Name:__________________

Name:___________________ &= nbsp; &nbs= p; &= nbsp; Economics of Development

Spring 2005 = ; &n= bsp; = ; &n= bsp; = ; <= /span> Quiz 1

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?
The O ring theory is based on the idea of a homogene= ous labor force allocated across N sectors in the economy, where N is “large”.	True or False
Reported levels of Official Development Assistance (= ODA) include military assistance.	True or False
A common market has free trade among member states, = common external tariffs against non member states, and free movement of capital = and labor among member states.	True or False
Income per capita is included as a component of the formula for calculating the Human Development Index.	True or False
The commodity terms of trade is defined as the value= of imports divided by the value of exports in a given year.	True or False
The big push model is based on the idea of “technology spillovers” due to increasing returns to scale in economy wide capital stocks.	True or False
Income elasticities of demand for primary commoditie= s tend to be lower than those for manufactured commodities.	True or False
The Lewis model assumes that there is surplus labor = in the agricultural sector that can be absorbed into productive activities by introducing a manufacturing sector.	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. Illustrate on this graph h= ow technological progress can lead to higher output per worker in a new steady state equilibrium with s held constant.

b. Did Solow find in his investigation of the US economy that the technological progress was more important than capital accumulation, or that capital accumulation was more important than the technological progress in explaining economic growth? Briefly explain how the distinction between these two sources of growth would appear on the graph above.&nb= sp;

3) East = produces 3 apples per worker, and 7 video games per worker. West produces 2 apples per worker = and 1 video game per worker.

a) If there are 200 laborer= s in East and West respectively, describe the level of production of each commodity in each country in autarky if they divide up t= heir labor force with 100 workers allocated to each commodity in each country.

Apples

Video Games

East

West

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

c= ) Explain why the Prebish-Singer thesis proposes that it is better to have a comparat= ive advantage in video games than in apples in the long run.

4) Consi= der the following matrix based on education – investment decision. Education is costly (1 unit of pay= off to fund education), but leads to higher wages than non-factory employment if t= he factory is built. Factory wag= es are 4, non-factory employment payoff is 2.&nbs= p; If no education, no factory, it is assumed that the local worker get= s a payoff in local economy in this non-factory employment.

	Investor<= /p>
Build Factory where Local worker is	Do not build where local worker is
Local wor= ker	Specialized Education	3 &nbs= p; &= nbsp; 5	1 &nbs= p; 0
No specialized education	4 &nbs= p; &= nbsp; -1	2 &nbs= p; 0

a= ) Describe the best response strategies in this game and identify the Nash equilibrium outcome.

b= ) Describe how this model illustrates how a failure to coordinate actions leads to a sub-optimal outcome.

5) Kuznets described 6 common characteristics of the g= rowth process of modern

developed nations we discus= sed in class.

a. Contrast the importance given to an increase in net investment in the Rostow model with the importance Kuznets places on this characteristic.

b. Is the transformation of the structure of the economy describ= ed by the Lewis model consistent with the pattern of “Structural economic transformation” that Kuznets identifies? Why or why not.

c. In the book and in class, we discussed 8 reasons why this historical record may be of limited value to the prospects of growth for developing countries today. Identify four of these.

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

Model	Write the number of the model	Assumption or implication
1) Agglomeration economies	Factor prices reflect relative natural resource endo= wments in the economy.
2) Sol= ow Growth	Specialization and trade allow improvements in well = being using existing resources.
3) Inf= ant Industry	Capital will flow to where the marginal returns to c= apital are highest – that is where capital stocks are lowest.
4) Big= Push	The economy can be represented by an aggregate produ= ction function that is characterized by constant returns to scale
5) Con= vergence	Tariff protection will be temporary as firms will le= arn to be competitive in the world economy over time.
6) Com= parative advantage.	Profit in the traditional sector is zero.
7) Har= rod Domar	Decisions about where to locate production are influ= enced by positive externalities generated by other firms locating in a given ar= ea.
8) Hecksher Ohlin	The capital to output ratio is a fixed parameter.

7) Illus= trate the following:

a. The impact of an overvalued domestic currency in terms of the supply and demand for foreign exchange.&nb= sp; (Price is in units of domestic currency to get one unit of the forei= gn currency, quantity is the quantity of foreign currency)

b. The impact of labor augmenting technological progress on an isoquant.

8) More fun with models.

= a. = Identify the model associated with this figure and contrast the assumption about the returns to scale in the modern sector and the traditional sector.

= b. Illustrate on this graph a line representing a total wage bill W₂ where coo= rdination will not be needed to allow modernization to take place in this sector and = it is individually rational for the firm to implement the modern technology.

9) Define:

a. Transfer pricing.

b. The World Bank standards to define a country as a developing country (categories are enough – you don’t need the cutoffs in dollar amounts).

c. Backward linkages.

10) International issues.

a. In class, we discussed four reasons why economists see polici= es encouraging free trade as being beneficial. Identify three reasons we not= ed that economists think free trade is beneficial by circling them.

1. Increased international flows of g= oods will eliminate monopolies.

2. Every country has to hav= e a comparative advantage, so there is always a path to growth through entering into free trade.

3. Free trade improves economic well = being without the introduction of new resources or technology.

4. We like the frequent flier miles f= ree trade allows us to accumulate.

5. Free trade allows for development = in the sense Sen argued as it increases peoples’ capabilities.

6. Free trade makes global factor pri= ces more efficient as it allows local factor prices to reflect global abundance or scarcity rather than local abundance or scarcity.

7. Free trade stimulates innovation a= nd sharing of ideas.

8. Free trade removes a source of rev= enue from the control of governments and economists view governments as evil.

b. Williamson identifies ten types of policies that he describes as the Washington consensus. From this list of = ten, circle the five that are policies included by Williamson as Washington consensus policies.

1. Privatization of state owned asset= s.

2. Increased central bank autonomy in forming monetary policy.

3. Liberalize foreign direct investme= nt inflows.

4. Tax reform (lower and broaden).

5. Peg exchange rate of domestic curr= ency to the US dollar.

6. Redirect public expenditure to fie= lds with high economic return and potential to improve income distribution.

7. Poverty reduction in the rural sec= tor through land redistribution.

8. Deregulate to abolish barriers to = entry and exit.

9. Import restrictions to control curr= ent account deficit.

10. Privatize government pension schem= es.