Question

Give example of a factor-price distortion in LDCs? Explain how it impacts their economic growth.

Answer 1

The factor price distortion means deviations of the listed price or predefined price with the present price of the market participants which were trading for the conventional way of risk return optimization.
The basic examples of market price distortions are price floors and price ceilings.
Price floor is the price which is in the favour of producers and it is decided above the equilibrium price.
Price ceiling is the price which is in the favour of consumers and it is decided below the equilibrium price.
In the LDCs (Least Developed Countries) price distortion is very important because of the following reasons:
In the least developed countries the price distortion plays an important role in the regulating the market conditions.
In the LDCs price distortion increases the economic growth because it reduces the market risk.
In the LDCs the economic resources are very less so it is important to use these resources in an optimum way for maximum output.
It helps to increase the dominance of the sellers in the market.
It helps to increase the control of the market price.
It is also helpful in the grading of the products.
It is also helpful in the price fixation of innovative products.