Cambridge International as and a level Economics Ebook

International Monetary Fund (IMF) 
and the 
World Bank, are not always suitable given the conditions 
in the developing economies. For example, advising an 
economy to use capital intensive methods when it has a 
shortage of capital but an abundance of labour may not 
be the best advice. In addition, requiring a government to 
cut spending on primary education to cut a budget defi cit 
may harm an economy’s development and longer-term 
economic growth prospects.
International Monetary Fund (IMF): 
an international 
organisation that promotes free trade and helps countries in 
balance of payments diff iculties.
KEY TERM
The role of trade, investment, 
multinationals and foreign 
direct investment
International trade
Th
e governments of developing economies oft en argue for 
trade rather than aid. What they are actually arguing for 
is trade on fair terms. Th
ere are a number of reasons why 
international trade can act as an engine for growth. It can 
improve supply conditions and can reduce costs, which 
can lead to more effi
cient production as:
■ 
economies of scale become possible because of the 
larger market
■ 
the increased competition encourages domestic 
entrepreneurs to innovate and look for new techniques 
of production
■ 
trade leads to a transfer of skills and technology from 
developed and developing economies
■ 
specialisation and trade increases incomes and so provides 
the increased savings which can be used for investment.
Figure 9.29 
The liquidity trap
0
Rate of Interest
Quantity of money
Q
Q
1
L
MS MS
1
L
R
Dependence: 
a situation where the economic 
development of a developing economy is hindered by its 
relationships with developed economies.
KEY TERM