Econ 365 Test #1 (ch 2 - 5)
Import Substitution Industrialization
"An economic system aimed at building a country's industry by restricting foreign trade. It was especially popular in Latin American countries such as Mexico, Argentina, and Brazil in the mid-twentieth century." - developing industry behind high protective barriers - later realized that government intervention leads to corruption
5. Countries with rapid growth over the period 1960-2009 include all of the following except
Venezuela ??
1. Which of the following countries has a higher score on HDI than on per capita income? (See Table 2). Note: a smaller rank number implies a higher HDI score.
Vietnam
4. Which of the following are considered non-tradable goods and services?
Visits to physician, housing, education
growth depends on two processes
1. accumulation of assets (capital, labor, land) 2. making those assets more productive
market failures
1. externalities 2. monopoly or market power 3. public goods 4. asymmetric information
1. If GDP is growing at 6% and population is growing at 3%, then GDP per capita is growing at
3%
economic growth
a rise in national or per capita income
modern economic growth
current economic era - still evolving, but key element has been the application of science to problems of economic production --> led to industrialization, urbanization and even explosive growth in population
terms used to differentiate poor from rich countries
developing and low-, middle-income economies - refer to nations with incomes lower than the developed and high-income nations
10. "Countries with high rates of tariff protection grow more slowly than countries with low rates of tariff protection." This statement is an example of an explanation based on
differences in economic policy (tariffs are economic policy)
11. "Democracies have higher incomes on average than authoritarian countries." This statement is an example of an explanation based on
differences in institutions - democracy is an institution of how government officials are voted into office/replaced
externalities
divergence of private and social costs and benefits, divergence of private and social costs and benefits
Public good (two definitions)
non-excludable and non-rival
moral hazard
once you have insurance, you fail to take precautions (house insurance --> leave door unlocked
behavioral economics
people don't always act in their best self interest
Berg Report
presented wide range of policy changes that would be needed if Africa were to reach its potential growth - focused heavily on agriculture
aggregate production function
show the economy wide relationships - size of the country's total labor force and the value of its capital stock with level of GDP
8. The empirical relationship between trade and growth is
strong - especially true of the 4 dragons
4. Look at Table 3.1 in Perkins to see which countries have had slow growth or rapid growth over the period 1960-2009. Which of the following rapid-growth countries has had a relatively low Anti-Corruption score? (See Table 2 and Table 2a)
(relatively low Anti-Corruption score = relatively corrupt) South Korea and China
what percent of world's population lives in low-income economies
- 12% - nations with GNI per capita falling below $1,005
Pareto optimality
- 1970/80's - a system that could not make anyone better off without making someone else worse off - economists argued it is up to government to address basic needs and target aid to the poor - realized that governments of developing countries needed to step back and better design policies that were already working
linkage
- Albert Hirschman - so creation of one industry (machinery for example) would create demand for steel --> create demand for iron and coal, etc.
percent changes in growth rate
- GDP = y x pop - *growth rate* of GDP = sum of growth rates of y and population
Easterlin paradox
- Richard Easterlin observed that. although per capita incomes in the US had risen dramatically over half a century, people did not seem to be any happier
growth accounting or sources of growth analysis
- Solow's procedure for measuring these relationships - starts with a standard production function relating the contribution of labor and capital to aggregate production, then adds a term to capture total factor productivitiy - Gy = WkGk + WlGl + a
4 East Asian Tigers
- South Korea, Taiwan, Hong Kong (laissez faire), Singapore - built their rapid growth on export of labor-intensive manufacturers - government was very involved in South Korea and Taiwan --> corruption
how is productivity growth measured
- as a residual - the increase in output that is not explained by increased use of inputs
marginal product of capital
- change in income due to an increase in capital - production function always displays declining MPK - as y/k increases, slope of the line decreases (MPK decreases)
Washington Consensus
- comprehensive view of what was wrong and also what successful development involved - economists' consensus on good economic policies: - basic message was macroeconomic balance and avoid microeconomic distortions (let the market work)
Non-rival
- consumption by one person does not interfere (or cost) with consumption by others - zero marginal cost to allow another person to enjoy the good - scientific research: non-rival because it does not cost more to let people read it (public good!!) - draining a swamp to eliminate mosquitos - cable TV broadcast - does not cost more to allow someone to see the content - non-rival
productivity growth
- defined as increasing the amount of output produced by each machine or worker - first way: improve efficiency with current factors - second: technological changed - new ideas, new machines, or new ways of organizing production
The big push
- development thinking post ww2 - idea of economist Paul Rosenstein-Rodan - argued that it was difficult for one modern industry to start up in a developing country because there would not be enough people with money to buy the products - one needed to develop a wide range of industry at the same time
Solow (Neoclassical) Growth Model
- dropped fixed coefficients - allows for more flexibility and substitution between factors of production - suggests that more rapid population growth leads to decreased capital deepening and decreased growth in output per worker
model of growth by Soviet Union
- emphasized role of capital and high rates of investment (limiting consumption) - priority to development of heavy industry --> machinery - rejected use of market forces except in areas with most economic activity
diminishing marginal product of capital
- gradual flattening of the curve as capital per worker grows - each additional unit of capital per worker yields smaller and smaller increases in output per worker
HDI equation example
- life expectancy = 60 years (range = 20 - 83) - schooling = 7 years (range = 0 - 13.2) - income = 10,000 (range = 108k - 163) TAKE THE LOG - to calculate, we use the highest score in the world and call it the goal post, and use lowest score in the world for opposite end - score is based on how far a country has gone to reach a goal post - (60 - 20)/(83 - 20) = 65% - (7 - 0)/(13.2 - 0) = 53% - (*log*10k - log163)/(log108k - 163) = 63%
long-run growth depends on.../definition of productivity growth
- long-run growth depends on being able to produce more output per unit of input - factor accumulation alone cannot sustain rapid growth in per capita income,
Solow Growth Model key ideas
- new investment increases the capital stock - new factories or machines, facilitates greater production - key to increasing investment (and capital stock) is to increase saving - saving comes from current income - corporations save in the form of retained earnings after distribution of dividends to stockholders - takes time for poor countries to catch up
Non-exludable
- no member of the group can be excluded from the benefits (national security) - gives rise to "free rider" problem - is it feasible to exclude someone unless they pay? if no, it is non-excludable - primary school: excludable because at private schools you have to pay, also a rival good because adding another children to the classroom requires the teacher to pay attention to another student, other students receive slightly less attention - crowded toll road: you have to pay to get over the bridge - scientific research: the findings are published and anyone can access it without paying - draining a swamp to eliminate mosquitos
assymmetric information
- one party to the transaction has info not available to the other party - moral hazard and adverse selection
capital deepening
- process through which the economy increases the amount of capital per worker - workers have access to more machinery and are able to produce more output per worker - saving/worker minus amount needed for capital widening
Why do growth rates differ?
- production function approach - savings and investment spending, education, research and development
why is there slow growth in the Philippines?
- proximate causes: production function: slow technology change, low rates of saving and investment, little growth in skills - deeper explanation: why such slow growth? economic policies - lack of infrastructure, poor quality schools
structural adjustment (proposed by World Bank)
- reforms aimed at changing structure of the economy to be more market based, efficient, open to international trade and production of tradable commodities - major objective: reduce/remove distortions generated by government intervention
World Bank Governance Indicators
1. Voice and Accountability 2. Political stability, absence of violence 3. Government Effectiveness 4. Regulatory Quality 5. Rule of Law 6. Control of Corruption
3. If the British pound is worth 2 euros on the foreign exchange market, and a basket of tradable goods sells for 100 pounds in Britain and for 250 euros in Germany, how could a trader make money?
100 pounds = 200 euros Buy the basket in Britain for 100 pounds -> sell in Germany for 250 euros -> exchange for 125 pounds
7. If a country's GDP per capita grows at 3% per year, about how many years will it take to double?
24 years
25 years ago, what percent of world's population lived in low-income nations
50%
2. If per capita income doubles in 20 years and it starts at 100, what level will it reach after 60 years?
60 years/20 years = 3 -> doubles 3 times 100 x 2^3 = 100 x 8 = 800
Millennium Development Goals (MDGs)
8 goals adopted by UN with a commitment to :making the right to development a reality for everyone and to freeing the entire human race from want (eradicate extreme poverty/hunger, universal primary education, promote gender equality/empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria, etc., ensure environmental sustainability, global partnership for development
countries in these continents have experience stagnation or even decline in incomes
African countries and some in eastern Europe
Advantage of backwardness
Alexander Gerschenkron - being relatively poorer might allow low-income ountries to grow more quickly - poor countries can borrow and adapt existing technology and have the potential to grow faster and catch up to more advanced economies
5. A country's nominal GNP for a given year is defined as the total market value of
All final goods and services produced
7. Consider the correlation of the growth of per capita income of countries (say 1960-2009) with each of the following variables: (1) per capita income in 1960; (2) Investment as a fraction of GDP, averaged over 1960-2009; (3) Anti-Corruption score averaged over 2000-2009; (4) Rule of Law score, averaged over 2000-2009. Which of the listed variables is positively correlated with the growth rate of per capita income?
All of them except (1) - conditional convergence: all things being equal, lower the income of a country, the faster than country grows - poor countries have potential to grow rapidly (if they do the right thing), because technologically they are far behind, so they have more to gain by bringing in new technology
3. Which of the following countries has a very high Anti-Corruption score, considering its per capita income?
Botswana, Tanzania, Chile
2. If a basket of goods costs $100 in the United States and 400 reals in Brazil, and the market exchange rate is 5 reals per dollar, how could a trader make money (assuming the goods could be transported from one country to thde other at zero transport cost)?
Buy the basket in Brazil for 400 reals -> ship to US and sell for $100 -> exchange for 500 reals
If a basket of goods cost 200 lira in Turkey and $100 in the US. Exchange rate is 3 lira per dollar, PPP = 2 lira per dollar
Buy the basket in Turkey for 200 lira -> sell in US for $100 -> exchange the 100 dollars for 300 lira
economic development
improvements in health, education, major structural changes (industrialization and urbanization)
15. Countries with slow growth over the period 1960-2009 include all the following except
China
between 1960 and 2009, these two countries increased their per capita incomes by factors of 15 to 19
China and Botswana
2. Which of the following countries has a higher score on HDI than on per capita income? (See Table 2). Note: a smaller rank number implies a higher HDI score.
Costa Rica, Chile, Sri Lanka
non-rival and excludable
no good name - regulated industry?
8. If population is growing at 2% and GDP is growing at 8%, how fast is GDP per capita growing?
GDP per capita is a RATIO of GDP and population y = Y/population (look at notes)
7. A country's labor force grows by 3% and capital stock grows by 9%. Assume that the labor share in output is 0.667. If output grows by 6%, how much does total factor productivity grow?
Gy = 6, Wk = 1/3 (automatically means that Wl = 2/3), Wl = 9%, Gl = 3%, a = ? sources of growth equation: Gy = WkGk + WlGl + a 6% = (1/3)(9%) + (2/3)(3%) + a 6% = 3% + 2% + a a = 1% = growth in total factor productivity
nominal income (Z) = real income (Y) x price level (X) --> Z = XY
If real income is growing at 3% and the price level is growing at 5%, what is the growth rate of nominal income? 8% (5 + 3)
last 40 years, these three very large countries have experienced rapid growth and development
India, China, Indonesia
4. In 2009, Bangladesh's GNP was 9 percent higher than its GDP; this occurred due to the fact that:
Large numbers of Bangladeshi men and women work abroad. GDP = C + I + G + (X - M) -> goods produced in the country GNP = GDP + net factor income from abroad
1. Which of the following countries has NOT grown faster than the United States since 1960?
Mexico
There is much less/more disparity in world incomes today than in the past?
More
Which estimate is a superior comparison? (PPP or ER) Why?
PPP - market exchange rates tend to underestimate the GDP levels of poorer nations because ER is based on traded goods and capital flows. PPP estimates obtained from UN correct this problem by expressing GDP per capita in terms of a common set of international prices
3. Using the traditional exchange-rate method of converting local currencies to dollars, one generally understates the level of GNP per capita of low-income countries like India.
True. When you use the exchange rate, the amount is lower than if you use PPP (?). Can make a country seem wealthier than they really are.
production function
Y = F(K,L) - divide both sides by L Y/L = F(K/L, 1) --> y = f(k)
1. Fiscal discipline
balanced government budgets are essential to avoid inflation, balance of payment deficits and capital flight
monopoly or market power
barriers to entry are critical, most barriers are created by government and are therefore not market failures
rival and non-excludable
common pool resources (fisheries and crowded parks)
9. Which of the following is NOT much of a problem in Botswana?
corruption (unemployment, HIV/AIDS, and inequality are all issues, however)
Purchasing Power Parity (PPP)
cost of a basket of goods in a certain country
economic growth occurs by...
either increasing capital stock (new investments in factories, machinery, equipment, etc.) or increasing labor force
6. Trade liberalization
elimination of import quotas and licensing, move toward uniform and low tariffs on imported goods --> encourage domestic firms to sell to foreign markets
justification for government action of income redistribution
ethical argument; often based on idea that marginal utility of income is higher for the poor than the rich; also on idea of equality of opportunity
informal economy
excessive regulation (Hernando de Soto)
5. Competitive exchange rates
exchange rate should be determined by market forces at a level that maintains a balance of payment equilibrium and facilitates expansion of exports
2. Reordering public expenditure priorities
expenditures on subsidies of various kinds (gas, food, many other products) and politically sensitive areas (military) should be cut back and instead concentrated on education, health, key infrastructure and maintaining essential public administration
sources of growth
factor accumulation and technological change
public goods
gives rise to free rider problem
Sins of omission
government fails to provide needed services
Sins of commission
government is too involved
Libertarian
government should stay out of economy - let the economy work itself out, but recognizes need for police (and therefore taxes)
6. If a country achieves rapid increase in income per capita by discovering new oil reserves, it is experiencing
growth but not development - not development, because development deals with HDI (Human Development Index) which takes health, education, etc. into account
paternalistic justification
human failures in decision making
capital widening
increase in capital stock that keeps pace with the expanding labor force and depreciation
factor accumulation
increasing the size of capital stock or the labor force
13. The Human Development Index is calculated by taking the geometric average of three indicators. These indicators are
life expectancy, schooling, and the log of income per capita
most fundamental determinant of human welfare around the world...
long-run economic growth
characteristics of rapid growers
macroeconomic stability, investment in healthy and education (life expectancy is positively correlated with growth - healthier people can contribute more), effective governance and institutions, market-legitimizing institutions, favorable environment for private enterprise
4. Liberalization of interest rates
market forces should determine interest rates (need to be positive, in real terms) and allocation of credit
total factor productivity
measure the contribution to production of efficiency, technology and other influences on productivity
9. Deregulation
primary vehicle for promoting competition within the domestic economy - greatly reduce or eliminate government regulation (keep ones ensure safety, environmental protections and supervision of banking sector
rival and excludable
private goods
10. Secure property rights
private property rights matter and steps should be taken to strengthen these rights - provide them at reasonable cost
8. Privitization
public enterprises should be privatized to relieve pressures on government budget and promote efficiency
non-rival and non-excludable
public good
10 components of Williamson's Washington Consensus (p. 147)
purpose: to identify the lowest common denominator of policy advice prevailing at the time - highlighted how policies differed from the conventional wisdom that had prevailed 20 years before
production function - core of standard growth models
relates the # of employees and machines to the size of the firm's output - would reveal how much more output the factory could produce if it hired 50 additional workers and purchased 5 more machines
7. Liberalization of foreign direct investment
remove restrictions on foreign direct investment to facilitate the inflow of needed capital, skills and knowledge (?)
institutions
rules of the game that govern the functioning of markets, banking systems, enforcement of property rights, etc.
Progressive/Liberals
tax and spend, tax and spend - larger role of government to help provide things for the poor, they accept market economy but want significant income redistribution
theory of market failure is based on traditional assumptions of economists
that people are rational and forward-looking
6. Diminishing returns to capital means that as you add more capital:
the additional contribution to output eventually declines
Solow residual
the basic procedure where you substitute actual data for all the variables except a, then calculate a as the residual
3. Tax reform
to alleviate budget deficits, improve incentives, achieve equity, reforms call for modest marginal tax rates and broadening of tax base
12. Most countries with negative growth are on the continent of Africa.
true
14. Sources of growth can be divided into factor accumulation and productivity growth.
true
6. There is a positive correlation across countries between scores on Anti-Corruption and the level of per capita income.
true
continuous growth equation
x(t) = x(0)e^rt e = 2.78 x(10) = 100 x (e^0.07x10) = 2.014
Conservative
want small government mainly because they don't want to pay taxes, but typically accept a modest safety net
growth accounting
we try to allocate the growth between factor accumulation and technological change
concept of development includes...
welfare and opportunities of the entire population - including health, education, distribution of income, literacy, life expectancy, years of schooling
compound growth equation
x(t) = x(0)(1 + r)^t ex: if r = 7% (0.07), and x is currently 100, what will x be in 10 years x(10) = 100(1 + 0.7)^10 = 1.967