Final.                                                                           Spring 2004

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)  Urban issues (2 points)

a. Describe the concept of “first city bias”. 

 

 

 

 

 

 

 

 

 

 

 

 

b. How can an import substitution industrialization strategy contribute to the “urban giantism” problem?

2)  The following graph is from the textbook.  Identify what model it is and explain the model with reference to the graph.  (2 points)


3)  Is humanitarian distribution of food aid (drought relief) targeted at chronic-structural poverty or transitory-stochastic poverty?  Explain  (1 point)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4)  Describe how the “inverse farm size – productivity” relationship can be used to justify a land redistribution policy in a latifundio-minifundio agrarian system.  (1 point)

5)  Inequality.  (2 points)

a. Draw and interpret a Lorenz curve of income distribution. 

 

 

 

 

 

 

 

 

 

 

 

 

 

b. Illustrate how to derive a Gini coefficient from a Lorenz curve.

 

 

 

 

 

 

 

 

 

 

c. Does a Lorenz curve provide information on relative poverty or absolute poverty?  Explain.

 

 

 

 

 

 

 

 

 

d. Does the cross country evidence suggest that inequality in educational achievement within a country is higher for countries with populations that have low average years of education completed or high average years of education completed?   (Circle one)

 

    Low average years completed        High average years completed

6)  Poverty Measures. (2 points)

Table of income by individual  (total income in table is $25.00)

Person number

Income per person per day

1

$0.10

2

$0.40

3

$0.60

4

$0.90

5

$2.00

6

$2.50

7

$8.00

8

$10.50

 

a)      If the absolute poverty line is $1 per person per day, what is the headcount of absolute poverty and the headcount index based on the information in the table? 

 

 

 

 

 

b)      If the poverty line is $1 per person per day, what is the total poverty gap and what is the average poverty gap per individual below the poverty line?

 

 

 

 

 

 

c)      Illustrate why the headcount index does not obey the principle of distributional sensitivity when considering the example of moving $0.10 from person number two to person number three.

 

 

 

 

 

 

 

 

 

 

d)     What percent of total income is received by the highest quartile?  The lowest quartile?

 

 

 

7) Official development assistance.  (1 point)  Circle yes or no or fill in the blank.

Statement

Answer

Does the distribution of aid per capita indicate that generally the highest aid per capita is allocated to regions of the world where income per capita is lowest?

Yes                           No

Is military aid included in measures of official development assistance?

 

Yes                           No

What country was the largest donor of official development assistance in terms of overall volume in 1999?

 

 

What is the UN target for ODA as a percent of GNP for donor countries?

 

 

What two countries receive roughly half of all United States foreign assistance in the current budget?

 

 

 

8)  Debt crisis.  (2 points)

a. What role did increased savings by OPEC countries in private banks in the 1970’s have on the debt crisis in developing countries?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b. What role did tight monetary policy adopted to combat inflation in the US in the 1980’s have on the debt crisis in developing countries?

 

 

 

 

 

9)  Currency valuation.  (2 points)

a. Is an overvalued domestic currency more likely to lead to a current account surplus or a current account deficit?  Explain.

 

 

 

 

 

 

 

b. Illustrate on a supply and demand graph (where the good supplied and demanded is foreign exchange and the price is in domestic currency units) how an overvalued currency can lead to excess demand for foreign exchange.

 

 

 

 

 

 

 

 

 

 

 

c. If a currency is overvalued, is GNI per capita using the purchasing power parity conversion higher or lower than GNI per capita using the official exchange rate? (Circle one)

 

            Higher                                     Lower

10)  Export issues.  (2 points)

a. What is the role played by the income elasticity of demand for developing country exports in the Prebisch-Singer hypothesis?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b. What is meant by declining commodity terms of trade over time?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

c. Do developing countries have a higher percentage of their GDP accounted for by exports than developed countries or a lower percentage of their GDP accounted for by exports than developed countries?  (Circle one)

 

            Higher                                     Lower

11)    Population. (2 points). 

a. Explain the demographic transition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b. Explain the hidden momentum of population growth.

12)  Growth theory. (2 points)  Circle either true or false for each statement.

Statement

Is the statement True or False?

The Harrod Domar model focuses on declining commodity terms of trade as a force leading to underdevelopment.

 

True             False

The Solow growth model assumes diminishing marginal returns to capital.

 

True             False

The “O-ring” theory suggests that highly productive workers will work with other highly productive workers rather than with less productive workers.

True             False

Endogenous growth theory defines spillovers as negative externalities imposed on one economic agent by another that inhibit growth in developing countries.

True             False

The Big Push model is based on the idea that there can be increasing returns to scale in production functions if there are positive externalities generate by the total economy wide capital stock

True             False

The commitment problem focuses on how agreements made ex ante are not always credible ex post.

 

True             False

Rostow’s stages of growth theory illustrates why migration to urban centers in developing countries can continue in spite of high urban unemployment.

True             False

Solow finds that the majority of the US growth experience from 1909 to 1940 is accounted for by technological change rather than capital accumulation.

True             False

 

13)  Health.  (1 point)

a. What is a Disability Adjusted Life Year, and how does it differ conceptually as a measure of health from the adult survival rate used as a health proxy in the Bhargava article?

 

14) Education.  (2 points)

            a. Circle the appropriate response in the table

Question

Response

Social rates of returns to education are highest at which level of education in developing countries?

 

Primary    Secondary   Tertiary

Private rates of return to education are highest at which level of education in developing countries?

 

Primary    Secondary   Tertiary

Female enrollment rate is closest to male enrollment rate at what education level in developing countries overall?

 

Primary    Secondary   Tertiary

Are social rates of return or private rates of return higher for all levels of education in developing countries?

 

Social                           Private

Do education budgets in developing countries tend to be allocated in a way that reflects the fact that marginal social returns = marginal social cost for primary education, and marginal social returns are less than marginal social cost for secondary and tertiary education?

Yes                               No

 

b. Describe justifications for developing a policy explicitly focusing on girls’ primary education in developing countries noting:  social rates of return to education; population growth issues; health issues; and the impact on overall economic growth.

           


15)  Kuznets curves.  (2 points) 

a. Verbally distinguish between an environmental Kuznets curve and the original Kuznets curve. 

 

 

 

 

 

 

 

b. Illustrate the original Kuznets curve on a graph.

 

 

 

 

 

 

 

 

 

 

 

 

c. Illustrate the environmental Kuznets curve on a graph.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

d. What is the critique of the use of cross country data to derive the original Kuznets curve?

 

16)  Multinational corporations.  (2 points).

a. Four arguments in favor of multinational corporations were provided in class.  Provide three of these.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b. Define the meaning of transfer pricing in the context of a multinational corporation.

17)  Environment and Development (2 points)

a. If my country’s current year financial savings rate is 14%, physical capital depreciation rate is 7%, natural capital depletion rate is 11%, and human capital change rate is 0% what is my adjusted net savings rate?

 

 

 

 

 

 

 

 

 

 

b. Is this a sustainable or unsustainable savings rate? (Circle one)

 

            Sustainable                  Unsustainable

 

 

c. Is this the savings rate used in the Harrod Domar model?    (Circle one)

 

            Yes                              No

 

 

d. What is meant by “land sparing” technological improvement in agriculture?

Extra Credit:  (1/2 point, no partial credit on this one).

 

Sen, in the 1983 article in the reader, suggests there were four main themes pursued within the sub discipline of development economics up until the time he wrote the article.  What are these four themes?