Practice final. Spring 2005

Name:_______________________ Economics of Development

Each question is worth the total number of points in parentheses; sub-questions are allocated an equal share of the total points per question. Final is worth 30 points.

1) Population issues (3 points)

a. What is meant by the hidden momentum of population growth?

The population structure may lead to continued population growth even if the total fertility rate is reduced to replacement level. This continued growth occurs as the size of the pre-reproductive female cohort is larger than current or post reproductive cohorts. The new population equilibrium will be reached only after this cohort works through the population.

b. Draw and describe the demographic transition.

You have the graph in your notes (or see page 275 of the book). As noted, I describe it as having four phases compared to the book’s three:

I.      High birth rate, high death rate. Stable or slowly growing population.

II.    High birth rate, declining death rate. Slowly leads to rapid growth in population.

III.    Declining birth rate, low death rate. Rapid leads to slowly growing population.

IV.   Low birth rate, low death rate. Stable or slowly growing population.

2) True or False (6 points)

Statement	Circle whether the statement is true or false
The informal sector is defined as the sector in an economy that deals in illegal activities.	True False
Import substitution strategies can increase the incentive to locate production in the largest city of a country.	True False
Evidence suggests that taller people earn more than shorter people.	True False
There is a negative correlation between GNP rank and the WHO ranking of health system performance.	True False
The Harris-Todaro migration model suggests urban job creation schemes may increase the urban unemployment rate.	True False
The social rate of return to education is highest at the university level for Asia.	True False
The poverty gap measure is constructed as an index of depravations associated with poverty.	True False
Educated females have lower total fertility rates than uneducated females overall.	True False
Urbanization is a concern in development since evidence suggests a higher share of total population living in urban areas is negatively correlated with GNI per capita.	True False
The current population of the world is estimated to be around 6.1 billion people.	True False
Food production per capita in Africa has decreased since 1970.	True False
Some countries in the world are currently experiencing negative population growth rates.	True False

3) Poverty measures. (3 points)

Person number	Income per day
1	$0.05
2	$0.45
3	$0.50
4	$1.50
5	$2.50
6	$2.75
7	$3.25
8	$14.00

TOTAL INCOME $25.00

a) What is the total poverty gap, the average poverty gap, and the normalized average poverty gap if the poverty line is defined as $1 per person per day?

The TPG =($0.95 person 1, $0.55 person two, $0.50 person three) = $2.00

NPG=TPG/N, or 2/8=$0.25 so that the NAPG=$0.25/$1.00=(1/4) or 0.25

b) What is the headcount and the headcount index if the poverty line is defined as $2 per person per day?

H=(person 1, person 2, person 3, person 4) = 4

HI =H/N=4/8=50%

c) What share of total income is held by the lowest quartile and what share is held by the highest quartile?

Quartiles, so 4 groups, thus two people per group. Lowest quartile is persons one and two, highest is persons 7 and 8.

Lowest quartile has ($0.50/$25.00) or 2%.

Highest quartile has ($17.25/$25.00) or 69%

4) Can the “inverse farm size – productivity” relationship be used to justify in efficiency terms a land redistribution policy in a latifundio-minifundio agrarian system? Why or why not. (1 point)

Yes. The basic idea is that smaller farms are more efficient / use resources better. So we can justify land redistribution in efficiency terms if the inverse farm size productivity relationship holds.

5) Inequality. (2 points)

a. Draw and interpret an education Lorenz curve.

See Figure 8.6, page 387

It maps out the cumulative percentage of schooling completed by the cumulative percentage of the population, when population is ordered across the x axis from lowest to highest educational attainment (implicitly, that is, since the x axis is just about cumulative percent in the population)

b. Explain how to derive a Gini coefficient from this Lorenz curve.

[OK, from here on out rushing since I want to get this up now, so the following answers are terse, and could be a bit more elaborate, but I am looking for something along the following lines.]

Area under the 45 degree line of perfect equality and above the Lorenz curve divided by the whole area under the line of perfect equality is the gini coefficient. A/(A+B) as drawn in class.

c. Does cross country evidence suggest that a country’s education Gini coefficient is positively or negatively related to the country’s average years of education? Explain.

See figure 8.7 in the book, page 388.

One, there is only so much education you can have so there is an upper limit as the average goes up.

Also, it suggests that at low mean, a few people get lots of education while the rest gets none.

6) Health issues. (2 points)

Statement	Circle whether the statement is true or false
Overnutrition is categorized as a type of malnutrition.	True False
Weight for age measures are used to identify current malnutrition.	True False
The Bhargava et al article in the reader reports that they find no evidence that improved health leads to faster GDP growth rates in low-income countries	True False
Estimates suggest over 40% of the global disease burden as measured by DALYs occurs in the developed world.	True False

7) Tragedy of the commons. (3 points).

Fisherperson A and fisherperson B can choose to put 1,2, or 3 fishing boats in the waters off the coast of their village. Payoffs are as described in each cell of the matrix, with payoff to fisherperson A on the left hand side, payoff to fisherperson B on the right hand side.

	Fisherperson B
Fisherperson A		1	2	3
	1	10 10	9 15	8 18
	2	15 9	14 14	10 16
	3	18 8	16 10	13 13

a) What is the Nash equilibrium outcome of this game if each fisherperson plays best response to the other?

Each puts 3 boats on the water, payoff of (13, 13)

b) Is the Nash equilibrium result the socially optimal result? Why or why not.

Nope. Pareto improving result at each playing 2,2 with social welfare at 28 compared to the NE of 26.

c) What types of policies are commonly proposed to deal with the tragedy of the commons?

1) Quota, quantity restriction (2 boats each)

2) User fee (per boat charge to change payoffs)

3) Privatize / allocate rights to users.

d) What is the “tragedy” in this tragedy of the commons?

Left to their own devices and without coordination, each makes decisions that make them worse off then they could potentially be.

8) Poverty traps. (3 points)

a) Explain the “stages of progress” method Krishna used to define poverty in the article in the reader.

See article. Basic idea, get people to talk at stages in the path out of poverty by identifiable steps.

b) Are Krishna’s poverty transition matrix findings suggesting that concerns about “churning”, that is where individual households move across the poverty threshold in offsetting ways so that net poverty remains roughly constant, are not warranted in his study area?

No, he finds churning. Almost equal % falling into poverty as come out.

c) What did Krishna find with regard to the link between escaping poverty and the informal sector?

It was an important part of the story. Lots of people identified migration and the informal sector as playing a role in their escape from poverty ( in contrast to agriculture for example)

9) Education (3 points).

Statement	Circle whether the statement is true or false
Evidence indicates that public expenditure per student in Africa is allocated to the educational level with the highest social rate of return.	True False
Evidence suggests the education gender gap has decreased worldwide since the 1970s.	True False
Evidence on spending patterns of public resources on education categorized by occupational status of the family indicate that education is a vehicle for promoting greater equality.	True False
Evidence suggests that the education component of the HDI and the income component of the HDI are positively correlated.	True False
If education is used as a “signaling device”, this is a good indicator that public investments in education are efficiently allocated across primary, secondary, and tertiary education.	True False
An education Gini coefficient summarizes information about the relative distribution of education in a population.	True False

10) Define and contrast (3 points).

a. Income poverty and asset poverty.

Outcome in terms of income level is below a poverty line – income poverty.

Assets are not sufficient to generate an expected income level above a given income poverty line – asset poverty.

b. Transitory poverty and chronic poverty.

Transitory means the household is not poor in all periods. It moves in and out of poverty, usually as measured by income. Some months above the line, some below.

Chronic poverty – the household is always below the poverty line, again usually an income line.

c. Ex Ante risk management strategies and ex post risk coping strategies with regard to income diversification strategies at the household level.

Ex ante is what you do to prepare – it is what you do in advance of the shock to help lessen the impact. Plant multiple crops, diversify income sources…

Ex post is what you do after the shock has hit. Go to the forest and gather nuts for sale, chop down trees to sell the wood when your crops fail.

d. Urban giantism with first city bias.

Urban giantism is that the city is huge. First city is large and much bigger than the next biggest city.

First city bias is the spending pattern / policy framework that allocates resources to the first city in a way that is disproportionate in per capita terms.

11) Environment (1 point)

a. Describe the idea behind “land sparing” agricultural technology, and discuss why it may have an unintended non “land sparing” impact overall.

Land sparing –increase value / harvest from converted land to keep people from expanding the zone of cultivation into unconverted land.

Backfires if this also increases the value of converting the unconverted land.

2. Why might increased access to credit lead to poverty reduction and environmental benefits for poor rural farmers?

Make investments that can pay off, make soil conservation investments, get capital to move out of subsistence farming into other activities that require start up capital,…

Extra Credit: (1 point, no partial credit)

Describe how common property systems can be viewed as risk management systems, and also discuss how land tenure programs in the presence of weak states can reduce tenure security.