Name:__________________

Name:___________________ &= nbsp; &nbs= p; Econo= mics of Development

Spring 2006 = ; &n= bsp; = ; &n= bsp; = ; <= /span> Exam 1, February 28

Total quiz is 30 points. Each question is worth three points. Each sub question is = worth an equal share of these three points.

1= ) Circle to indicate whether the statement is true or false.

Statement	Is the stat= ement True or False?
Solow’s model provides an explanation for the underlying forces that drive technological progress.	True or False
The United States provides ODA as a share of nati= onal income at a rate higher than the UN guideline of 0.7%.	True or False
The commitment problem focuses on whether promises m= ade ex ante will be honored ex post by a self-interested age= nt.	True or False
Prebisch found that a price index of primary products increased more rapidly than a price index of manufactured commodities.	True or False
An overvalued exchange rate makes products produced = in a given country less competitive on export markets.	True or False
A country with present value debt worth 200% of the = annual value of exports from this country is categorized by the HIPC program as having a sustainable level of debt.	True or False
The Lewis model explains how a largely agrarian econ= omy can develop an industrial sector by absorbing surplus labor from the agricultural sector.	True or False
The “O-ring” model is based on the idea = of strong complementarities in production.	True or False
The Harrod –Domar model is based on the idea of diminishing marginal returns to capital.	True or False

2= ) Growth theories.

= a. = This is the graph of the equilibrium in the Solow model, with output per worker = on the y axis and capital per worker on the x axis. Identify the steady state equilibrium level of capital per worker: with s and f(k) by noting where k<= sup>* lies on the x axis; if s increases to s^’by noting where k^*_s’= lies ; if f(k) changes to f’(k) by noting where k^*_f&#=
8217; lies.

b. Which type of change, s= to s’ or f(k) to f’(k) did Solow identify as offering the promise = of sustained growth in income over time? (Explain your answer)

c. Explain the forces in this model t= hat would lead a country with an initial stock of capital per worker value of 4= 9 to move to a lower level of capital stock per worker value in steady state.

3) In th= e land of McPeakia, one worker can produce e= ither five tomatoes per day or three hammers per day. In neighboring Johnovia, one worke= r can produce either two tomatoes per day or two hammers per day.

= a) Write out the two production functions for each good in each of the two countries with output as a function of labor.

	Tomatoes	Hammers
McPeakia
Johnovia

= b) If there are 100 laborers in McPeakia and 100 in Johnovia, describe the level = of production of each commodity in each country in autarky if they divide up t= heir labor force with 50 workers allocated to each commodity in each country.

	Tomatoes	Hammers
McPeakia
Johnovia
TOTAL

= c) Identify the commodity for which each country has a comparative advantage.

= d) Illustrate by reallocating laborers between the two products how it is possible to increase total production of the two goods.

	Tomatoes	Hammers
McPeakia
Johnovia
NEW TOTAL

4) Sen i= n the reader argued there were four main themes in the first generation of development economics. Circle= from this list the four he identified.

&nbs= p; a. Planning and an economically active state.

&nbs= p; b. Control of population growth throu= gh family planning.

&nbs= p; c. Focus on determinants of total fac= tor productivity growth.

&nbs= p; d. Mobilization of underemployed labo= r.

&nbs= p; e. Development of transportation netw= orks.

&nbs= p; f. Rapid capital accumulation.

&nbs= p; g. Industrialization.

&nbs= p; h. Importance of role played by guild= s and unions.

&nbs= p; i. Development as freedom

&nbs= p; j. Preventing fragile states from fai= ling.

5) Match the model / theory to the assumption or impli= cation.

Model	Write the number of the model	Assumption or implication
1) Stages of Growth	Technological progress can be explained as a functio= n of the economywide average capital stock
2) Rom= er growth	Profits obtained in the manufacturing sector will be reinvested in this sector, thus increasing capital stocks and generating = more employment.
3) O-r= ing	Modern manufacturing is characterized by increasing returns to scale while traditional manufacturing is characterized by cons= tant returns to scale.
4) Big= Push	Higher quality workers will choose to work with other higher quality workers, leaving lower quality workers to work together.
5) Lew= is model	Primary product exporting economies will experience unfavorable changes in their commodity terms of trade over time due income elasticities of demand.
6) Com= parative Advantage	Net investment increases to over 10% in the takeoff = stage.
7) Inf= ant industry	Well being can be improved by specialization and tra= de without using any new resources.
8) Pre= bish – Singer	Firms will lower their costs of production over time= as they ‘learn by doing’, thus making the need for protection temporary.

6) Illus= trate the following:

Show the level of domestic su= pply, the level of international supply, and the tax revenue generated. Y axis is price, x axis is quantity.

b. The i= mpact of an overvalued currency, where demand is for foreign exchange, supply is of foreign exchange, the y axis records the price per unit of foreign exchange= in terms of the domestic currency, and the x axis records the quantity of fore= ign exchange. Be sure to note whe= ther we have excess supply or excess demand.

7) The Poverty Reduction Strategy as defined by the Wo= rld Bank has four core principles. Circle them from the list below.

a) The strategy is aimed at allocatin= g aid to those who show a commitment to ruling justly, promoting economic freedom, a= nd investing in people.

b) The strategy is partnership orient= ed – coordinating participation of bilateral, multilateral, NGO, governm= ent, and civil society institutions.

c) The strategy is country driven and participatory.

d) The strategy should include tax re= form that broadens the tax burden but lowers the taxation rates.

e) The strategy involves deregulation= to abolish barriers to entry and exit.

f) The strategy is medium to long ter= m in perspective.

g) The strategy is comprehensive and results-oriented, and focuses on outcomes that will benefit the poor.

h) The strategy is based on the idea = that integrated rural development will lead to the realization of the millennium development goals.

8= ) There are four workers in the economy: worker one is q=3D0.8, worker two is q=3D0.6, worker three is q=3D0.= 4, and worker four is q=3D0.2. Produ= ction takes place using two workers, with output of combining workers i and j def= ined by .

a) Fill = in the following

Combination 1	Resulting output 1	Combination 2	Resulting output 2	Total ouput (1+2)
(0.8, 0.6)		(0.4, 0.2)
(0.8, 0.2)		(0.6, 0.4)
(0.8,0.4)		(0.6,0.2)

b= ) Say production can be increased by paying for training that will increase the q= of a given worker. The cos= t of this training, c, can be expressed in terms of output y. Training that costs c raises the s= kills of a worker by 0.1. As you may recall from class, training will be given to the lower q worker in a given pair.

= a. = If the cost of training is below what level of c will a firm decide to pay for increasing the skill level of the 0.6 worker in a (0.8,0.6) pairing?

= b. If the cost of training is below what level of c will a firm decide to pay for increasing the skill level of the 0.2 worker in a (0.4,0.2) pairing?

9= ) Debt crisis.

= a. = Describe the role played by US monetary policy following the second oil price shock = in the debt crisis.

= b. Answer the following

Statement	Is the stat= ement True or False?
Debt relief in the 1980s was made conditional on cou= ntries developing participatory poverty reduction strategies.	True or False
Debt for equity swaps were one of the tools used to = reduce debt burdens and encourage privatization of state owned industries.	True or False
Debt relief was conditional upon opening up the econ= omy and encouraging foreign direct investment inflows.	True or False
Debt relief was designed to allow countries to move = from an ‘outward looking’ to an ‘inward looking’ development strategy.	True or False

1= 0) Produ= ction functions.

= a. = Circle the correct answer: The concept is characterized by _________ returns to scale.

	Returns to scale
Manufacturing sector in ‘big push’	Increasing Constant Decreasing
Solow Growth model	Increasing Constant Decreasing
Cobb Douglas Production function	Increasing Constant Decreasing
Romer model	Increasing Constant Decreasing

= b. Illustrate on the production functi= on the impact of technological progress, with output on the y-axis and the input on the x-axis.

= c. = Illustrate using isoqants the impact of labor saving technological progress.

= d. Can a production function be characterized by constant returns to scale and diminishing marginal returns to an input at the same time? Why or why not.