Primary product dependency, the savings gap and Harrod-Domar

Overview

Recall questions on commodity price volatility, the Prebisch-Singer hypothesis, the savings gap, the Harrod-Domar model and the foreign currency gap.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is primary product dependency?

   Model answer

   When a country's economy relies heavily on the export of unprocessed raw materials or agricultural goods, making it vulnerable to external shocks.

2. 2

   Why does primary product dependency limit export revenue growth as global incomes rise?

   Model answer

   Primary products typically have low income elasticity of demand, so demand for them grows slowly even when world incomes increase.

3. 3

   What does the Prebisch-Singer hypothesis suggest about the terms of trade for primary products?

   Model answer

   It suggests a long-term decline in the terms of trade for primary products relative to manufactured goods.

4. 4

   Define volatility of commodity prices.

   Model answer

   The frequent and unpredictable fluctuations in the prices of primary products on world markets.

5. 5

   Why do small shifts in supply or demand cause large price changes for primary products?

   Model answer

   Because both supply and demand curves for primary products are price inelastic.

6. 6

   How does commodity price volatility hinder development?

   Model answer

   It creates uncertainty for government revenues, investment planning, and household incomes.

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