Developmental Economics MT1

Explain the ​Easterlin Paradox​. Does it hold true across a large sample of countries? Could it be true among any given income category of nations (e.g. "low", "medium", or "high" income)? Why do the countries in eastern Europe and central Asia almost always lie below the trend line in a chart showing ​mean level of life satisfaction on the Y-axis and ​log of GDP per capita on​ the X-axis? Do you ​personally​ think that economic growth​- the way we have defined it in this course - is desirable?

**Easterlin paradox - although per capita in the US had risen dramatically over the preceding half century, people did not seem to be any happier --> The analysis of well-being Life satisfaction rises with per capita income. It increases with % changes in per capita income across entire range of observed incomes Economic growth and happiness are correlated, but there appears to be less of a trend between them within income categories (low, medium, high) Eastern Europe and central Asia always lie below the trend line, because of the wrenching effects of the transition from planned to market economies. People who benefitted from the former system were made worse off → measures of life satisfaction Research shows that happiness and income levels are correlated, implying that economic growth improves happiness. Economic growth is desirable because it ensures the increase of production of g/s which increases income. W. Arthur Lewis said that economic growth gives man greater control over his environment, and thereby increases his freedom. Overall, although economic growth can lead to further inequality, the benefits are much greater.

Trace the history of the debate regarding the impact of economic growth on inequality. In your answer, be sure to refer to the Kuznets inverted-U curve, the surplus labor model, and the evidence from cross-section and time-series studies on this issue.

-Kuznets suggested that inequality might first increase as a nation makes the transition from a mostly agricultural economy to an industrial one (increase in inequality with economic growth) Eventual decline in inequality with further economic growth -Lewis developed model that predicts rising inequality followed by a turning point, which eventually leads to a decline in inequality i. Industrial growth accompanied by rising share of profits. Average income rises, labor receives smaller share of the total, increasing inequality. Turning point reached when all the surplus labor has been absorbed and the supply of labor becomes more inelastic. Wages/labor's share of income then starts to rise and inequality falls Inequality is a cause of growth Research based on cross-section analyses of countries supported the existence of Kuznets inverted U-curve Time-series data on individual countries, coupled with more rigorous econometric methods, but no distinct trend in inequality in either direction

Briefly explain the six equations of the basic growth model. Also explain the resulting equation ​ΔK​ ​= ​sY ​- ​dK i​ n words.

1. Aggregate production function: Y = F(K, L) Output is a function of the capital stock and the labor supply -->As capital and labor grow, output expands Y - total output (total income) K - capital stock L - labor supply 2. Savings equation: S = sY Explains how capital stock changes over time S - total value of saving s - average saving rate 3. Savings-investment identity: S = I In closed economy. All output of g/s produced by economy must be used for either current consumption or investment, while all income earned by households must be either consumed or saved I - investment 4. Change in capital stock: ∆K = I - dK Capital stock increases each year by the amount of new investment Capital stock decreases every year because of the depreciation of existing capital --Depreciation rate is constant d - depreciation. 5. Change in the supply of labor: ∆L = nL n - growth rate of both the population and the labor force. **Simplified by adding equations 2, 3, and 4 together: ∆K = sY - dK The change in capital stock is equal to saving minus depreciation Allows for calculation of change in the capital stock and enter new value directly into aggregate production function equation

Describe the general trends in economic growth around the world estimated since the year 1 B.C.E. to the present time. As in the textbook, divide your answer in the following three periods of time: 1 B.C.E. to 1000 C.E., 1000 C.E. to 1820 C.E., and 1820 C.E. to 2008 C.E.

1. BCE - 1000 CE -Growth in per capita was 0 -No growth 2. 1000 CE - 1820 CE -World income per capita growing 0.05% per year -World GDP grew only slightly more than the growth in world population -Slow growth 3. 1820 CE - 2008 CE -Average growth in world income increased to 1.3% per year -Average real income doubles in less than every three generations -Richest countries recorded fastest growth rates, and poorest countries the slowest until 1950 -Per capita income in Western offshoots grew 1.6% per year between 1820-1950, in Asia only 0.16% -1950 -2008: poorest region in 1950 (Asia) has fastest growth rate of 3.6% Latin America growth rate stagnated 1980s-1990s -Europe's growth rate collapsed 1989: fall of Berlin Wall -2000s - Latin American and Europe continued economic growth -Africa growth rate accelerated after 1820 and after 1950: end of colonial era, then stagnated 1980-1990s, rebounded only recently -1970s - All regions experienced growth

Explain the ​three​ different ways in which ​global i​ncome inequality can be measured. What are the arguments in favor of reducing global inequality?

1. Compare average incomes across countries 2. Weight each nation's mean income by its population 3. Estimate inequality as if the whole world is one nation 4. Reasons to reduce global inequality Redistribution could increase return on total global investments Prevent global destabilization Moral obligation

Explain any ​two ways​ in which rich and poor countries are categorized.

1. Developed and Developing countries --Poorest: LDC (least-developed countries) --Emerging economies: industrial output growing rapidly --Rich: industrialized countries --Highest income countries - post industrial countries/service based economies (because services account for largest most rapidly growing share of their economies) 2.Rich-poor dichotomy --Low-income economies: avg. incomes less than $1,005 per capita --Lower-middle-income economies: income $1,006 - $3,975 --Upper-middle-income economies: income $3,976 - $12,275 --High-income economies: income over $12,275

Based on the broad results of ​sources of growth analysis​, what are the main determinants of economic growth observed over several years in industrialized countries and developing countries?

1. Developing countries Have lower levels of capital per worker than the industrialized countries and can catch up (or converge incomes) through investment process. Much of capital equipment imported by developing countries (counted as investment) embodies advances in tech. **Mobilization of capital is major concern** Capital accumulation is the main contributor to growth 2. Industrialized countries Increases in capital stock frequently account for less than half the increase in output Contributors to growth are split between capital accumulation and TFP growth

Explain the difference between ​diminishing returns ​to factors of production and constant returns to scale.​

1. Diminishing returns to factors of production is when, all other equal, if one of the factor increases by r%, the output increases by a rate <r%. 2. Constant returns to scale is when the output increases by the same rate as the rate of increase of factors of production. Ex: doubling of labor leads to doubling of output

For a given population, inequality can be measured by observing the distribution of ​income ​or ​consumption o​r ​wealth ​among the individuals in that population. Discuss why the distribution of ​consumption ​is the preferred measure of inequality for developing countries. As a part of your answer, you will need to highlight the merits and / or demerits of using each of the three criteria

1. Distribution of income Hard to measure income in poor countries, especially for subsistence farm households who consume rather than market most of what they produce Depends on ownership of factors of production 2. Distribution of consumption Consumption tends not to fluctuate as much as income 3. Distribution of wealth Good for understanding the opportunities individuals have to be productive and generate household income Always most unequal ownership usually highly concentrated so it makes income more unequal

What does ​economic globalization mean​? In what sense is globalization "not a new phenomenon"

1. Economic globalization - integration of national economics into the international economy through trade in goods and services, direct foreign investment, short-term capital flows, international movements of people, and flows of technology 2. Not new: early voyages of Ferdinand Magellan, Christopher Columbus Zheng He, Marco Polo and others opened early epoch of globalization, late 19th/20th centuries saw increased global integration until the onset of WW1.

Explain the difference between ​economic growth and​ ​economic development​. Be sure to explain at least ​one​ measure of both.

1. Economic growth - rise in national or per capita income. Production of goods/services rises and avg. income increases → economic growth. 2. Economic development - improvements in health, education, and other aspects of human welfare. Rise in national or per capita income with improvement in social and economic infrastructure. Shifts in structure of the economy, more people shift away from rural agricultural production to urban-based and higher-paying employment

Describe the ​two​ basic processes that drive economic growth of a country.

1. Factor accumulation: increasing the size of the capital stock or the labor force. -->Producing more g/s requires more machines, factories, buildings, roads, etc. along with more and better educated workers to put this capital equipment to work. 2. Productivity growth: increasing the amount of output produced by each machine or workers. -->Productivity can be increased improving by efficiency in which current factors are being used. Reorganizing workers so that they specialize in one task → total production increase. --->Also increased by technological change, through which new ideas, new machines, or new ways of organizing production can increase growth Can either invent or adopt new technologies Shifting resources from producing one good to the other

Explain the meaning of ​Gross Domestic Product ​(GDP). How is GDP different from Gross National Product (​ GNP)? Is growth in ​per capita ​GDP a better measure of economic progress than growth in ​total G​ DP of a country? Why or why not? Differentiate between ​real GDP a​ nd ​nominal GDP.​

1. GDP - Counts all output produced within the borders of a country, including output produced by resident foreigners, but excludes the value of production by citizens living abroad 2. GNP (GNI) - sum of the value of finished g/s produced by a society in a given year. Excludes intermediate goods (goods used up in production of other goods (ex: steel used in automobile or chips that go into computer). Counts all output produced by the citizens and residents of the country, regardless of the location 3. GDP growth per capita is a better measure of economic progress of a country, because it adjusts for population differences between countries. 4. Real GDP is computed by deflating nominal GDP (GDP measured in current prices) by a price index.

What are three characteristics of countries with rapidly growing economies?

1. Investing in healthcare and education -Healthy and well-educated people are more productive thus increasing output produced which stimulates economic growth 2. Stable Government and Policies -stable countries attract direct foreign investment which will accumulate capital. In developing countries, this is crucial for economic growth 3. Geography -affects trade ability and access to international markets. Landlocked nations depend on other countries for trade, which affects the accumulation of capital and productivity.

Explain the broad steps involved in the calculation of the ​Human Development Index (HDI) for a particular country.

1. Life expectancy: (country's life expectancy - 20) ÷ (83.2 - 20) 2. Knowledge: 2 variables -->Mean years of schooling achieved by adult population (25+) 1. Goalposts: 0-13.2 -->Expected years of schooling for children of school-going ages (based on enrollment data) Goalposts: 0-20.6iii. -->Values are then aggregated to form one composite index for education 3. Access to resources: transforming GNI per capita (PPP in US$) -->Goalposts: $163 and $108,211 -->Relative standing of nation's GNI per capita is determined by taking the logarithms of all $ values 3. Then a geometric mean (nth root of the product of n numbers) of the 3 percentages is computed -->Geometric mean = imperfect substitutability across HDI's 3 dimensions

Explain any ​three​ criticisms of the HDI methodology. Is the HDI a much better measure of economic development than ​per capita GDP?​

1. Limits the index to only 3 dimensions of human development 2. Assumes diminishing returns only to income but not to either life expectancy or schooling 3. Geometric means are sensitive to low values; in the extreme if an index equaled 0 HDI would be 0 too 4. Income alone explains 90% of the variation in HDI, still, HDI has been useful in calling attention to development issues. This data also shows that improved health and education depend on factors other than income. The inclusion of other indicators in HDI allows it to give a better picture of the state of well-being of a country's populace.

Discuss the two major explanations of the degree of absolute poverty observed around the world today. As a part of your answer, be sure to explain the following statement: "Inequality determines the amount of absolute poverty at any given level of income".

1. Low levels of total production per capita 2. Unequal distribution of income **Inequality is the driving force for absolute poverty. With the wealth gap and more importantly the distribution of consumption continuing to grow, absolute poverty will not decrease. Inequality affects the amount of poverty generated by a given level of income

How has the context of economic development changed since the 1980s?

1. Low-income countries have adopted more democratic political systems 2. Demographic shifts have led to a fall in population growth rates, with a decline in the number of dependent children and a corresponding growth in the share of workers in the population 3. The spread of endemic disease threatens development progress. Diseases bring a heavy human toll and substantial economic costs 4. Global trade has grown rapidly in line with sharply falling transportation and communication costs, giving rise to far more sophisticated global production networks. Shift away from producing goods for the local market under government protection toward greater integration with global markets 5. Capital moves much more quickly across borders. More sophisticated financial instruments and a greater emphasis on private capital have opened opportunities for low-income countries to access foreign capital for local investment. Some countries, rapid financial liberalization resulted in deep financial crisis when financial institutions were weak and foreign capital was quickly withdrawn. On the other hand, the financial crisis of 2008-2009 in US had less impact on developing countries than expected. 6. Information and ideas spread faster around the globe. Cell phones, internet, and other communications technology have created new opportunities for low-income countries. Farmers can get pricing info, family members can send money without the need of traditional banks. New technology has created jobs that provide services via satellite and through the internet (accounting, data entry, and telephone help lines).

​Discuss any ​three​ characteristics of rapidly growing countries. Be sure to explain how the attributes of your choice allow countries to accumulate capital and increase productivity and, in turn, ensure economic growth.

1. Macroeconomic and political stability -->Relatively low budget deficits over time (with corresponding high rates of government saving), prudent monetary policy (which keeps inflation in check), appropriate exchange rates, suitable financial markets (depending on the stage of development)l and judicious foreign borrowing at sustainable levels are key elements to macroeconomic stability. Stability reduces risks for investors (multinational conglomerates or coffee farmers considering planting more trees) -->Civil and cross-border wars, military coups, and other incidences of political instability undermine investment and growth Porr are most vulnerable and least able to protect them 2. Favorable environment for private enterprise --> Many countries: agricultural policies are central to growth process Agricultural production (and farmer income) has suffered where governments have pushed farm-gate prices low to keep food prices cheap or forced farmers to sell their products to government-owned marketing boards Farmers need reasonable access to fertilizers, seeds, and pesticides, and the construction of rural roads has had dramatic impact on rural incomes -->Climate for small-scale businesses and manufacturing also important When regulatory burden to start a business is high, fewer entrepreneurs bother to start businesses, and when they do, they tend to operate on smaller scale and in the informal sector Government investments in infrastructure at core of capital formation are central 3. Favorable Geography -->Landlocked nations have low economic growth Higher transport costs and fewer economic opportunities Imports more expensive → reduces income left for consumption and raises production costs Makes exporting more expensive, reducing profits Overland shipping costs -->Poorest countries in the world are almost all in the tropic where richest are in temperate zones Tropical countries have to deal with burden of virulent diseases, erratic climate, and poor-quality soil for agriculture ---Diseases undermine worker productivity and add to healthcare costs ---Hotter climates reduce labor productivity

Explain at least ​three​ problems with using per capita GDP as a measure of economic progress. Also describe the ways in which such problems could be mitigated in practice.

1. Non-paid work is not counted in GDP 2. Much of what is produced by the agricultural sector is consumed by the farm house-hold and never exchanged in the marketplace. 3. Does not account for the 'bads' in an economy such as pollution and depletion of resources -->Solution: Deduct cost to the society of crime and congestion? 4. More GDP per capita does not guarantee a better standard of living or infrastructure as income may not be distributed fairly 5. Can get sample estimates to at least get idea of these unaccounted for indicators

Describe at least ​three​ causes of inequality ​other than ​economic growth.

1. Politics. Ex: South Africa, apartheid excluded blacks from owning prime agricultural land, getting a decent education, and living in major urban areasb. 2. History/Land Ownership Ex: Latin America, colonial legacy but also demand of specific crops, including advantages of plantation style agriculture 3. Government Policy: policy decisions affect the diffusion of technology and access to markets, which condition productivity growth and the returns to factors of production

Describe the ​three​ broad strategies that could be used to reduce poverty.

1. Promote market-oriented economic growth Macroeconomic stability Greater economic openness to trade and investment Increased public investment in infrastructure Improved credit markets 2. Direct basic health and education services to the poor Increases the poor's productivity and thereby contributes to poverty reduction. 3. Develop social safety nets Assists individuals unable to take advantage of market opportunities

Which of the following changes is not typical of the structural changes that accompany development? A. Increasing poverty in rural areas B. Increase in manufacturing output as a share of GDP C. an increase in urbanization of the population D. a decrease in the infant mortality rate

A. Increasing poverty in rural areas

Productivity gains can be shown on a graph of a production function by: A. an upward shift of the production function B. a movement along the production function C. a downward shift of the production function D. None of the above

A. an upward shift of the production function

While there is no evidence of unconditional convergence, there is strong evidence today of conditional convergence in which: A. countries sharing certain characteristics are able to achieve rapid growth and begin to catch up with the richer countries B. by entering into World Trade Organization, a nation implicitly agrees to integrate into the global economy C. countries all agree to play "by the rule of the game"

A. countries sharing certain characteristics are able to achieve rapid growth and begin to catch up with the richer countries

The Human Development Index is a composite of 3 basic measures of human welfare. Which of the following is not a component of the HDI? A. Life expectancy B. Infant mortality rate C. National Income D. Years of schooling

B. Infant mortality rate

Diminishing returns to capital means that as more capital is added: A. Output falls B. Additional contribution to output eventually declines C. Labor usage falls D. Output rises

B. additional contribution to output eventually declines

What characteristics of the economies of India and Indonesia make those countries potential challenger's of China's status as the "global manufacturing powerhouse?"

Both countries have large population growth and a generally young population which creates a more productive manufacturing environment and workforce. India has half the production costs of China which is extremely attractive to investors. They are also implementing policies that reduce tariffs and subsidizing foreign investors.

If everyone in a country had the same level of income, then the value of the Gini coefficient would be: A. 1.0 B. 0.5 C. 0.0 D. infinity

C. 0.0

Which of the following terms does not belong with the others? Which is the odd one out? A. LDCs B. low-income countries C. North D. Third World

C. North

Use the solow diagram to explain the effect of an increase in the savings rate (s) on the position of the steady state point on the diagram. Explain the effects of increase in savings rate on capital per worker, output per worker, and the growth rate of per capita income.

Capital per worker increases from K0 to K2 output per worker increases from y0 to y2 savings rate increases from s to s' growth rate of per capita income increases at a faster rate n until it reaches steady state B and then grows at a slower rate of <n%

The ratio of the number of people below the poverty line to the total population is the A. Gini coefficient B. Poverty gap C. marginal income deficiency D. head-count index

D. Head-count index

What special problem is associated with non-traded goods when measuring the Gross National Product (GNP)? A. Non-traded goods are excluded because they are intermediate goods B. Non-traded goods are excluded because they are not sold in the market C. There is no value added in the production of non-traded goods D. Non-traded goods are improperly valued by the exchange rate conversion for international comparisons

D. Non-traded goods are improperly valued by the exchange rate conversion for international comparisons

Elements of a pro-poor development strategy would contain all of the following except: A. encouraging market-oriented economic growth B. improving basic health and education C. designing social safety nets for vulnerable groups D. encouraging zero population growth through free access to all forms of birth control

D. encouraging zero population growth through free access to all forms of birth control

Why does inequality matter? In other words, why should a society attempt to reduce inequality of income (or consumption or wealth) among the individuals in that society? What is the empirical evidence regarding the impact of inequality on economic growth?

Degree of inequality plus the level of income income determines the extent of poverty. When inequality is high, worthwhile investments may not be undertaken. Poor may have promising investment opportunities. When inequality is high, the rich use their wealth to secure outcome favorable to their interests, influencing everything from government spending to trade policy. Can lead to inefficient outcomes that lower growth rates. Empirical evidence is inconclusive.

Explain the meaning of ​conditional convergence​. Does empirical evidence support the idea of conditional convergence?

Each country takes its own individual combination of key parameters. Each country has its own individual steady-state level of capital and income per capita We do see faster growth among initially poorer countries, if each country is allowed to have its own steady-state level.

What is the problem with using ​exchange-rate conversion ​to compare the per capita GDP across countries? Explain how the ​PPP exchange-rate ​methodology can address this problem. In your answer, be sure to refer to the fact that ​non traded goods and services are​ a significant part of a country's income.

Exchange rates are more volatile than PPP. PPP creates a weighted basket of goods and services and compare the price levels in the two economies. An economy mostly consists of non traded goods and services which are stuff that cannot enter the international market (be exported or imported) such as a haircut or land or train. Prices of the traded goods and services tend to be similar across countries so exchange rate doe not incorporate the effects of non traded goods and services whereas PPP does. The problem is that exchange rates can be distorted, particularly in those of developing countries. --->Trade restrictions/direct government intervention in setting the exchange rate make it possible for an official exchange rate to be substantially different from a rate determined by a competitive market for foreign exchange Pick a set of prices for all g/s prevailing in one country and to use that set of prices to vale the g/s of all countries being compared -- how to calculate PPP The problem with the comparison is that each country purchases different amounts of nontraded goods. PPP allows for more valid comparisons of real income levels across economies

Discuss the meaning of foreign aid. Provide at least one example of each of financial flows that are considered foreign aid and flows that are not considered foreign aid

Foreign aid consists of capital flow, technical assistance, or commodities given from a foreign entity to a domestic economy. NGO's or charities providing help is considered foreign aid. Government expenditure on military is not considered foreign aid.

In some detail, discuss any one of the three different views regarding the effect of foreign aid on economic growth.

Foreign aid is beneficial for economic growth because countries often find themselves in a poverty trap they can't escape. Foreign aid helps them alleviate debt, invest in social welfare programs, conduct R&D in various industries, and promotes overall economic growth and development. Foreign entities can provide help that they could not have acquired domestically.

Explain the following two measures of absolute poverty: (1) ​head-count index,​ and (2) ​poverty gap​. As a part of your answer, explain how the ​poverty line ​is constructed.

Head-count index: ratio of the number below the poverty line ÷ total population i. What proportion of the population is poor Poverty gap: measures severity of poverty Proportionality how far the poverty line the mean income of the poor falls PG = [(PL-MC) ÷ PL] x H PL - poverty line ($) MC - mean consumption of all individuals below PL H - headcount index Poverty line can capture the degree of material deprivation but may not reflect securing basic health and education. --Separate poverty lines for urban and rural areas --Adjusted for inflation over time --Usually the per capita cost of a minimal food basket and a few other necessities

Describe the following two measures of inequality: (1) Lorenz Curve, and (2) Gini Coefficient. Be sure to include any necessary diagrams and formulas.

Lorenz Curve: Shows the share of total income received by any cumulative percentage of recipients. Shape indicates the degree of inequality in the income distribution. Curve must touch 45-degree line at both lower left corner and upper right corner Gini Coefficient: derived from Lorenz curve. Ratio of income share of the top 20% of households to the share received by bottom 20% or 40% Area A ÷ Area (A+B) = Gini Coefficient

Does ​pro-poor growth m​ ean that income growth among the poor should be faster than the average income growth? Or does it mean economic growth that includes any​ growth in the incomes of the poor? Why does it matter in practice that we recognize such a distinction?

Pro-poor growth is sometimes described as the situation in which income growth among the poor is faster than average income growth. General definition: economic growth that includes any growth in incomes of the poor Problem with this definition is that it favors circumstances in which the incomes of the poor grow, for example, at 3% while the GDP per capita grows at 2% over situations in which the incomes of the poor grow at 4% while the GDP per capita grows at 6%, even though more rapid poverty reduction would occur in the latter case.

Explain whether market-friendly growth strategies can really serve the interests of the poor.

Sometimes more than economic growth and market forces may be needed to reduce absolute poverty --Well-being of the bottom quintile falls despite increases in GDP per capita --Too few of the poor cross poverty line because initial share of income is so low, despite economic growth --Distributional changes reduce the amount of poverty alleviation generated by economic growth

What is ​sources of growth analysis?​ Describe how results from a ​sources of growth analysis c​ an help policymakers in a developing country to implement appropriate economic policies.

Sources of growth analysis/growth accounting - is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy. Breaks down GDP into 3 parts: 1. Growth in capital stock 2. Growth in labor force 3. Changes in productivity The policy makers can understand the weak points in their economy and the areas of potential growth by the sources of growth analysis. They can strive to increase the capital if the analysis says that the economy needs to focus on capital and/or the same with labor and productivity.

Given the Solow diagram, identify and explain the significance of the steady state point on the diagram. What are the growth rates of total GDP (​Y​) and GDP per capita (​y​) at the steady state point?

Steady State point is where the investment per worker equals the amount of capital needed to keep capital in an economy constant. The only place where the amount of new saving, ​sy​, is exactly equal to the amount of new capital needed for growth in the workforce and depreciation. Therefore, at this point, the amount of capital per worker, ​k​, remains constant. GDP (Y) grows at a rate of n% but GDP per capita (y) is constant (average income remains unchanged)

Explain the two problems with the interpretation of the ​Solow Residual ​(i.e. the rate of change in ​Total Factor Productivity)​ revealed by a growth accounting exercise for a country.

TFP growth is estimated as residual output growth unexplained by use of capital and labor "a" is a combination of influences this analysis cannot disentangle. Limited growth accounting framework cannot definitively answer questions without adding many more variables for which data do not exist "a" captures net effect of all errors and omissions in the other data

For the Solow model, explain the equation ​Δk​ ​= ​sy ​- (n + ​d)k ​in words.

The equation means that change in capital per worker is positively related new investment per worker. ∆k positively related to savings per work and negatively related to population growth Depreciation erodes capital stock It is inversely related to change in population. Each year, because of growth in the population and labor force, there are ​nL n​ ew workers. If there were no new investment, the increase in the labor force would mean that capital ​per worker ​(​k​) falls. Capital per worker is also inversely related to depreciation of capital in an economy, as depreciation mean less total capital and less capital per worker.

Describe Amartya Sen's ​capabilities approach to​ economic (or human) development. Also clarify how the UNDP's characterization of human development is related to Sen's ​capabilities approach​.

The goal of development is to expand the capabilities of people to live the lives they choose to lead. 4 broad factors that affect how well income can be converted into the capability to live minimally acceptable life are: personal heterogeneities, environmental diversities, variations in social climate, and differences in relative deprivation. UNDP's characterization of human development includes: to live a long and healthy life, acquire knowledge, and have access to the resources needed for a decent standard of living. A specific measure was constructed and aggregated into an index, HDI. These determinated can each fall into Sen's capabilities approach.

Describe the cause-effect relationship between health and economic growth of a country. In other words, does higher income lead to better health or does improved health lead to faster economic growth in a country? Or is it both? Be sure to present adequate reasoning for your choice

There is a mutually beneficial relationship between economic growth and health, because they both promote a better society and overall well-being. Health improves economic growth because a healthy labor-force leads to higher productivity, which in turn creates economic growth. People who are healthier assume they will live longer and therefor will put money into long-term investments. Economic growth also improves health because the stronger the economy, the more people make, and the more they can afford healthcare that will keep them working and so on and so on.

Explain the meaning of ​unconditional convergence implied by the Solow model. Be sure to explain how the assumption of diminishing returns to capital results in unconditional convergence among countries. Does empirical evidence support the idea of unconditional convergence?

These are very powerful implications. It is important to recognize that they rest on the assumption that all else is equal between the two countries, in particular that countries have the same rates of savings, population growth, and depreciation, and hence the same steady-state level of capital and income per capita. As this interpretation of the Solow model is not conditional on countries differing from one another in these key parameters, it is known as unconditional convergence. Example of Japan: When Japan was relatively poor, it could grow fast; as it's income increased, it's growth rate declined; and as result, it's income converged significantly toward US income. -->Those who believed that Japan could grow indefinitely ignored the impact of diminishing returns to capital on long-term growth rates There has been general tendency for poor countries to catch up to the world leaders, if anything, opposite is true. Gap between poor and rich countries has grown Assumes that all countries share the same key parameters (d, s, and n) and hence the same steady-state levels of k and y

Use the Solow diagram to explain the effect of an increase in the ​savings rates​(​s​) on the position of the steady state point on the diagram. Describe the effects on capital per worker, output per worker, and the growth rate of per capita income. Be sure to label both the axis and all the ​four​ curves in the diagram appropriately.

We can see that an increase in savings rate from s to s' shifts the sy curve to s'y, shifting the steady state point from A to B, meaning B is the long run equilibrium point for the economy. In the process, capital per worker increases from k​ to k​ 0​ 3 and output per worker increases from y​0 to y​3 . Per capita income increases at a 0​ 3​ faster speed than n till the point B, after which it increases at the rate of n.

Explain the ​two​ ways in which the new theories of economic growth go beyond the Solow model. In other words, explain the ​two​ types of features incorporated in the new economic growth models that represent an advancement over the basic Solow model.

We move from the assumption of a fixed savings rate, growth rate and technological growth rate. These are made possible due to the following two features included in the new economic growth model 1. Increasing returns to scale rather than constant returns to scale. Doubling of capital, labor and other factors of production leads to more than a doubling of output. Impact of investment on both physical and human capital would be larger than suggested by Solow 2. They have positive externalities - larger impact from the investment on the entire economy , such as Henry Ford's development of assembly line revolutionized the entire production line system.

Use the Solow diagram to explain the effect of an increase in the ​rate of population growth (​ ​n)​ on the position of the steady state point on the diagram. Describe the effects on capital per worker, output per worker, and the growth rate of per capita income. Be sure to label both the axis and all the ​four​ curves in the diagram appropriately.

When the population growth increases to n', the production and saving functions do not change. Because there are more workers, savings per worker (sy) becomes smaller and no longer is large enough to keep capital per worker constant. Therefore, k begins to decline, and the economy moves to a new steady state, C. More workers also means that capital per worker declines from k​0 to k​4 and saving per worker falls from sy​0 to sy4​ . Output per worker (or income per capita) also​ declines, from y​ to y​. Thus, an increase in the population growth rate leads to lower average income in the Solow model.

Is it possible for a country to experience ​economic growth during​ a given period, but not undergo much ​economic development during​ the same time? Why or why not?

Yes, example: Equatorial Guinea had very rapid growth rate with the discovery and development of oil deposits. Had a high level of per capita income, there was little transformation in low levels of education and poor health health care for most of the country. Not much change in economic activity either. **Because all wealth is kept by the dictator!

Easterlin Paradox

although per capita in the US had risen dramatically over the preceding half century, people did not seem to be any happier The analysis of well-being