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Table of Contents

  1. Topic pack - Development economics - introduction
  2. 4.1 Economic development (notes)
  3. 4.1 Economic development (questions)
  4. 4.2 Measuring Economic Development (notes)
  5. 4.2 Measuring development (questions)
  6. 4.3 The role of domestic factors in economic development (notes)
  7. 4.3 The role of domestic factors in economic development (questions)
  8. 4.4 The role of international trade (notes)
    1. Role of international trade - introduction
    2. Trade problems (LDCs)
    3. Problems - over-dependence on primary products
    4. Price volatility of primary products
    5. Consequences of price volatility
    6. Price increases can also be problematic!
    7. Price volatility case study - tomatoes
    8. Price volatility case study - copper
    9. Trade strategies for growth and development
    10. Import substitution
    11. Import substitution case study - sorghum
    12. Export promotion
    13. Export promotion case study - Thai toy industry
    14. Trade liberalization
    15. The role of the World Trade Organization
    16. Background information
    17. The Doha round
    18. Case study - trade sanctions
    19. Bilateral and regional preferential trade agreements
    20. Case study of a bilateral preferential trade agreement
    21. Case study of a multilateral preferential trade agreement
    22. Some background reading
    23. Diversification
    24. Case study - diversification
    25. Diversification in Malawi - video
    26. Some background reading
  9. 4.4 The role of international trade (questions)
  10. 4.5 The role of Foreign Direct Investment (FDI) (notes)
  11. 4.5 The role of foreign direct investment (questions)
  12. 4.6 The role of foreign aid and multilaterial development assistance (notes)
  13. 4.6 The role of foreign aid and multilateral development assistance (questions)
  14. 4.7 The role of international debt (notes)
  15. 4.7 The role of international debt (questions)
  16. 4.8 The balance between markets and intervention (notes)
  17. 4.8 The balance between markets and intervention (questions)
  18. Print View

Consequences of price volatility

S:\triplea_resources\DP_topic_packs\economics\student_topic_packs\media_microeconomics\images\boom_recession.jpgMany developing economies produce mainly primary exports and also tend to specialise in a relatively small range of these products (Factor Endowments). This leaves them heavily reliant on the world prices of relatively few products, which can be a real barrier to economic development.

Most exported commodities are relatively inelastic in supply in the short run and once the crop is planted, there is little else to do but accept whatever the world price is at the time of harvest.

With volatile market prices and consequential unreliable flows of earnings, it is difficult to put aside funds for investment for diversification - so the problem of specialisation is compounded.

Some economists have advised the creation of sellers' agreements, which would be an effective cartel in all but name (cf OPEC). However, problems arise when trying to keep individual countries loyal to such agreements, (cf Prisonerīs Dilemma) with difficulties regarding:

  • Overproduction, (Saudi Arabia and OPEC) which puts pressure on member countries to accept whatever price they can get.
  • Failure to get all producers to join the 'club' (Not all Oil Procucers are members of OPEC)
  • Storage of some commodities may be both difficult and expensive, so fluctuations cannot be evened out (esp crops).
  • 'Price Floor agreements' are too high and encourage overproduction. This then requires precious funds to buy up surpluses and so the investment funds disappear without any return.

The heavy reliance by developing countries on primary exports can lead to considerable changes in revenues, which means that current account balances can vary at alarming speed; import costs can quickly exceed export revenues. This can lead to increased borrowing or a running down of slender foreign exchange holdings (the Pot).

If such deficits persist, the developing countries may have to adopt deflationary policies to decrease the demand for imports, leading to higher unemployment and cuts in public services (which are already small scale).

The domestic currency could suffer a depreciation, which in turn can make imports even more expensive and destroy the chances of achieving a period of sustained economic growth.

The impacts of these economic problems normally hit the poorest members of society.

Imports are normally essential to growth planning and a failure to acquire the essential diversification further hampers the development process.