Development Exam 1

Specific Measures of Vulnerability Differ in Choices Regarding:

- Objective risk vs Perceived risk - What is significant risk? What is significant loss? - Temporary vs Permanent - Arising out of what kinds of shocks?

Vulnerability arises when:

- People are exposed to shocks, *and* - they do not have good ways to keep their consumption from dropping off when hit by shocks - Nearly impossible to measure... it is future looking and probabilistic

Economic Growth

- The rate of increase in a country's average income - Total income = Total value of production - usually measured as the average annual rate of growth in real per capita GDP

Economic growth rate is positive when _________ is rising

Aggregate Labor Productivity

Determinants of well-being

Features of households' circumstances that they take as given in the present moment that help determine how much well-being they achieve -Key Determinants: 1. Assets (Human, physical, communal) 2. Needs (family size, sickness, marriage) 3. Market Conditions (wage, output prices, access to credit) 4. Institutions (formal rules and informal norms that constrain peoples' choices)

Vulnerability

"Significant risk" of "significant future reductions" in well-being

Economic Determinants of Growth

The types of policies, institutions, external market conditions, and other circumstances that are taken as given by people within the socioeconomic system, and that affect how willing and able people are to make the choices associated with the proximate sources of growth

Production Function

Y=F(L,K;a) - we expect positive but diminishing marginal products of L and K and a positive function of A

If everyone in an economy had the exactly same level of income, what would the value of the Gini coefficient? a. 0.0 b. 0.5 c. 1.0 d. infinity.

a. 0.0

If one country is growing at a growth rate of 2 percent per year, how many years would you expect for it to double income per capita? a. 36 years b. 72 years c. 14 years d. 100 years

a. 36 years

________ provides a method to examine the differences determinants in GDP per capita growth over time within individual countries. a. Growth accounting b. Development accounting c. Total factor productivity d. Growth theory

a. Growth accounting

From the World Development Indicators 2012, the Headcount Ratio using $2 per day poverty line in Bangladesh was 76.5 and in Ethiopia was 77.6. It means: a. In Ethiopia, poverty is slightly more widespread. b. In Bangladesh, poverty is slightly more widespread. c. In Ethiopia, poverty is slightly deeper. d. In Bangladesh, poverty is slightly deeper.

a. In Ethiopia, poverty is slightly more widespread.

For three years, the country of Dreamland has been growing at a steady annually compounded rate of 10 percent, if Dreamland's GDP per capita starts with $20,000, what will be the GDP per capita after three years? a. $20,000 b. $26,000 c. $26,620 d. $200,000

c. $26,620

Policies promoting asset creation and growth may improve well-being of the poor through a. the policies give the poor new assets directly or they encourage the poor to undertake their own investments. b. the policies drive up wages for low-skill workers or drive down the prices of goods consumed by the poor. c. the policies can generate more assets for non-poor and their assets can be transferred to the poor through public or private safety nets. d. All of the above.

d. All of the above.

Which is the following shows the impact of road improvement projects on well-being in Bangladesh? a. These projects raised per capita consumption expenditure on average 7.5 and 10.8 percent. b. These projects raised consumption expenditure at the bottom of the income distribution by more than they raised incomes higher up the distribution. c. Estimates show that these projects reduced the time it takes for people to get to market and raised enrollment in secondary schools. d. All of the above.

d. All of the above.

From the World Development Indicators 2012, the Poverty Gap Index using $2 per day poverty line in Ethiopia was 28.9 and in Haiti was 46.7. It means: a. In Ethiopia, poverty is more widespread. b. In Haiti, poverty is more widespread. c. In Ethiopia, poverty is deeper. d. In Haiti, poverty is deeper

d. In Haiti, poverty is deeper

Which of the following constitutes a non-market interaction? a. Jim borrows money from a bank to purchase a plow b. Shuman buys rice for his family c. Jane works for Rob at his farm and earns a wage d. Jim and Shuman cooperate to build a road together

d. Jim and Shuman cooperate to build a road together

Which of the following may increase labor productivity for a firm? a. increasing capital per worker b. improving technology c. increasing its technical efficiency d. all of the above

d. all of the above

Poverty reduction efforts reduce inequality at the same time if a. the incomes of non-poor remain unaffected. b. the financing for the poverty reduction efforts is derived by taxing the non-poor. c. the incomes of poor grow faster than the incomes of non-poor. d. all of the above.

d. all of the above.

One of the issue facing households in developing countries is how they cope with fluctuations or shocks which can arise from all of the following except: a. seasonal changes in weather b. life cycle event such as marriage and old age c. market prices d. consumption smoothing

d. consumption smoothing

The per capita value of income earned by everyone in an economy is equal to the per capita value of ____. a. government expenditure b. expenditure of all businesses in the economy c. goods produced in the economy d. goods and services produced in the economy

d. goods and services produced in the economy

All of the following are considered as consumption smoothing except: a. eating two good meals every day rather than having several three-meal days followed by several one-meal days b. spending less on daily basis to save for dowries for daughters or bride prices for sons c. if households have fewer or smaller fluctuations, they are willing to accept lower average consumption d. households take out a loan to spend more than their current income even if it means they have to consume much less in the future

d. households take out a loan to spend more than their current income even if it means they have to consume much less in the future

To construct a Lorenz curve measuring the distribution of per capital household income, we order everyone in the population by: a. consumption expenditure. b. the number of children in the household. c. age of head in the household. d. income per capita

d. income per capita

The Public Sector refers to all of the following except: a. governments b. NGOs c. any development actor d. private market transactions

d. private market transactions

Since we cannot measure well-being directly, people often turn to the most common measure of standards living which is: a. nominal income b. real income c. nominal income per capita d. real income per capita

d. real income per capita

Policies that intervene in the market include: a. the government hires a contractor to build a road b. making credit more available to stimulate investment by firms c. Social Insurance and assistance d. tariffs and other polices aimed at encouraging or discouraging international trade

d. tariffs and other polices aimed at encouraging or discouraging international trade

The average product of labor (APL) is the equal to a. total quantity of labor employed divided by the total output. b. total amount of output produced divided by price of the output. c. the increase in total output. d. total amount of output produced divided by the quantity of labor employed.

d. total amount of output produced divided by the quantity of labor employed.

Inequality

Some people experience lower levels of well-being than others

How many Millennium Development Goals are there? a. 6 b. 8 c. 10 d. 15

b. 8

Mathematically, all of the following statements are correct except a. If we could increase economic growth while holding the distribution of income constant, we would speed the rate of poverty reduction. b. If we could increase both economic growth and inequality, we would speed the rate of poverty reduction. c. If we could speed reductions in inequality while holding economic growth constant, we would speed the rate of poverty reduction. d. If we could increase economic growth while reducing the inequality, we would speed the rate of poverty reduction.

b. If we could increase both economic growth and inequality, we would speed the rate of poverty reduction.

If one person in an economy had all the income and the rest of the population had zero income, where would the Lorenz curve for this economy locate? a. 45 degree line. b. L-shaped curve following the bottom and right sides of the Lorenz curve box. c. L-shaped curve following the left and top sides of the Lorenz curve box. d. a curve starts off with a lope lower than 1 then it becomes steeper.

b. L-shaped curve following the bottom and right sides of the Lorenz curve box.

Choice of Poverty Line

- Absolute vs Relative poverty lines - Generosity of poverty lines - Tremendous variation in poverty lines around the world - The U.S.'s line was originally set by 3X the cost of a minimum food diet

Proximate Sources: Firm Level

- Economic growth involves growth in aggregate labor productivity - economists organize their thinking about the technological possibilities a firm faces around the concept of a production function

Specific Measures of Inequality Differ in Choices Regarding:

- How to measure well-being - How to aggregate information for many people

Emerging Consensus Regarding Macro Determinants

- Humanly devised policies and institutions are more important than geography and physical constraints - Education, openness to trade, macroeconomic stability and respect for property rights may be especially important

Common Measures of Inequality

- Income share of the bottom 20% - income share of the top 5% - Gini Coefficient which is the area above the Lorenz Curve/total area under the 45 degree line (the higher the coefficient, the higher the inequality)

Choice of Aggregation Formula: Poverty Gap Index (p1)

- Measures the extent to which individuals fall below the poverty line (the poverty gaps) as a proportion of the poverty line - The sum of these poverty gaps gives the minimum cost of eliminating poverty, if transfers were perfectly targeted - The measure does not reflect changes in inequality among the poor.

Micro Determinants of Growth

- What decisions must be made, and by which decision makers to: accumulate physical and human capital, improve technology, and move labor from less productive to more productive activities - All of these activities require investment at the micro level - to understand growth, we have to understand what encourages and discourages people from undertaking investments of many types

Choice of Aggregation Formula: Squared Proportional Income Gap Index (p2)

-Averages the squares of the poverty gaps relative to the poverty line - Shows the depth of poverty and gives priority to helping the poorest people

Proximate Sources: Aggregate Level (Accumulation of assets)

1. Accumulation of physical capital (machines, inventory, infrastructure; more rapid than the growth rate of population) 2. Accumulation of human capital (increasing average skill level of workforce) 3. Improvements in technology (through research, development, dissemination, purchase and adoption of new technologies) 4. Improvements in technical efficiency

How households pursue well-being

1. Earning Income - Labor is the primary means - agriculture is the largest sector in most poor countries, so also increased productivity or better access to markets 2. Acquiring G&S - Most of the budget goes to food 3. Coping with Fluctuations - Consumption smoothing by any means possible - Savings, Downsizing, Microfinance, Relatives 4. Investing in Tomorrow - Education, Innovation

Specific Measures of Poverty Differ in Choices Regarding:

1. How to measure well-being 2. How to draw the line defining "minimally acceptable" 3. How to aggregate information fro many people

Choice of Well-Being Measure

1. Per capita income within a person's household 2. Per capita consumption expenditure within a person's household

Indicators of Well-Being and Their Strengths/Weaknesses

1. Real household income per capita over last two weeks - weakness: farmers may only get seasonal "income" which may not fall in 2 week period; income doesn't typically come as paychecks, so it is hard to measure that way 2. Real consumption expenditure per capita over the last month - strength: consumption is a more accurate measure of well-being than income -weakness: it is hard to recall total consumption over an extended period of time 3. Per capita meat consumption over the past month -weakness: meat consumption isn't always culturally appropriate 4. Indicators of whether household has dirt floors, uses water from an improved source, and sends kids to school 5. Individual measures of height and weight for all family members

Proximate Sources: Aggregate Level (Improve

1. Shift labor from sectors or firms where the value of the marginal product of labor (VMPL) is lower to sectors or firms where the VMPL is higher 2. Shift labor out of unemployment to employment 3. Shift labor out of rent seeking activities into productive activities

How Might Poverty Reduction Policies Slow or Speed Growth?

1. They may slow growth by: - redistributing income from those who save to those who don't - weakening incentives for work and investment 2. They may speed growth by: - releasing the poor from "financial constraints" that prevent them from investing in high-return projects - encouraging them to invest in human capital (conditional cash transfer programs)

Development Accounting Studies

Seek to quantify the relative importance of differences in physical or human capital per worker in differences in TFP for explaining differences across countries in GDP per worker - often find that differences in capital per worker and differences in TFP each explain about half the cross-country differences

Growth Accounting Studies

Seek to quantify the relative importance of factor accumulation (rising quantities of physical or human capital per worker) and growth in total factor productivity (rise in all other proximate sources of growth) for explaining historical growth - often find that factor accumulation and TFP growth each explain about half of overall growth

Well-Being

Summary assessment of how good or bad life circumstances are; access to minimun quantity (and quality) of goods needed; hopes and fears regarding the future

Proximate Sources of Economic Growth

The kinds of change in socioeconomic activity that give rise to economic growth and the related choices through which those changes come about

Macro Determinants of Growth

Cross-country determinants: - current policy (openness to international trade, fiscal discipline) - geography (distance from equator, landlocked) - long-lasting social characteristics (languages, religions) - legacy of earlier policies (education stock) - institutional heritage (colonizers, legal systems) - current institutions beyond codified policies (property rights, corruption, bureaucracy)

At the macro level, successful development involves some combination of:

Economic growth, reductions in poverty, reductions in inequality, reductions in vulnerability

Default unit of analysis in the measure of well-being

Households: members make many joint decisions in the pursuit of well-being

How might successful growth policies reduce poverty?

If economic growth is rapid, rates of investment and asset creation (broadly defined) must be high, but it is not guaranteed that the poor have access

According to World Bank classification, many African and Asian countries qualify as __________ income countries, while most Latin American countries qualify as __________ income countries

Low; Middle

Choice of Aggregation Formula: Headcount Ratio

Measures the proportion of the population that is poor - Popular because it is easy to understand and measure, but it does not indicate how poor the poor are

Poverty

People experiencing well-being below some minimally acceptable level

To identify the features of life circumstances that matter to developing country households, and then to identify the factors that constrain their pursuit of well-being, the author suggests it is useful to describe four sets of activities which are: a. Increasing wealth, improving life expectancy, decreasing infant mortality and gaining freedom b. Increasing wealth, fetching fresh water, improving environmental quality and building future through savings c. Earning Income, gaining access to stable healthcare, Increasing wealth, improving life expectancy d. Earning income, coping with fluctuations, building future through investment and acquiring goods and services

a. Increasing wealth, improving life expectancy, decreasing infant mortality and gaining freedom

By the World Bank definition, with income per capita of $350, Malawi is classified as a ______. a. Low Income Country b. Lower Middle Income Country c. Upper Middle Income Country d. High Income Country

a. Low Income Country

Development policies can be broken down into three main categories, they are: a. asset creation policies, safety net policies, and intervention policies b. asset creation policies, growth policies, and inflation policies c. growth policies, price control policies, and investment policies d. safety policies, financial policies, and income growth policies

a. asset creation policies, safety net policies, and intervention policies

The term policies can refer to all of the following except: a. governments b. strategies c. programs d. projects

a. governments

If we use $10 per day as the global poverty line compared to use $2 per day, the global poverty would be a. greater. b. smaller. c. the same. d. all of the above are possible.

a. greater.

Changing market conditions can alter a household's well-being, __________prices for output and ________prices for inputs raises potential profits. a. higher; lower b. higher; higher c. lower; higher d. lower; lower

a. higher; lower

In studying the well-being, it is most common to focus on _________ as the unit of analysis. a. households b. individuals c. entrepreneurs d. the Macro economy

a. households

Asset creation policies include: a. the government hiring a contractor to build a road b. social assistance programs providing food to the poor c. government taxation and subsidies d. tariffs and other polices aimed at encouraging or discouraging international trade

a. the government hiring a contractor to build a road

If we graph the average product of labor as a function of the quantity of capital employed by a firm operating along its production function. When the capital per worker increases, the average product of labor curve is a. upward sloping b. shifts upwards c. downward sloping d. shifts downwards

a. upward sloping

Development is most successful when a. The assets that are distributed and employed in ways that limit their benefit to society as a whole b. The assets are of high quality and durability c. An economy creates a small quantity of assets for a select few d. All of the above

b. The assets are of high quality and durability

Which of the following best describes a production function? a. The maximum profit generated from given levels of factors of production. b. The maximum level of output generated from given levels of factors of production. c. All levels of factors of production that could produce a given level of output. d. All levels of output that can be generated from given levels of factors of production.

b. The maximum level of output generated from given levels of factors of production.

Which one of the following statements is true? a. The objective in development is merely to generate higher income per capita. b. The objective in development is to make people's lives better. c. Development can happen over night d. Income and well-being are exactly same concept

b. The objective in development is to make people's lives better.

A loaf of bread purchased by your professor would be described as a. an intermediate good. b. a final good. c. a financial good. d. a used good.

b. a final good.

Nominal GDP growth is calculated as the growth rate of the value of goods and services using ____ prices while real GDP growth is calculated as the growth rate of the value of goods and services using ____ prices. a. current; real b. current; constant c. constant; current d. constant; real

b. current; constant

Gross Domestic Product (GDP) is defined as the total value of ____ goods and services produced within a country's borders over a year. a. intermediate b. final c. consumption d. capital

b. final

"Howlats loans" are loans that citizens borrow from: a. the federal and local government b. friends, relatives and neighbors c. the central bank d. private companies

b. friends, relatives and neighbors

Among these four countries, one would expect that the percentage of workers who are self employed, employers and family workers is: a. highest in Indonesia b. highest in Malawi c. highest in Mexico d. highest in the United States

b. highest in Malawi

If country A's Lorenz curve dominates country B's, it means: a. inequality is worse in country A than in country B. b. inequality is worse in country B than in country A. c. country B's Lorenz curve is above country A's. d. country A is richer than country B on average.

b. inequality is worse in country B than in country A.

Diminishing marginal product of labor refers to the relationship where as the quantity of labor increases, a. average product of labor reaches a maximum. b. marginal product of labor decreases. c. total product of labor reaches a maximum. d. average product of labor decreases.

b. marginal product of labor decreases.

If we graph the average product of labor as a function of the quantity of capital employed by a firm operating along its production function, when the technology improves while holding both labor and capital constant, the average product of labor curve is a. upward sloping b. shifts upwards c. downward sloping d. shifts downwards

b. shifts upwards

According to World Bank (2012), in Ethiopia, the poorest 20 percent of population received 9.3 percent of income or consumption and the richest 20 percent of population received 39.4 percent of income or consumption; in South Africa, the poorest 20 percent of population received 2.7 percent of income or consumption and the richest 20 percent of population received 68.2 percent of income or consumption. What conclusion can we reach based on the above statistics? a. absolute poverty in South Africa is more widespread. b. the income distribution is more unequal in South Africa. c. relative poverty in South Africa is more widespread. d. South Africa is growing faster than Ethiopia.

b. the income distribution is more unequal in South Africa.

If a Brazilian works in U.S, the value of final goods and services he produced is counted in Brazil's ____ and U.S.'s ____. a. GDP; GDP b. GDP; GNP c. GNP; GDP d. GNP; GNP

c. GNP; GDP

The magnitude of household's needs can be affected by all of the following except: a. Households with members that are disabled or sick b. Cultural norms regarding celebrations and other obligations c. Income d. Number of dependents in the household

c. Income

The accumulation of assets is central to understanding development, assets can be broadly grouped into the following categories EXCEPT: a. Business assets b. Infrastructure assets c. Inflation assets d. Human assets

c. Inflation assets

All of the following are examples of development indicators except: a. Economic growth rates b. Poverty c. Interest rates d. Income

c. Interest rates

Which of the following is NOT true about rural Ethiopia? a. Most people live on less than $2 a day b. Most people do not have access to clean water c. Most people have one or two children d. Most people have never been enrolled in school

c. Most people have one or two children

Changing market conditions can affect household's well-being in many ways, if money is not available in financial markets for example, small firms may not be able to invest in key parts causing a ______ of goods and the price of goods to ________. a. Surplus; increase b. Surplus; decrease c. Shortage; Increase d. Shortage; decrease

c. Shortage; Increase

Safety net policies include: a. the government subsiding low income housing b. making credit more available to stimulate investment by firms c. Social Insurance and assistance d. tariffs and other polices aimed at encouraging or discouraging international trade

c. Social Insurance and assistance

Which of the following cost saving activities is referred to as ex post responses to fluctuations? a. Households spend less than earnings in an effort to "Save up" b. Keep extra money in a mud bank c. Take out a loan, promising to repay it with interest out of future income d. Purchase a formal insurance

c. Take out a loan, promising to repay it with interest out of future income

What is the ultimate aim in development? a. To generate higher income per capita b. To achieve faster economic growth c. To make people's lives better d. To make sure that everyone in the world is not hungry

c. To make people's lives better

By the World Bank definition, with income per capita of $8,890, Mexico is example of ______. a. Low Income Country b. Lower Middle Income Country c. Upper Middle Income Country d. High Income Country

c. Upper Middle Income Country

Constant returns to scale refers to a situation that when capital and labor both double, a. output more than doubles b. output less than doubles c. output just doubles d. output does not change

c. output just doubles

An empirical pattern known as Engel's Law states that as income levels rise, per person food expenditure a. falls, but its share in total consumption expenditure rises b. falls, and its share in total consumption expenditure falls c. rises, but its share in total consumption expenditure falls d. rises, and its share in total consumption expenditure rises

c. rises, but its share in total consumption expenditure falls

The quantity, quality and types of assets that an economy creates in any period of time and the way the value generated by the assets is distributed across diverse groups are determined in a country's _____________ system? a. network b. command c. socioeconomic d. infrastructure

c. socioeconomic

All of the following is examples of ex ante coping mechanisms except: a. precautionary saving. b. participation in informal insurance arrangements. c. take out loans to smooth consumption. d. use of insecticide-treated bed nets.

c. take out loans to smooth consumption.

Economic growth is defined as: a. the rate of increase in an economy's nominal GDP. b. the rate of increase in an economy's real GDP. c. the rate of increase in an economy's average income. d. the rate of increase in an economy's price level.

c. the rate of increase in an economy's average income.

Empirical studies show that with economic growth, the poorest 20 percent of population gain ________ the average members of the population. a. more than b. less than c. the same as d. we cannot compare them

c. the same as