Final. Spring 2003
Name:_______________________ Economics of Development
Each question is worth the number of points in parentheses.
1) Inequality. (2 points)
a. Draw a Lorenz curve and show on your drawing how one calculates the Gini coefficient (label one area A, another area B, and provide a formula for calculating the Gini coefficient).
b. Draw a Lorenz curve that has a more unequal distribution of resources than the one you drew in (a).
c. Does the Gini coefficient satisfy the scale independence principle? (be sure to say what the scale independence principle is, and describe why the Gini does or does not satisfy this principle)
2) Technical Progress (2 points).
a. Define labor saving technical progress.
b. Illustrate the impact of labor saving technical progress on an isoquant, with capital on the x axis and labor on the y axis.
c. Has most technological progress in industrialized countries been capital saving, labor saving, or neutral?
d. What issues arise related to your answer to (c) consider the potential for technology transfer from industrialized to developing nations?
3) Poverty and Inequality Measures (2 points).
Table of income by individual
Income per person per day
a) If the absolute poverty line is $1 per person per day, what is the headcount of absolute poverty and the headcount index for the individuals in the table?
b) If the poverty line is $1 per person per day, what is the poverty gap and what is the average poverty gap for the individuals in the table?
c) Illustrate why a poverty gap measure does not satisfy the transfer principle by showing what happens when $0.20 is moved from household 2 to household 1. Describe and illustrate an alternative measure that does obey the transfer principle and is sensitive to such a movement of income. (be sure to define the transfer principle in your answer)
d) What percent of total income is received by the highest quintile? The lowest quintile?
4) Population. (2 points)
a. Compare the typical age structure of a developing country with that of a developed country by drawing the respective population pyramids.
b. Describe how the developing country age structure is related to the concept of “the hidden momentum of population growth”.
c. Is the rate of world population growth over the past decade the highest ever experienced in human history? Explain your answer.
d. Approximately what share of the world’s population currently lives in developing countries as defined by the World Bank?
5) Growth Theory. (2 points)
a. Contrast Solow’s explanation of the nature of economic growth with that of endogenous growth theory.
b. Discuss whether Solow’s finding that there are decreasing marginal returns to capital is or is not consistent the theory of unconditional convergence.
c. Are Barro’s findings more supportive of the theory of conditional or unconditional convergence? (explain your answer)
6) Migration and the Informal Sector. (2 points)
a. Why does Todaro argue that programs creating urban jobs actually can increase urban unemployment rates?
b. Describe two benefits provided by a functioning informal sector in a developing country context.
c. Describe two drawbacks of a functioning informal sector in a developing country context.
7) Education. (2 points)
a. Illustrate on a graph that has the age of the individual on the x axis the financial tradeoff of a decision to continue in secondary school after completing primary school, noting both direct and indirect costs.
b. Does the pattern of public expenditure on different levels of education reflect the social returns to different levels of education in developing countries? (Explain your answer).
c. What is meant by the educational gender gap?
d. Is the educational gender gap larger at the primary or secondary level in developing countries?
8) Agriculture. (2 points)
a. Describe how an overvalued exchange rate impacts farmers who grow crops that are primarily destined for export.
b. Did per capita food production in developing countries increase or decrease during the period 1970-1990?
c. Does the growth rate in overall GNP tend to be faster or slower than the growth rate of the agricultural sector’s contribution to GNP for most developing countries?
d. Does the inverse farm size – productivity debate support or call into question the wisdom of land redistribution programs? Explain.
9) Environmental Issues of Development. (1 point)
a. Draw and describe an environmental Kuznets curve.
b. Does the evidence suggest the environmental Kuznets curve is a reasonable approximation of the relationship between increased income and the environment? Why or why not.
10) Development. (3 points)
a. By what measure does the World Bank categorize countries into developing or developed countries?
b. Describe Sen’s view of the relationship between income growth and economic development.
c. Define the Human Development Index.
d. Describe how defining development by income levels differs from ranking development by the human development index at a conceptual level.
e. Describe the difference between being undeveloped and underdeveloped according to underdevelopment theory.
f. Is underdevelopment theory more supportive of inward looking or outward looking trade strategies? (explain your answer)
11) Comparative Advantage. (1 point)
Here and There are two countries.
Each country has 100 workers, and currently these workers are evenly divided between rice and cowboy hat production (50 workers are allocated to each product for both Here and There).
12) Exports. (2 points)
a. Explain how the income elasticity of demand for primary products versus the income elasticity of demand for manufactured products influences the long term pattern of the commodity terms of trade for primary product exporters.
b. Explain how the price elasticity of demand for primary products is related to the concept of earnings instability.
c. What is meant by export dependence?
d. Does export dependence mean that a country has a negative current account deficit? Why or why not.
13) Inward looking strategies. ( 1 point)
a. What arguments are used to justify following an “infant industry” strategy.
b. Describe policies that are associated with this policy.
14) Debt Crisis. ( 2 points)
a. Describe the evolution of the debt crisis from its origins in the 1970’s until now. What happened, in what sequence, and with what consequences?
15) Trade. (2 points)
a. What is transfer pricing?
b. What is dumping?
c. What is the difference between a quota and a tariff?
d. What are primary products?
16) Exchange Rates. ( 1 point)
a. Show on a supply and demand graph how an overvalued currency can lead to excess demand for foreign, hard currency.
b. What is the expected impact on a current account deficit of devaluing? Why?
17) Balance of Payments (1 point).
a. What are the main components of balance of payment accounts?
b. What is the impact of capital flight on the capital account?
Extra Credit (1/2 point).
Describe the relationship between:
liberalizing capital flows in developing country economies,
and capital flight during the debt crisis.