Name:__________________

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

Spring 2005 = ; &n= bsp; = ; &n= bsp; = ; &n= bsp; Practice Quiz 1

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

Statement	Is the stat= ement True or False?
The theory of positive assortiv= e matching (as in the O ring theory) implies that market incentives will le= ad to training of lower skilled workers before higher skilled workers.	True or False
The Lewis model is designed to explain the process by which an economy changes structurally from a rural agricultural base to i= ncorporate an urban manufacturing sector.	True or False
The Big-Push model assumes constant returns to scale= in the traditional technology and increasing returns to scale in the modern technology.	True or False
Romer’s endogenous= growth theory model is based on the idea of positive spillovers in the economy b= ased on the level of the economy wide capital stock.	True or False
Price elasticities of de= mand for primary commodities tend to be more elastic than those for manufactured commodities.	True or False
On average, developed countries have a lower share o= f GNP accounted for by the value of exports than do developing countries.	True or False
An overvalued exchange rate makes the price of expor= ted goods higher than they would be if the exchange rate was determined by ma= rket forces.	True or False
A free trade area has free trade among member states, common external tariffs against non member states, and free movement of l= abor and capital among member states.	True or False

2= ) Technological progress.

= a. = Illustrate on an isoquant the impact of (Hicks) neutral technological progress.

= b. Contrast the treatment given to technological progress in exogenous growth theory wi= th that in endogenous growth theory.

3= ) Growth theories.

= a. = This is the graph of the equilibrium in the Solow model. Does an increase in the savings ra= te lead to temporary or permanent growth in income per capita? (the y = axis is output per worker and the x axis is capital per worker). Illustrate on this graph and expla= in your answer.

b. You are given the follo= wing equation: . Identify = the model from which this equation is drawn, explain what this equation means, = and contrast the implication for an increase in s on growth according to this equation with that of the Solow model above.

3) East = produces 5 hats per worker, and 2 cans of beans per worker. West produces 4 hats per worker an= d 1 can of beans per worker.

a) If there are 100 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 50 workers allocated to each commodity.

	Hats	Cans of Beans
East
West

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

c= ) Contrast the idea of an absolute advantage with comparative advantage using this example.

4= ) Sen identifies four themes in the first generation of development economics.

= a. = Identify three out of the four.

= b. Sen interpret the empirical evidence on the developme= nt process as it relates to these themes.&nbs= p; Does he do this to argue that income growth generated according to t= hese four themes is the primary goal of development economics? Explain your answer.

5= ) Given the following matrix based on the merchant guild example, answer the follow= ing questions.

	RULER
Security	No security
TRADER	Bring Goods	½ &nbs= p; &= nbsp; ¼	-1 &nbs= p; 1
Don’t Bring Goods	0 &nbs= p; &= nbsp; - ¼	0 &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.

c= ) In the context of the development of trade, describe how this model illustrates the commitment problem.

6= ) Kuznets described 6 common characteristics of the growth process of modern developed nations.

= a. = Identify three of these.

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

= c. = Are the eight reasons given for the limited value of the historical record note= d in (b) the underlying conceptual basis for the distinction between underdevelo= ped and undeveloped nations in the dependence model?

7= ) Match the model / theory to the assumption.

Model	Write the number of the model	Assumption
1) Lewis Model	Strong complementarity a= nd specialization in division of labor
2) Romer Model	Labor is allocated equally across N sectors in the economy.
3) Big-Push Model	Increasing returns to scale are due to capital stock spillovers
4) Solow Model	Technological progress occurs at a constant, exogeno= usly determined rate.
5) Stages of Growth Theory	The capital output ratio is a fixed constant.
6) Harrod Domar	Given temporary protection, cost curves will fall ov= er time as firms learn by doing.
7) Inf= ant Industry	Surplus labor exists in the agricultural sector that= can be absorbed into the manufacturing sector.
8) O-R= ing Model	During the takeoff stage, net investment increases t= o over 10%.

8= ) Illustrate on a supply and demand graph the following:

= a. = The impact of an overvalued domestic currency in terms of the supply and demand= for foreign exchange. (Price is in units of domestic currency to get one unit of the foreign currency, quantit= y is the quantity of foreign currency)

= b. The impact of a tariff on an imported manufactured good undertaken as part of an import substitution industrialization strategy.

9= ) Balance of Payments.

= a. = Did developing countries during the 1960’s tend to have positive or negat= ive current account balances?

= b. Identify two impacts on developing countries of the tight monetary policy adopted by= the United States in the early 1980s in regards to the origin of the debt crisis.

= c. = Is the trade balance another name for the current account balance? Why or why not?

1= 0) Defin= e:

= a. = The Human Development Index.

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

= c. = An “inward looking” trade policy.

= d. The commodity terms of trade.