Barriers to economic growth and development practice questions.

A developed country charges a 2% tariff on imported raw cocoa beans but a 25% tariff on imported chocolate bars. Which barrier to economic development does this situation best illustrate?

• Capital flight from the cocoa-producing country
• A large informal economy in the cocoa-producing country
• Limited market access caused by tariff escalation
• A poorly functioning domestic banking system

Answer: Limited market access caused by tariff escalation

Tariffs that rise with the degree of processing (tariff escalation) discourage developing countries from moving into higher value-added manufacturing, restricting their access to international markets.

Which of the following best describes capital flight?

• Residents move financial assets abroad amid instability
• Multinational companies invest in new factories in a foreign country
• A government repays part of its foreign debt ahead of schedule
• The central bank raises interest rates to attract foreign deposits

Answer: Residents move financial assets abroad amid instability

Capital flight occurs when domestic residents move savings and financial capital out of the country, reducing the funds available for domestic investment and eroding the tax base.

A country that earns over 80% of its export revenue from copper experiences large year-to-year swings in export earnings. Which explanation is most likely?

• Copper has a high income elasticity of demand in world markets
• Low PED and PES mean small shifts cause big price swings
• The country's exchange rate is fixed to the US dollar
• Copper producers face constant returns to scale

Answer: Low PED and PES mean small shifts cause big price swings

Because commodities have low PED and low PES, shifts in demand or supply produce sharp price swings, making export revenues of commodity-dependent countries highly volatile.

In a country where land ownership is rarely backed by formal legal title, which outcome is the most likely consequence for economic development?

• Farmers over-invest in land improvements to signal ownership
• Banks lend more freely because land disputes raise loan demand
• Government tax revenue from land rises sharply
• Farmers under-invest and cannot pledge land as collateral

Answer: Farmers under-invest and cannot pledge land as collateral

Weak property rights are part of a weak institutional framework: without secure title, farmers have little incentive to invest and cannot pledge land as collateral, restricting access to credit.

Which statement about a large informal economy in a developing country is correct?

• It increases recorded GDP because informal output is included in national accounts
• It reduces government tax revenue, limiting spending on education and health care
• It guarantees workers access to social protection such as pensions
• It eliminates the need for labour market regulation

Answer: It reduces government tax revenue, limiting spending on education and health care

Informal activity is untaxed and unrecorded, so a large informal sector shrinks the tax base and leaves workers without legal protection or social benefits.

Which of the following best explains why gender inequality in access to education acts as a barrier to economic growth and development?

• Excluding girls from school lowers human capital and productivity
• Educating girls raises the birth rate, increasing the dependency ratio
• Female education mainly benefits the informal sector, which is untaxed
• Educated women are more likely to move their savings abroad

Answer: Excluding girls from school lowers human capital and productivity

When girls are denied education, the economy loses potential human capital; higher female education is also associated with better child health and greater household investment in the next generation.