econ 471 midterm 1
The APG for country A would be ___ and for country B would be ___.
C. .175, .325 The APG for country A would be (100/200) • [(1 - .65)/1] = .175 and for country B it would be (100/200) • [(1 - .35)/1] = .325.
Consider a country with each quarter of the population, in order, has the following amounts of income: 1, 2, 3, 4. As we'll be dealing with how all income is distributed as a percent, we don't need to worry about the currency involved or even the units (millions, billions, or trillions). For this country, what would the 25:25 ratio be?
4 The 25:25 ratio would be the share of income received by the highest 25% (4) divided by the lowest 25% (1)
By the 10:10 ratio, what region has the most equal income distribution? Please look at the 15 countries with the lowest ratio.
Africa Europe has 8 of the 15 countries with the smallest 10:10 ratio: Switzerland, Slovenia, Slovakia, Norway, Austria, Belarus, Ukraine, and Sweden.
Using the data from the last question, the vertical axis for the Lorenz curve would be:
C. .1, .3, .6, 1.0 The length of the vertical axis is 1 (or 100%) and it measures cumulative income by the different income groups. Total income is 10 (1 + 2 + 3 + 4) so the first group has .1 of total income, the second has (1 + 2) / 10, the third has (1 + 2 + 3) / 10 and the last has (1 + 2 + 3 + 4) / 10
Explain and show your calculations on which country would be better off in 50 years. Country A has a current GDP per capita of $41,000 and a growth rate of 2% (as you should know, these are about current U.S. GDP per capita and its average annual growth over the last 50 years) and country B has a current GDP per capita of $10,000 and is growing at 5% (this is roughly Botswana)? While not graded, did this result surprise you?
Country A in 50 years has a GDP per capita of 41,000*(1+0.02)^50 = 110,355 and country B has 10,000*(1+0.05)^50 = 114,674
In looking at ranking of countries, there are two groups of countries: the rich and the poor with a large gap between them.
False In looking at the rankings, when you sort them by "GDP per capita 2010," you will find that there is no clear break between rich and poor countries. (Well, Qatar is much richer than Luxembourg, which in turn is much richer than the UAE, but looking at three very rich and sparsely countries is hardly what this question is asking.) That is, there is a pretty even spread from the poorest to the richest with many in between.
Income mobility is just another way of measuring income inequality.
False Income mobility (we often look at "intergenerational mobility") looks at how people move between income groups over time while income inequality (often measured with the Gini coefficient) looks at the distribution of income over time.
Mexico is one of the poorest countries in the world.
False Mexico's GDP per capita is about $12,000. While far below the U.S.'s value of some $41,400, it ranks 68th out of the 189 countries listed. Thus, its GDP is substantially above the median of all countries.
In the 1960 to 2010 period, no country has experienced negative growth.
False When you sort the data on "Avg. Ann. Growth Rate (1960 -- 2010)" you will see over this 50 year span that 7 countries had their GDP per capital decline. That is, their economies shrunk over these years. They are Haiti, Nicaragua, Guinea, Madagascar, Central African Republic, Niger, and the Democratic Republic of the Congo.
For this question, first calculate and report the median income of all countries with data for the year 2010. Now, as you saw with the extract from the Penn World Tables, a typical annual growth rate from 1960 to 2010 was about 2% a year. Do you think that this means that the typical country has been growing at 2% for many centuries?
First, the median GDP per capita across countries for 2010 is $7,350. If you think about working backwards from 2010, this implies a small level of GDP per capita only a few centuries ago. Thus economic growth is a recent phenomenon. Specifically, applying the rule of 71, at 2% growth, a country's GDP per capita doubles in size in 26 years.
Why is GDP per capita a better measure of well-being in a country than its natural resources?
GDP per capita measures not only production, but also income per person. The value of natural resources does not measure income flowing to the population of a country
In what country does the bottom 10% have the smallest share of income?
Honduras at 0.4%. Please keep in mind how much these values an vary around the world.
By the 10:10 ratio, what region has the most unequal income distribution? Please look at the 15 countries with the highest ratio.
Latin America Ten countries in Latin America are in this set of 15 countries: Guatemela, Costa Rica, Panama, El Salvador, Paraguay, Bolivia, Columbia, Brazil, Haiti, and Honduras. Please keep in mind these regions that have the highest and lowest income inequality as measured by the 10:10 ratio. We'll see them as we move through the course.
Since 1975 or so, have all countries grown at the same rate?
No In the table you can see that growth rates vary substantially between countries in the 1960-2010 period.
Can the Lorenz curve slope downward? Please explain.
No since the Lorenz curve orders households by their income form lowest to highest
Which will be larger for a country: PG or APG? Please explain
Poverty gap = (z-yq)/z and average poverty gap = (q/n)(poverty gap). Since q is the headcount of the poor and n is the total number of population of a country (q/n)<1 so AGP is smaller
As income rises, the saving rate:
Rises As households have more income, their rate of saving increases.
In what country does the bottom 10% have the largest share of income?
Switzerland at 7.5%
The richest African country listed has greater GDP than China.
True Equatorial Guinea has GDP per capita of about $14,000 while China's value is some $7,100
Since 1960, the most common growth rates for countries around the world has been:
c. 1% to 2% When you compute the mean of the data in the "Avg. Ann. Growth Rate (1960 -- 2010)" you will find a value of 1.95 and a median value 1.78
In 2010, eight countries have GDP per capital levels higher than the U.S. All of them are much less populous than the U.S.
True When you sort the data on "GDP per capita 2010" you will see that this is the case. The most populous of these countries is the United Arab Emirates, at about 5 million people. The U.S. has a population of 310 million.
Human capital (HK) can be transferred from one person to another.
True Unlike physical capital (PK), human capital cannot be shifted from one person to another.
Say that two countries had GDP per capita of $10,000 50 years ago and today one has GDP per capita of $20,000 and the other of $40,000. Explain why this second country had or did not have twice the annual growth rate of the first country.
Using the rule of 72, 72/(growth rate) = time to double. Rearranging this equation yields growth rate = 72/(time to double). Thus, a halving of the time to double means that the growth rate is twice as much. Thus this is true.
When would you use the Rule of 72?
When you want to know the approximate number of years it takes something to double in size when you know its annual average growth rate
Using the data from the last two questions, what would be the value of the Gini coefficient? Note: you'll need the area of both a triangle and trapezoid to make this calculation.
You'll first need to calculate the area of Q, which is made up of four parts (the cumulative income earned by the four different groups -- these are called quartiles). Each has a width of .25. The first quartile is shown by a triangle with width .25 and height .1, for an area of .5 • .25 • .1 = .0125. The second quartile has cumulative income of .25 • (.1 + .3) / 2, (the area of this trapezoid) the third of .25 • (.3 + .6) / 2 and the fourth of .25 • (.6 + 1.0) / 2. Taken together, Q is .0125 + .05 + .1125 + .2 = .375. finally, G = 1 - 2 • Q so G = 1 - 2 • .375 = .25
From data in the spreadsheet, compute China's average annual growth rate from 1985 to 2010.
a. 8% or more Use g = (yt+n / yt)1/n - 1 and you will see that it is 8.3%. Of course, this number is in the online lecture as well.
From 1960 to 2010, the fastest growing countries were generally in:
b. Asia Over this period, the most quickly growing countries were Equatorial Guinea, China, Taiwan, South Korea (Republic of Korea), Botswana, Singapore, Hong Kong, Thailand, Malaysia, and Romania. Seven of these ten are in Asia.
China's growth rate is pretty common.
b. False From the spreadsheet, when you look at growth rates from 1960 to 2010 you'll see that this figure is very unusual. In fact, it is higher than any country's growth rate over this longer period. If you compute growth rates of all countries from 1985 to 2010 you'll see that only Equatorial Guinea grew more quickly than China. Still, keep in mind that while China has grown very quickly, its GDP per capita is about $7,100
From 1985 to 2010, which country has the highest annual growth rate?
b. S. Korea S. Korea had an annual average growth rate of 5.4%, Botswana of 3.3%, Malaysia of 3.8%, Singapore of 4.6%, and Mexico of 0.8%. Note the very large changes in GDP of all of these countries except Mexico over these 25 years.
In looking at income mobility, we often chart income quintiles for parents on the vertical axis and their children on the horizontal axis. If you sum the values across a row (say for the parents in the first quintile), it would:
be equal to one Almost by definition, the children of a parent must end up in one of the five income quintiles. Thus, the sum of any row will be one. Note that a column does not have this property.
Say that a country is growing at 1% a year. In roughly how many years will it take for their GDP to double? Please do not use a calculator for this question.
c. between 50 and 100 years Use the Rule of 72: 72/1 = 72 years (note how a calculator is not needed). Thus, GDP would double in this many years. More importantly, even low growth rates lead to substantial changes in income over the decades.
Now, using the appropriate equation, let's check this. That is, instead of using the Rule of 72, let's compute the exact value value of a country's GDP 72 years in the future if it is growing at 1% a year. Let's say that their starting GDP is $1,000 per person. In 72 years it would be:
c. more than $2,000 From yt+n = (1 + g)n * yt with yt = $1,000, n = 72, and g = .01, yt+n would be $2,047. Thus, the Rule of 72, while not exact, is a decent approximation.
The poorest countries are most likely to be located in:
e. Africa Note that the last ten listed countries are are in sub-Sarahan Africa.
From our course overview, which of these is sure to have an impact on economic growth and not vice-versa? That is, it is certain the causality only runs to economic growth.
e. geography Geography is fixed for a country and other factors cannot influence it.
This mini-lesson examines how economic growth influences income inequality.
false Rather, this mini-lesson looks at how income inequality influences growth.
Which matters when one is examining the impact of income inequality on savings and thus on growth?
is the saving function convex or concave If the saving function is concave then then income inequality hinders growth through less saving and income inequality aids growth if the function is convex.
In looking at income mobility, we often chart income quintiles for parents on the vertical axis and their children on the horizontal axis. If there was perfect income mobility (that is, no matter the income of the parent, the child would have an equal chance at ending up in any quintile), you would expect the values in each row:
to stay the same as you move across to the right If every value was the same it means that the child has the same chance of ending up in any income group as an adult.
Here we want to measure both poverty and its intensity in two countries, A and B. Country A: 200 million people, poverty line = $1/day, 20 million earn $.25/day and 80 million earn $.75/day, and everyone else earns more than the poverty line Country B: 200 million people, poverty line = $1/day, 80 million earn $.25/day and 20 million earn $.75/day, and everyone else earns more than the poverty line. Countries A and B have the same headcount ratio.
true Recall the headcount ratio is the percent of the population below the poverty line. In both countries, there are 100 million below the poverty line and their total populations are 200. Thus, the headcount ratio is 50% in both countries.
Country A has yq of ___ and Country B has yq of ___.
yq for Country A = (20 • .25 + 80 • .75)/100 = $.65 and yq for Country B = (80 • .25 + 20 • .75)/100 = $.35. Note that while both countries have the same headcount ratio, but how poverty in country B is more intense as the average income of the poor is lower there than in country A.