when 12m are aged 0 to 14, 50m aged 15 to 64 and 8m aged 65 plus.
4. The export price index is 120 and the import price index 100. Calculate the terms of trade and state what has happened to them.
5. World income rises 3%. Calculate the change in demand for a product with income elasticity 0.6, and for one with 2.0.
6. Debt service is 8 and exports are 40. Calculate the debt-service ratio.
7. External debt is 36 and GDP is 80. Calculate debt to GDP.
8. Exports are 20, imports 25 and GDP 90. Calculate the openness ratio.
9. Demand has price elasticity −0.5 and supply falls 5%. Estimate the price change needed.
10. In question 9, supply falls 5% and price rises 10%. Calculate the change in revenue.
11. Top quintile share is 50% and bottom is 5%. Calculate the ratio.
12. Give two critiques of the environmental Kuznets curve.

Answers

1. 24 / 4 = 6.0%.
2. k = s / g = 20 / 5 = 4.
3. (12 + 8) / 50 × 100 = 40.0.
4. 120 / 100 × 100 = 120, an improvement of 20% on the base year.
5. 0.6 × 3 = 1.8%; 2.0 × 3 = 6.0%.
6. 8 / 40 × 100 = 20%.
7. 36 / 80 × 100 = 45%.
8. (20 + 25) / 90 × 100 = 50%.
9. 5 / 0.5 = 10% rise.
10. 0.95 × 1.10 = 1.045: revenue up 4.5%.
11. 50 / 5 = 10.
12. For example: no automatic turning point, and pollution may be moved abroad rather than reduced; some damage may be irreversible before the peak.

Where marks are usually lost

• Writing about development as if it were only GDP growth.
• Listing factors without a chain of reasoning.
• Using Harrod-Domar with the formula upside down, or ignoring its limitations.
• Quoting the Prebisch-Singer hypothesis without the income elasticity reason.
• Mixing up price volatility (short run) and the long-run decline in the terms of trade.
• Treating debt as always bad, or a budget deficit as always good.
• Not saying which factor matters most in the case, and why.
• Treating the Kuznets curves as certain.
• Giving percentages without units or with the base year wrong.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, section 3.4.3.2, first teaching September 2020 (OxfordAQA).